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Liberty Global, Inc. (NASDAQ:LBTYA)

Q2 2012 Earnings Conference Call

August 3, 2012 09:00 AM ET

Executives

John Malone - Chairman of the Board

Michael Fries - President and Chief Executive Officer

Diederik Karsten - Executive Vice President, European Broadband Operations

Charles Bracken - Executive Vice President and Co-Chief Financial Officer (and Principal Financial Officer)

Bernard Dvorak - Executive Vice President and Co-Chief Financial Officer (and Principal Accounting Officer)

Balan Nair - Executive Vice President and Chief Technology Officer

Bryan Hall - Executive Vice President, Secretary and General Counsel

Analysts

James Ratcliffe – Barclays

Jeff Wlodarczak – Pivotal Research Group

Matthew Harrigan – Wunderlich Securities

Vijay Jayant – ISI Group

Hugh I. McCaffrey – Goldman Sachs

Will Milner - Arete Research

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 express 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 section 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, August 3, 2012.

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

Michael Fries

Thanks and hello everybody. I hope you are doing great, enjoying the Olympics wherever you may be. We have the usual cast of characters on the call with us today, my Executive Vice President, Diederik Karsten, who runs our European Operations; Charlie Bracken and Bernie Dvorak, our co-CFOs; Balan Nair, our Chief Technology Officer; and Bryan Hall, our Counsel; and others on the call who might chime in from time to time.

Our agenda is as it has been in prior calls, I am going to make some opening remarks and then Bernie is going to go through the financials on this call and then we will get to your questions. But before I do that, we want to review the Safe Harbor statements. So, operator, 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 for 2012; and future growth prospects and other information and statements that are not historical facts. 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 Forms 10-K and 10-Q. Liberty Global disclaims any obligation to update any of these forward-looking statements to reflect any change in its expectation 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.

Michael Fries

Great, thanks. So, as usual, we are going to go through some slides which you can access and I am going to start it off on Slide 4 with a quick recap of the quarter and where we are today in a few key areas.

I think what you will notice straightaway that the best part of our story continues to be our subscriber growth. Given the focus in our industry today, competitive platforms and disruptive technologies, and the European market situation, I think you will be pleased to learn that we continue to grow at record levels. We added 364,000 RGUs in the 3 months ended June 30, which is significantly higher than last year. And not surprisingly, Germany continues to be our primary growth driver, representing about 50% of our net ads, but we are also performing well across Europe, and I will show you those numbers in a minute.

Revenue for the 3 months was $2.5 billion, that’s a second straight quarter of more than 5% rebased growth and operating cash flow was $1.2 billion, that’s up 2.5% rebased year-over-year. I think it’s important to point out that our operating cash flow growth figure is in line and with expectations and actually a little better than budget. So obviously, we are anticipating an acceleration in OCF growth in the second half of the year and we are on track to do just that.

Adjusted free cash flow was up 24% for the quarter and 19% year-to-date, which is also on par with our guidance. In fact, not surprisingly, we are confirming all of our financial guidance targets today.

Switching gears, it was relatively a quiet quarter in the M&A area but I will provide you with four quick updates. I assume everyone knows at this point that we closed the sale of Austar at the end of May and banked $1.1 billion in proceeds. We also recently announced that together with Searchlight Capital we have begun the process of consolidating the market in Puerto Rico with the acquisition of the largest cable operator there, OneLink. Together, we are paying about 6.3 times synergies 2012 OCF for 263,000 RGUs which will merge into our operations. So, essentially with no additional capital investment on our part, we will own 60% of the business with a combined operating cash flow of approximately $120 million, 70% of the market, and pretty reasonable scale and growth prospects. With no obvious exit today, we think it’s a prudent way of rationalizing this asset.

Also Chellomedia, our programming division announced two transactions this week, the first is the deal of MGM to acquire the 13 MGM channels in Europe, the Middle East and Latin America, including the remaining 50% of MGM Latin America which we launched together in ’98 and the remaining 49% of MGM Central Europe over partners. And then the second deal was a continuation of our partnership with CBS, whereby we will be branding several of our channels with the CBS name and improving the quality of the programming and issuing them a minority stake. So, all in all, those are both smart and accretive deals for Chellomedia.

Then lastly, the integration of Unitymedia and KBW in Germany is right on plan. We officially announced the combined management team on July 1st and we are moving out of the investment phase and beginning to generate net positive synergies on the operating cash flow line, which is great. So, when you combine that upside with 11% revenue growth in the second quarter, it should be clear that Germany continues to be a big value driver for us. On the innovation front, our Horizon launch is right around the corner, I will touch on that in just a moment. We rolled out VTR mobile in Chile, which is off to a really good start.

And then finally, our balance sheet remains in great shape. At June 30, we had roughly $4 billion of total liquidity, about half of that in cash, including $1.3 billion at the parent level. Essentially all of our debt is fixed, hedged, and long term I think you will all understand how important that is to us. We are on track to hit our track of $1 billion in buybacks for the year, which would bring total stock repurchases to $9 billion.

So, another strong quarter, in our opinion across board, a good growth in our operating and financial metrics, four transactions completed or announced that further should have rationalized our platform. VTR mobile launch and Horizon weeks away, I think we are marching ahead on our levered equity capital strategy.

So, let’s dig a bit deeper on the operations results starting on Slide 5, which is a pretty compelling picture. It shows our subscriber net adds over the last three-and-a-half years broken down into 6-month increment. So, you will see that in the first half of 2009 we had a chart of 40,000 new RGUs, a number which has steadily increased every quarter since then, and totalled over 800,000 in the first 6 months of this year. If you exclude the impact of acquisitions, we have added 3.4 million RGUs organically since January 2009, which has helped bring our total RGUs to 34 million today. Essentially, all of this growth is attributable to the strength and competitive differentiation of our triple-play bundles, we have talked about that quite a bit, whether it’s in Germany or Holland or Ireland and we are gaining market share from incumbents of steady clip. In just the last 12 months, for example, our triple-play base has expanded by 39% to 5.6 million and it’s going nowhere but up since these products represent the vast majority of our sales.

Slide 6 provides some geographic context to our reported subscriber growth. First point to make here is that 10 of our 12 European markets are up over last year, so broadly speaking we are performing well across the board. The main graph on the left that breaks that growth out by regions, so if you start at the bottom of the chart, the green portion of the bar is our German operation, which as I mentioned represented over 50% of 800,000 net adds year-to-date. All three products are showing improvement in Germany as a result of lower video churn and strong bundled sales of voice and data, and we are managing through the impact of the SCO’s remedy package pretty well so far. The middle bar, the blue portion, shows our European operation excluding Germany, so this is all organic. You will see that combined net adds were up to 320,000 of all but one country showing significant improvement. In fact, we doubled net adds in Switzerland, Austria, and in Central and Eastern Europe. Then in top portion in orange shows that Chile and Puerto Rico were positive but flat year-on-year on a combined basis. So, year-to-date, quite of you are looking at year-to-date of the second quarter, sub growth is very strong for us, especially compared to US or EU peers and many of you follow those companies so you know the numbers.

Now, on Slide 7, we have talked a lot about our wireless strategy in the past, usually highlighting three things. First, that the jury is out on the quad play in our opinion. Second, for us the decision on how to do mobile will vary by market. So, one size does not fit all. And lastly, wherever possible, we will take a capital like approach. And so, consistent with these, tenants in the category of one size does not fit all, we did embark on the rollout of own mobile network in Chile, with our scale and brand and market share, we believe warranted this approach. I am happy to report that even though we are only two-and-a-half months into it, things are looking very good with our 4G launch in Chile. Technically, operations have been smooth and we are now at over 40,000 mobile subs and expect the pace of growth to accelerate as we expand our retail points of presence. From a product standpoint, we are really pushing the competitive advantages that flow to us for having a robust fixed network and custom based. Like unlimited free fixed to mobile calling for VTR customers and rollover minutes and rollover megabytes, mobile data plans is very convenient entry points for our triple-play subs which represent about half of our mobile subs today. A by-product of this early success is a $40 average ARPU, roughly double the industry average, and over time we expect that number to come down as we penetrate more of the market, but it’s a great start. So, in an effort to keeping you posted on this new product launch as well as our European MVNO platform which is slated for 2013 roll out.

And the one last slide of Horizon and this will be the final time that we will speak about this product in the future tense, as since we are on track to launch in Holland in September, with Switzerland right behind. Just a couple of anecdotal points. We had John Malone and entire LGI board in Switzerland last month, where we demoed the platform live and things are looking very good on all fronts, the stability of the software, the functionality of our online and iPad applications and the depth of our content offering are in good shape. I also attended just coincidently an event yesterday with Brian Roberts, and Steve Burke, and Neil Smit here in London where they provided a demo of their X1 platform. I will simply say that we are in sync with Comcast on many levels, the multi-screen, multi-device elements, even the move to a cloud-based UI where we are using their RDK software stack, our next generation Horizon box. Of course, I am biased; I think we are ahead on a number of fronts. Mostly as a result of the greatest sophistication and computing power in our gateway, but our roadmaps are very similar from a technology and product point of view.

So, I will wrap it here with by just saying we have got market leading sub growth, I think we have done some smart M&A activity in the second quarter and we have made important progress on new products. You add to that a strong balance sheet and a very motivated and focused management team, I think it’s fair to say we feel very good about the second half of the year, and I am looking forward to your questions. So, before that I will turn it over to Bernie.

Bernard Dvorak

Great, thanks Mike and hello everyone. I will begin on Slide 10. We generated revenue of $5.1 billion for the 6 months ended June 30, 2012, which was up 8% on a reported basis, as compared to $4.7 billion for the comparable prior year period. Similarly, our OCF increased 8% to $2.4 billion for the first half of 2012, up from $2.2 billion for the first half of 2011. In terms of our OCF margin for the same periods, it was essentially flat at 47.2% for the 2012 6-month period versus 47.3% for the respective 2011 period. Both our revenue and OCF results were driven in part by continued subscriber gains over the last year and by the contribution from acquisitions, particularly KBW.

From a reporting perspective, and as most of you are aware, the translation effect from foreign currency movements has been a headwind for us. For example, the euro has depreciated versus the dollar on average by 8% in the 2012 year-to-date period as compared to the first half of 2011. Adjusting our results to neutralize for the effects of M&A and FX, we delivered rebased revenue growth of 5% and OCF growth of 3% for the 6 months ended June 30. Several specific factors have impacted our OCF growth. First, the incremental

OCF deficit of our Chilean wireless business was over $20 million higher during the first half of this year, as compared to the first half of 2011. Second, the cost of Belgium football rights acquired by Telenet in Q3 2011 exceeded $20 million during the first 6 months of 2011. And lastly, we incurred higher costs in sales and marketing to support our strong RGU gains, including cost related to our built for growth initiative in Germany. Adjusting for the combined impacted of these factors, our rebased OCF growth would have been meaningfully higher than our reported 3%.

Slide 11, captures our Q2 results geographically. Our European broadband operation, excluding Telenet posted comparable results to Q1, generating $1.7 billion in revenue and $880 million in OCF, while obtaining a modestly higher OCF margin of 51.9%. Year-over-year reported growth was approximately 8% for both revenue and OCF, while on a rebased basis it was 5% for revenue and 3% for OCF. Principle driver of our Q2 rebased growth was our German operation, which delivered $566 million of revenue and $334 million of OCF and rebased revenue of 11% and rebased OCF growth of 8%.

In Belgium, Telenet generated 7% rebased revenue and 5% OCF growth in Q2 and revenue of $466 million and OCF of $237 million, resulting in an OCF margin of 50.8%. Q2 revenue growth was driven primarily by improved ARPU from Telenet’s digital TV and broadband Internet services, RGU growth and increased revenue from mobile services and handset sales. Additionally, Telenet’s Q2 OCF growth was adversely impacted by roughly $9 million in programming cost for Belgium football, a cost that Telenet will begin to lap in Q3.

And finally, VTR Chilean operation produced $227 million in revenue and $75 in OCF in the second quarter. VTR’s results reflect rebased revenue growth of 5% and a rebased associate decline of 8% for Q2. Since we launched our mobile services in Chile in mid-May, we recognized limited mobile revenue during the quarter, although moving forward we would expect this revenue stream to positively impact our top line growth in Chile.

With respect to our second half OCF rebased growth, we expect to generate accelerating rebased associate growth due largely to the strong volume growth that we have experienced so far in 2012, as well as margin expansion in Germany. From a phasing perspective, we would expect a significant portion of our growth to occur in the fourth quarter. Overall, we remain comfortable confirming our mid single-digit growth rate targets for both revenue and OCF for the full year.

If you go to Slide 12, this focuses on our big four markets. On this slide we have highlighted our rebased revenue growth in Q2 as compared to the second quarter of last year. On a combined basis, these four markets achieve rebased revenue growth of 7% in Q2 2012, up from 5% in Q2 2011, with three of the four markets posting improved revenue growth year-over-year.

Beginning in the upper left, Germany remains our strongest performer. We generated 11% rebased growth compared to the Q2 2011 rebased growth rate of 8%, and the Q2 growth rate represents Germany’s best top line performance since our investment in Unitymedia in 2010.

And moving to the upper right, our Swiss business has shown steady improvement over the last year in top line with a Q2 rebased growth rate representing Cablecom’s highest growth rate in over three-and-a-half years. And our Swiss results were driven in part by growth in advanced service RGUs, as we have added over 200,000 digital cable, broadband Internet and telephony RGUs in the 12 months.

One the bottom left, our Dutch business posted rebased revenue growth of 4%, down from last year’s 6% but relatively consistent with the growth rates that we have seen in the previous three quarters. We are optimistic about the prospects for improved top line growth in the Netherlands during the second half of this year due in part to price increases on our triple-play bundles which took effect on July 1st.

And on the bottom right, Telenet continues to post strong top line growth at 7% for the quarter as we discussed previously. However, this growth rate is likely to trend down somewhat during the second half of 2012 with certain factors such as price increases and handset sales are expected to have a smaller positive impact during the second half of this year.

Slide 13 highlights our revenue by country and product. Revenue in our big four markets of Germany, Belgium, Switzerland and the Netherlands accounted for 65% of our consolidated Q2 revenue. This is an increase from 57% in Q2 last year when we did not own KBW, but we did own Austar. And suffice to say, with four markets comprising two-thirds of our business, our story is simpler today than it was a few years ago. The right-hand chart takes the snapshot of our Q2 revenue by product. Our overall subscription revenue which accounted for 84% of our revenue during the quarter increased 5% on an organic basis with Telephony and Broadband Internet services growing at a fast pace. Our other revenue, which includes our programming, B2B, and mobile revenue, among other items increased 6% organically.

Slide 14 summarizes the level of our capital expenditures and free cash flow generation on a year-to-date basis. For the first half of 2012, we incurred $994 million of CapEx or 18.6% of revenue as compared to $967 million, or 20.6% of revenue for the first half of 2011. The decline in CapEx measured as a percentage of revenue was largely related to a $76 million increase in vendor financing and capital lease additions. Our overall property in equipment adds which includes CapEx on an accrued basis and all vendor financing of capital lease additions were 21.9% during the first half of 2012 as compared to 20.3% during the corresponding 2011 period. The higher percentage during the first half of this year reflects our higher value of RGU adds and a larger and relatively faster growing Germany operation with KBW in the mix. Along these lines, it’s worth noting that the percentage of our property adds represented by CPE and scalable infrastructure increased from 55% during the first half of 2011 to 58% during the first half of 2012. The right-hand chart illustrates our adjusted free cash flow results. Our adjusted free cash flow for the first half of 2012 increased year-over-year by 19% to $466 million, with Q2 adjusted free cash flow of $186 million, reflecting growth of 24% over Q2 of last year.

And as you recall, our adjusted free cash flow principally removes the impact of our mobile initiative in Chile, which generated an incremental cash flow deficit of $74 million through Q2 of this year, or $41 million higher than last year’s first half results. Similar to the phasing of our adjusted free cash in prior years, we anticipate that our adjusted free cash flow substantially weighted to the fourth quarter as compared to Q3.

If you move to slide 15, I will recap our leverage position and share repurchase activity. Our debt position at June 30th amounted to $23.9 billion, reflecting a decline of approximately $1.3 billion from the first quarter. This decline resulted mainly from FX and modest due leveraging as we repaid nearly $500 million of debt in the quarter. At June 30th, we had total consolidated liquidity of $4 billion, consisting of cash at the parent level of $1.3 billion, cash at the operating subsidiaries of $600 million and maximum borrowing capacity under our revolving credit lines of $2.1 billion, and relative to the first quarter, our total cash position increased approximately $200 million to $1.9 billion, and our corporate cash increased about $500 million to $1.3 billion.

Based on the quarter-ending debt and cash levels, our adjusted leverage ratios were 4.8 times on a gross basis, 4.4 on a net basis for Q2, reflecting deleveraging from our Q1 ratios of 5 and 4.7 respectively.

Turning to the right-hand chart, we have repurchased $434 million of equity during the first six months, and as Mike mentioned earlier, we are committed to completing our ability to our target for 2012.

So, in summary, consumer demand for our products remains healthy, with the rollout of Horizon beginning this fall. We are upbeat about our growth prospects over the balance of the year and heading into 2013.

So, operator, this completes our prepared remarks today. So, we would like to open up for Q&A.

Question-And-Answer Session

Operator

(Operator Instructions) And we will take our first question from James Ratcliffe with Barclays.

James Ratcliffe – Barclays

Question, two if I could, first of all, regarding the chart on video, revenue exposure and just subscription exposure, can you give us an idea of what that pie chart on Slide 13 looked like a year, or say two years ago? And secondly, you mentioned potential price increases going through on your Dutch bundles. How does that compare to price increases that you have taken or could take in other markets, and what are the opportunities for that for the remainder of this year and next year? Thanks.

Michael Fries

Thanks, James. I don’t know if we have that chart handy, but I think it’s fair to say that all revenue streams are growing roughly comparably. The digital video would be one of our fastest revenue streams, because we are able to essentially add digital and double revenue for each digital home, but all revenue seems to be growing. Do you have a sense of that Charlie or Bertie?

Bernard Dvorak

(inaudible) right at our fingertips, but the guess is that, the sense is that it’s relatively from a year ago, let’s say around 80%. So, it’s been fairly constant.

James Ratcliffe – Barclays

Yes, in terms of subscription revenue –

Bernard Dvorak

In terms of subscription revenue, right. Obviously in terms of geography, we are significantly more concentrated than we were a couple of years ago.

Michael Fries

Right. And I think in terms of price increases, I will let Diederik handle that, but we are, I would say far more focused on pricing power and relative pricing of our products today than perhaps ever and our finding opportunities to take rate increases were appropriate and price our bundles competitively. And that’s because we still have a far superior broadband service or offering in every market in which we operate. But why don’t you take us through the specifics, Diederik?

Diederik Karsten

Yes, thanks Mike. In that strategy, what we do is also, I would say have separate sets for both acquisition as well as base management. In acquisition, we have been successful in lifting prices behind speed increases, creating superior value, we will keep doing that. I doesn’t only work in the Netherlands, but now also currently, it’s a reason for the success in Switzerland as well as in Germany. What we do know is base management where we lift the base in terms of adjusting the rates also mostly behind adding value via speed increases. So, all in all, like Mike said, more focus on it, widespread in most countries. So far, we see it’s a rewarding kind of a strategy and with Horizon, we will have a next opportunity via added value to move up in the price range. But what we do keep in mind obviously is that so-called bulls eye and marketability of our product versus competition, because, because Swisscom and KPN and Deutsche are keen to see a good winner.

Bernard Dvorak

Mike, just want to add. If you look at subscription revenue as a percent of our total revenues for both 2009 and 2010, 2011, it’s right around 80% to 83%. So, it’s been constant.

James Ratcliffe – Barclays

Okay.

Operator

All right. And we will take our next question from Jeff Wlodarczak with Pivotal Research Group.

Jeff Wlodarczak – Pivotal Research Group

Switzerland had another solid accelerating results, looking more and more like the Netherlands, I guess. Do you feel like the upward trend can continue, given what you sort of – given the trends now and what you have in place? And then the other question is related to the Horizon box. Should we expect material EBITDA hit related to marketing spend around that box launch in the fourth quarter in Netherlands? And I think it was the first quarter in Switzerland. And can you remind us what the cost of that box is and the incremental revenue expected to generate from it? Thanks.

Michael Fries

Diederik, you can handle the Switzerland question. On Horizon, Jeff, we haven’t really disclosed in any detail the business model around that. We are obviously well prepared to roll the product out and feel very, very positive about the returns on that product, both in terms of the cost of the box overall as well as the incremental ARPU and margin we think we can generate from the device.

It will be a premium product overtime, probably only high-end device real market. So, at some point, very quickly we won’t be offering our HD-DVR. This will be our HD-DVR high-end box. So, the goal is to try to migrate the base efficiently. All news customers will try to move into the Horizon box at a premium. So, there will certainly be an increased revenue in margin, but we are not going to get specific on here in this call, except I will tell you that it’s a very, very attractive MPV as far as we can tell. And we hit the numbers that we are projecting to hit. In terms of Switzerland, do you want to address that, Diederik?

Diederik Karsten

Yes, I think it’s not a coincidence that business is flourishing and striving. It’s almost best results since ’08, and from an operational point, we don’t see reasons for a slowdown, and Horizon triggers for a second half to further kind of boost business. Next to that, our base portfolio shows strength and it’s a triple play, it’s CR plus bundles and the increased Internet speeds work, Swiss channels moving to HD, works for us. So, all in all, we don’t see concerns for a real slowdown. Although as a disclaimer, I have to say Swisscom has been aggressive, also launching new mobile plan, extra HD channels and so forth. So, it’s a two-horse race.

Michael Fries

Yes, but we are still really outperforming on the broadband fee. On average, our broadband funds are five times there on comparable fund. So, we really have an edge, and with Horizon rolling out later this year, we think that is going to be very impactful in terms of the attractiveness of the bundle. So, it’s looking positive in Switzerland.

Jeff Wlodarczak – Pivotal Research Group

And are you guys still priced well under Swisscom in terms of your broadband offering?

Michael Fries

Diederik, do you want to address that?

Diederik Karsten

Yes, you mean priced under Swisscom?

Jeff Wlodarczak – Pivotal Research Group

Yes, sorry.

Diederik Karsten

There is a certain range, which we know our pricing works versus Swisscom than being call it maybe the superior brand in terms of reputation that has been the challenger with superior value, and we keep those track of that range. We also sometimes see Swisscom coming up with that offers trying to kind of change that relationship. But so far, it worked, like Mike said, also the triple play and the superior broadband.

Michael Fries

Relatively speaking though, I would say Switzerland is on the higher end of pricing, our bundles and their bundles. So, I think it’s a rationale market, that’s the main point.

Diederik Karsten

(inaudible) higher data ARPU than last year. So, that’s a good illustration of it.

Jeff Wlodarczak – Pivotal Research Group

Great, thanks.

Operator

And we will take our next question from Matthew Harrigan with Wunderlich Securities.

Matthew Harrigan – Wunderlich Securities

Thank you. I was just curious, if maybe Charlie, could update us on your thinking on hedging with the Europe, the level of fertility that it’s out, and I guess you could even see the Swiss franc peg, break at some point and then there’s some good markets like Poland and Czech as far as the macro economy, the non-Euro market. Are you starting to think about changing your currency exposure a little bit on the financial side? And then, secondly, I would like to get’s Mike rethink on Wi-Fi, you know, 802.11ac coming in line, some of it will fall a little bit, or will hype, but what represents it as a business alternative, business opportunity or business challenge? Thank you.

Charles Bracken

On the countryside, I still feel pretty comfortable about our position. As you know, we fully hedged the debt. So, from a financial risk point of view, we are in a situation, we are pretty underexposed to any kind of fluctuation, because the debt moves up and down within currency. So, I am pretty comfortable with that. I think operational currency matches, would really minimize those. We got very little dollar spend left in our CapEx and OpEx relative to our size. And once we have some inherent exposure, call it the euro, thus far our read of it is that we have very low volatility. So, I think despite all the ups and downs in the currency market, our results and our projections are that we will weather it pretty well. The one area we won’t weather it is on the equity which we don’t hedge.

Now that said, we have allocated significant amount of dollars, which we hold cash in dollars because clearly of the buyback commitment. So, in that sense, we have been making money relative to the currency movement.

In terms of the market economics, the cable business is still very resilient even in Ireland, which as you know it has had some tough times. It’s all holding up pretty well. So, I think that fingers crossed, we feel we are riding through the economic turbulence, and pretty well, an opportunity with some great countries, and Germany is thriving, Switzerland is a very safe have etcetera.

Michael Fries

On the Wi-Fi question, Matt, we continue to debate this internally on a regular basis. Certainly, intuitively you would think there must be a plan and an opportunity for us, but when you think and look at our business model and our core value drivers, we believe that most of the opportunity resides in the four walls of the home. And that, the vast majority of wireless usage, whether it would be mobile, smart phones or tablets is occurring in the home. And our Horizon boxes, you know, comes with two Wi-Fi chips, one a dedicated moving content around the home within the platform and the other dedicated to your own internal Wi-Fi usage, and we will also have the ability to create a neighborhood of Wi-Fi usage if we choose, so that you can share and roam on other Horizon boxes at some point, but our main objective here is to satisfy the demand for wireless broadband in the home and to do it with massive pipes and bandwidth, and we see that going nowhere but up.

In terms of outside the home, where we have two basic approaches, one obviously resides within our NVNO/mobile plans, all of which include a mobile broadband component to them. So, you should expect us to be offering mobile broadband in every market where we roll out wireless, and so, we will have some opportunity there. And then secondly, we do continue to look at Wi-Fi networks outside the home. I think the challenge we face in many of our markets, unlike the U.S. operators is that we don’t have the “furniture in the way of a lot of outdoor or above-ground infrastructure. A lot of are planted underground.” So, we don’t have easily identifiable or cheap places to hang radios. So, that makes the Wi-Fi opportunity a little more challenging, but nonetheless we are evaluating it six ways to Sunday in many markets. Maybe Balan, you can be specific about a couple of examples.

Balan Nair

Sure. In regards to the 802.11ac, we have been monitoring that. However, the chips for that won’t even be until next year, in consumer devices, probably another a year or two, (inaudible) not for a while, and it’s only now just taking off. So, but the future thing, however, I would say 11ac doesn’t change the economics of outdoor Wi-Fi implementation. It’s still pretty challenging.

Matthew Harrigan – Wunderlich Securities

Since the ac is the standard evolution, is that something that is easily incorporated to the Horizon box overtime? I assume the initial prototype boxes wouldn’t be more than compatible for that, but it will probably pretty easy to do at some point.

Michael Fries

Yes, so the way we put our chips in there today, it’s a data board for Wi-Fi, the 11n, and 11ac is back with compatible as well. So, I am not too terribly concerned.

Matthew Harrigan – Wunderlich Securities

Yes, that’s what I thought. Great. Thank you for your time. I appreciate it.

Operator

We will take our next question from Vijay Jayant with ISI Group.

Vijay Jayant – ISI Group

Hi, I have two broad questions. First, Mike, can you sort of just give us some sense of what’s really happening in the market on the ground with eurozone that’s actually deemed in recession. Obviously, your numbers are not showing any of it, but is there – consumers spinning down services, cutting back at all, or all the games you are seeing are mostly shared and filling the market penetration at all, or are these products being viewed as staples like these, I think they are in the U.S. And second, I just want to get your comments on the EU, (inaudible) comment couple of weeks ago about potentially not requiring fiber networks to unbundle and do you think that’s going to sort of spur up fiber deployment across Europe and change the competitive landscape?

Michael Fries

I will address the second one, and Diederik, maybe think about the first one. We welcome the comments or statements that in essence, something needs to be done to rationalize the reseller regimes across Europe. The basic objective there is to eliminate the excuse that every incumbent has utilized to slow down or install fiber to the home element. That excuse being a reseller regime that doesn’t support the investment required to build those networks. Now, when we look at the – it’s a lesser of two evils in our opinion, because I fully expect at some point and we have always maintained it publicly that incumbents will build fiber. They have to build fiber, there is no question about it. In that instance, we feel really good about our ability to compete from a number of perspectives. So, we have never pretended that this wasn’t going to happen.

The second main point though is that I would much rather see this happen in an ecosystem or a structure, market structure that’s rationale and doesn’t encourage senseless, short-term reseller models that ultimately fail and destroy the economics of the business for everybody. And I think the EU has recognized that while reseller models worked effectively at one point in time, that going forward, if they want to stimulate to next generation networks in every market, they need to think more carefully about pricing and wholesale regimes and relationships. To us, that is a net positive, if not just an absolute positive, because, remember that we are superior in all respects to the current incumbent offering and anticipate being superior or at least as good forever and what we struggle with is the rational pricing model or the economics of our business deteriorating. Now, it hasn’t yet, but we worry about that. So, I think if the approach that they are taking is a smart one I think we came out as an industry in support of our comments just to tell you, this is not just me thinking that and that I believe in the long run a more rational regulatory environment for telcos is a good thing, for cable operators. Alright, you want to deal with the second question? Diederik, I think it was Diederik.

Diederik Karsten

Yeah Mike. Yeah, thanks.

Michael Fries

(Multiple speakers) what if that many were seeing from the market environment.

Diederik Karsten

I would say old rule I think you said it as well Mike before we see the strength of our products reflected in relatively stable – small reactions marginal, nobody’s going to throw away their internet or TV. Actually, there is still demand for conversion to DTV because people spend maybe more time in the home. Having said that with the strength of our products, there are areas of concern and but for us they are marginal, but you may have heard from other telcos these decline in fixed telephony usage and obviously we see that also amongst our user base, but we don’t depend on that user base as much as they do. So, for us that has factored into the total, that is one thing we see. We also started in Ireland to see a slowdown in pickup of premium DTV, because that is one premium product DTV is probably one where we have to be careful in Ireland. Actually, the government is actively informing people on savings areas and one part of their I’d say information bulletin is to review your kind of TV subscription. Now, it makes sense for people there, but it is only there where we’re noticing some premium let say slowdown in premium DTV.

Overall, also in Central Europe so far we are to see any negative reactions or impact.

Michael Fries

One last comment on the fiber point, any – your question is will (inaudible) what will it do to fiber building principle. Western Europe has a whole estimate at something around 4% penetration of fiber to the home networks, 4%. So, will it take that 4% to a 100% meaningfully faster, I doubt it. I don’t know, but there is a long way to go or our key competitors, our core markets to build fiber and tens of billions of Euros of investment and the incumbent telcos, if you are watching that environment you’re seeing that they are going through very structural change with respect to either ownership, dividends, market position, mergers, cost cutting; they are re-thinking their business models in a significant way and I would think that is going to take some time. I think it is going to take a couple of years before most of our major competitors land definitively on a geographic financial and product strategy and ownership model because several of these – the rumours around mergers are real, they are real and I think the Telmex investment in KPN for [ph]jambling and always signalling that perhaps there are some large scale movements occurring in ownership and so what does that mean for me and my assets – we are from incumbent not want to take time to shake out. So, I see lots of open space here in front of us.

Vijay Jayant – ISI Group

Alright. Thanks so much.

Operator

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

Will Milner - Arete Research

Thanks very much, just a couple of questions. One, I am just coming back to the out-of-home mobile strategy, talked a bit about earlier, but fairly you own mobile spectrum now in Belgium and Holland and I just want to understand if you actually rolling out any mobile base stations yet? Maybe only in test mode, just to see how they will fit in with existing systems, but are you doing anything yet or just holding on to the spectrum for the time being and the second question is just on the basis of technical question, but the fully swapped [ph]barring cost (inaudible) fell 20 basis points to 7.8%. I just wonder if you can talk about the reasons for that and while as shake that going forward, thanks.

Michael T. Fries

Sure. [ph]Terry you can prepare the swap barring cross questions in terms of the build outs in say Belgium or Holland where we own spectrum. I’ll go back to the three (inaudible) I articulated, one, is every market will be different. Two, we’re going to look for the most capital light approach that we think achieves the objectives and three, we’re not yet convinced and we’ll need a lot more market data to be convinced that the quad plays a critical part of our offering. So, those are a lot of “yes” if you follow me. Having said that so which would imply that no we are not definitively committed to a build out in Belgium or Holland, but we remain opportunistically investigative, how is that, the point being that we are all these re-visiting that question based upon new information either technical, strategic, market driven or otherwise and the beautiful thing about the Chilean bill if you focused on it is, we are not building out the entire country. We’re building network in relatively small geographic spaces where the vast majority of traffic exists and in a balance of the market we have roaming arrangements and sharing of infrastructure. So, they are very creative and they created hybrid approaches to build out, that we’ll be exploring.

Will Milner - Arete Research

So, just to come back to the specific question, you’ve not rolled out any mobile base stations in test mode in order of those markets here.

Michael T. Fries

I don’t believe we have any. We may have had one or two – we have done a few to maintain our life and status. Sorry, let me – yeah, but that was to maintain our licenses.

Will Milner - Arete Research

Great.

Michael T. Fries

Yeah and Charlie wanted to do the second question.

Charles H.R. Bracken

Yeah. There is no real set changes with that. Everyone to be aware that we fully swap out that both from a currency match, but also from an interest rate point of view. So, we are totally fixed on interest rates because that was relatively high for today, but then if you would in a short term and floating. We obviously will be able to be significant enough, what we think it is an insurance where paying given the long term nature of business. If we have it done 20 basis points in the quarter reflects the [ph]passage we were always looking for ways to optimize couple of swaps and well optimize the (inaudible) in the life, but I don’t think you can tune it as a step change occurring in the midterm although we continue to have trouble looking ways to reduce our cost with that and as to our re-financing program we were trying to re-finance at a price that is at least the same if not less than the current cost of the debt we’re re-financing but gets effects to maturity and that is what pretty (inaudible).

Will Milner - Arete Research

Thanks a lot.

Operator

And we’ll take our next question from Hugh I. McCaffrey with Goldman Sachs.

Hugh I. McCaffrey – Goldman Sachs

Good morning guys and I have a couple of questions please. Firstly, can you just give us a view on the Dutch market, it seems like growth must be getting just a little bit incrementally harder there and some color on that would be really great and then secondly, in terms of just the call stack in the second half of last year compared to what you’re sort of expecting to see in this second half this year and do you expect any incremental step up in marketing and the acquisition costs in the second half of this year relative to last year, thanks.

Michael T. Fries

Okay. Diederik, you want to take the Dutch question.

Diederik Karsten

Yeah, talking about the Netherlands, if you look at them, the trend second quarter is always been slow, even so that we don’t compare (inaudible) and if you compare this year versus last year, what happened is that I have to say KPN as a competitor started to act more I would say aggressively, change and up some of their propositions included (inaudible) HD. Second, (inaudible) trying to start up to regain what they’ve been losing and with that – it means that for us there is a –I would say some of their fight, but the market is still out there. If took for example the outlook for Horizon do believe that an high [ph]bundle ratio I demand for high speed internet, Wi-Fi, HD -- I think we are well poised to kind of tap into the continued demand, but KPN is stepping up as well. For example, they’re now trying to bolster in the fighter to their home area which like Mike said is still limited, but they are aggressive in new sales techniques like door-to-door. So, I think the Horizon will see some revamping of their growth and again combined that with the historically slow market in Q2. We think, they are doing well.

Hugh I. McCaffrey – Goldman Sachs

John, I think you are following their result, so you know what they are doing in various business products and they are challenged of course, but we don’t expect them to lay down. I hope that is clear? We expect all of these telcos to regroup and re-evaluate their strategies maybe even correlate in terms of how they are going to stem the loss. This is what they are paid to do, but we have equal and just as powerful response tools and I feel much better about our ability to be creative and quick and focussed in the product offering and for the perceivable future we have much more robust ammunition in terms of the (inaudible) and offering with Horizon a very sophisticated and elegant user interface and in a multi-screen device that is going to get people’s attention. I really believe that firmly and so I think it boards well for Holland in terms of that we still have lots of room on product comparability and we have product additions like Horizon that will make it easier for us to excel. And in terms of the marketing, I mean in general I think we’ve all said it here. We do expect the second half of the year to be higher in OCF growth in the first half of the year, but I don’t know that we should be pinning on any one element or another I mean as you heard in the call, there is positives and negatives, but what we are going to lose we are going to have some revenue and better results in Chile, but we continue to grow very rapidly in Germany. So, I think in principle it may be just the best way to leave it as we do anticipate a better OCF results in the third quarter and the fourth quarter. We did provide mid single digit OCF guidance and as a result based on where we are here today it is theoretically obvious we anticipate higher OCF growth in the second half of the year, but the puts and takes in the reasons for that will vary and we look forward to explain that to everybody when it happens.

Hugh I. McCaffrey – Goldman Sachs

Okay, that is clear Mike, thanks.

Michael T. Fries

Thanks.

Operator

And we’ll take our final question from (inaudible) with Morgan Stanley.

Unidentified Analyst

Thanks, to you Mike. I was curiously just comment on the acquisition, disposition, sort of pipeline and level of activity out there as you guys work out over the next kind of year and a half. You expect to see a lot of more transactions out there. You guys have been active, but I didn’t know if you thought the bid asked toward a normal sort of reasonable place here and then second just like Germany can you remind us on the sort of programming cost guarantee I guess for guys carriage revenues on the broadcasting for there has been some I think chord activity in Germany about whether the broadcasters will continue to pay you guys to carry them on your systems and I am just curious if you could update us on where that stands and as to how you think about that and whether it is even material to the business.

Michael T. Fries

Yeah, so on the second point. In Germany, the public broadcasters have historically paid relatively small fees to cable operators and for our – because we carry those channels to vast majority of customers in Germany and have therefore reduced their cost and made life much easier for them. They have recently decided that maybe they don’t want to do that anymore. Of course it is much more complicated than that. Let me say three things, one, the total revenue to our German operations from public broadcast carriage fees is less than 1.5%. It takes small piece of our revenue and in our opinion, I think its €20 to €25 million, it’s not material or even meaningful. Secondly, the rules are clear, there is no must carry in Germany, but if there is a contract we will carry, and with no contract they won’t be carried. And that is the fight the KDG is taking to the broadcasters publically and I think has very strong legal ground to take that flight. Of course it’s a bigger issue for KDG, because they are slightly larger. And then the third point is if these broadcasters have very ambitious objectives in HD and a new channel, I think there is as many as 10 HD channels that they’ve launched none of which are carried on cable and none of which will be carried on cable unless there is an arrangement of some sort. So, I think it’s interesting headlines and perhaps, a bit of drama here or there, I don’t see it as __ material to us. And I see it sorting itself out, hopefully without a lot of public Kaboogie dances going on, but we’ll see. And then in terms of acquisition pipeline, has been to be too specific about anything, but as you point out we’re always evaluating rocket opportunities firstly in our core markets, where we can get bigger. We do deals regularly and in fact in the second quarter we close deals in Holland and Switzerland on small acquisitions that continue to grow our footprints there. And we’ll always look at those in market deals, some big some small. There are some transactions in market like Poland that are rumored to be or publically disclosed to be up for sale, and of course we look at those things. But I will tell you that we’re going to stay very disciplined. The bigger assets and you would know what those are remain where they are. And there is a price, certainly a multiple discrepancy between our stock and those stocks, and whether or not we will ever be able to achieve something there is a big question mark. But we are paid to continually evaluate opportunity and scale as a critical piece of puzzle for us, and so if something comes about that looks interesting, we’ll absolutely take a look at it and see if we can make it happen. In the meantime it’s not distracting us and I don’t there is anything eminent. I guess might be one way to say it. But we can’t foretell that so we can’t talk about it and any more detail than that.

Unidentified Analyst

Got it, thanks a lot Mike.

Michael Fries

I think that’s it guys, so appreciate your attendance on the call. We do want to exit about the quarter, and in fact the first half of the year as you’ve obviously heard today. And we look forward to report on the third quarter and crack it out in the second half of the year. So, I appreciate you being on the call and have a great summer.

Operator

Ladies and gentlemen, this concludes the Liberty Global’s Q2 2012 Investor Call. As a reminder a replay of the call will b available in the Investor Relations Section website at www.lgi.com. There you can also find a copy of today’s presentation materials.

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