Feb 13, 2015
Executives
Michael T. Fries – President and CEO Bernard G.
Dvorak – EVP, Co-CFO, and Principal Financial Officer Tom Mockridge – CEO, Virgin Media Balan Nair – EVP and CTO
Analysts
Benjamin Swinburne - Morgan Stanley Tim Boddy – Goldman Sachs James Ratcliffe – Buckingham Research Jeff Wlodarczak - Pivotal Research David Joyce - Evercore ISI Matthew Harrigan - Wunderlich Securities Amy Yong - Macquarie Michael Bishop - RBC Capital Markets Saroop Purewal - Redburn Justin Funnell - Credit Suisse Carl Murdock-Smith - JP Morgan Operator Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global's 2014 Results Investor Call.
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Today's formal presentation materials can be found under the Investor Relations section of Liberty Global's website at www.libertyglobal.com. Following today's formal presentation, instructions will be given for a question-and-answer session.
As a reminder, this investor call is being recorded on this date, February 13, 2015. 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 Forms 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 over to Mr. Mike Fries.
Michael T. Fries
Thanks operator and welcome everybody. We appreciate you joining the call today.
We have a number of folks of management on here tonight, I could introduce them just right now, but I’ll introduce them as they speak. And as a reminder we do work with slides, I hope you can grab those from our website.
I am going to kick it off on slide 4, we provide highlights of the quarter and full year and I’ll start with the numbers. Because a sport better than anything the most important part of our story and that’s growth.
We had another very strong year in subscriber additions with 1.3 million new RGUs and not surprisingly most of that growth is coming from broadband. But investment in our video and entertainment platforms are also paying off with digital penetration now up to 68% and our lowest level of video offers since 2006.
That volume together with our pricing initiatives through a rebased revenue growth of 3% and rebased OCF growth of 5.5% for the full year generating 18.2 billion of revenue, 8.5 billion operating cash flow, adjusted free cash flow of 2.1 billion that’s up 18% and all of those numbers are on or ahead of our guidance. Hoping by now it is clear that increased scale is really working for us and we’ll continue to generate returns for several years as a result of our consolidation of Poland and the Ziggo merger, a combination of our Swiss and Austrian operations, and of course the substantial value creation on the way of Virgin Media.
Speaking of Virgin, hopefully you all saw the announcement today about Project Lightning which will grow Virgin Media’s footprint by 30% to over two third of UK household over the next 5 years. I’ve got an entire slide dedicated to it so be patient, I promise we are going to provide plenty of detail.
The bottom-line though is that it is an incredible opportunity, one that is financially accretive, strategically smart, and readily financeable. I’ll also update you on Horizon in a moment which is our next gen video platform which just reached a million subscribers and has helped us create happier and stickier customers and all sorts of product innovations like the Horizon Go App which is now available in eight countries.
Our mobile business is healthy and growing. We added 500,000 postpaid subs last year and grew revenue of 8% to 1.3 billion.
And of course we announced our plan to create a tracking stock for our Latin American business which we called LiLAC. In the shareholder meeting with the Board and this proposal is on Feb 24, and I’ll reiterate the rationale in just a moment from those who haven’t yet voted which is most of you.
As in prior quarters and prior years our balance sheet is in great shape and geared to drive our levered equity strategy. At year end we had 5.2 billion of liquidity including 1.2 billion of cash and adjusted leverage of 4.9 times.
We continue to de-risk the capital structure with 94% of our debt fixed, all currency exposures hedged, and over 90% of our debt a 2020 and beyond. And then finally on slide 4 we announced today a further $2 billion increase in our buyback program which brings a total current commitment for 2015 and 2016 to around 4 billion.
Together with the 1.6 billion purchased last year and the 10 billion to be repurchased between 2005 and 2013 when this latest program is done we’ll have bought back nearly 16 billion of stock since we formed the company. And now let me dive in to a bit more detail on our operating results.
Starting on slide 5, where we show our broadband and video performance. I’ll start with broadband on the left hand side of the slide which clearly shows how steady our growth has been in this product.
Over the last three years we have added around 900,000 broadband subs every year and a total of 4.1 million over the last 5 years. That success is a function of our superior networks and broadband speed which our competitors simply can’t deliver.
Our average European customer today are getting 70 megabits a second and consuming 70 gigabytes per month and those numbers are 40% to 50% year-over-year. On the bottom left you’ll see our top broadband speed in each of our five biggest markets in red and how that compared to two years ago.
Essentially all of our operations offer 150 mb to 250 mb products today and we’re actually selling a 500 mb product in three countries. In Western Europe we are currently winning three broadband service for every one DSL sub the company is adding on a combined basis even though we reached less than 100% of the homes.
On the video front we are completely reinventing the entertainment experience for our customers with Horizon on the continent and TiVo in the UK. Today one in four of our digital TV subs has access to an advanced TV platform and that number is ramping quickly.
We’re particularly happy with our Horizon platform which has now crossed the 1 million subscriber mark, like X1 here in the states, Horizon is the single best user experience in the market and all of our statistics support that. We’ve launched the Horizon Go App in eight countries, and in markets like Holland 20% of our customers are already watching TV on their Smartphone’s, tablets or laptops.
MyPrime which we’ve talked about is our own OTG product that competes with Netflix but is actually bundled into our high end packages for free and subscribers love it we are getting nearly 40% usage in the MyPrime app both on the TV and on other devices, in Holland and Switzerland. And that app features thousands of movies hit series and kids programs.
All of this innovation and investment in the best TV experience is paying off. We estimate that an average Horizon customer generates 20% more ARPU ensuring 15% less in a traditional digital customer and the slide indicates total video losses as a percentage of the base of decline from 2.5% roughly 5 years ago to just 1% today.
Two other areas of our business are of course generating faster top line growth today on mobile and B2B which we talk about a bit on slide 6. As I mentioned a moment ago with 4.5 million mobile subs today 80% of which are postpaid, we generated 1.3 billion of revenue last year and grew 8%.
We believe as I said before, Europe is a Quad-play market and we’ve now launched mobile in 9 countries. Telenet and Virgin are already plus or minus 20% Quad-play penetration and we see no reason why we can’t reach those sorts of levels or higher in other markets.
All of our MVNO deals already provide or allow us to get to 4G services which we know drives mobile data usage. And with our fixed networks we’re ideally setup to offload that traffic for better economics.
On the B2B front, we finished 2014 with 1.7 billion of revenue, up 7% and growth here was driven by a well executed turnaround in the UK, disciplined investment in the wholesale and enterprise segments, revenue growth in our European wide server business are over 25%. And the plan looks just as good from here in my opinion.
We expect to benefit from scale economics in markets like Holland and while we are doing well in the SOHO segment we are still under penetrated. SOHO market share is going to grow because we are focused on the new services like WiFi, cloud, we are focused on triple play bundles, top class support, and appealing price points.
Now I am going to turn to slide 7, and I like to spend a couple of minutes on LiLAC which is our Latin American tracking stock. Of course we are going to put shareholder vote on February 24, as a British PLC all classes of stock have a chance to weigh in on what we think is good deal for investors.
You know we operate two of the largest and most advanced cable assets in the region, that together pass around 4 million homes, 3.2 million RGUs, and generated 480 million of operating cash flow of which grew to 16% last year. We think there is a significant opportunity to expand in this region where broadband penetration is just 25% and 6 out of 10 homes don’t have Pay-TV.
We believe the tracking stock is the right way to do it and we will benefit shareholders and server rights first. So, we’ll give investors choice by creating a pure played stock for Latin America and allowing shareholders to decide where they want to invest.
By the way as most of you know, there are very few listed Latin American PayTV companies, so LiLAC will be an unique asset from that perspective. In addition to the organic growth you see in Chile and Puerto Rico, we’re pretty sure that our M&A experience in 20 plus years in the region will create a very interesting consolidation opportunity that may get lost as part of the bigger group.
Thirdly, the tracking structure allows us to retain the advantage of scale by sharing management expertise, technology innovation, and purchasing power across the broader group. While this is something new for British PLC, many of you would have direct experience in the value creation benefits of tracking stock of Liberty shareholders over the years.
So it goes without saying that we would appreciate your support in voting for the tracker and we’re happy to get on the phone with any of you to answer questions that you may have. Let me spend a few minutes on our announcement today in the UK.
1after considerable research, field trials, lots of planning but we’re going to launch the largest and we believe the most attractive broadband investment in the UK in over a decade. Over the next 5 years, Project Lightning which is what we call it will extend Virgin Media’s reach by 30% to nearly 17 million homes or almost two thirds of the UK households.
As many of you know Virgin Media’s network has grown through a consolidation mostly with various cable companies over time which has let a patch work of unserved homes right around the corner so to speak. In fact we’ve identified 4 million premises that are within 50 meters of our existing infrastructure with two third of those actually just 20 meters from the current network.
The close proximity of these premises combined with lower build cost today means that the value creation opportunity here is very attractive. Total project will cost around 3 billion pounds and will be predominantly debt financed with minimal equity required since its largely self financing and based on the rapid take of new services that we are planning.
It’s also important to point out that investments are going to be modular so it could stopped if we are not generating the expected levels of demand or if construction costs are higher than we anticipated. Our initial instinct is that Virgin's best in class broadband in corporate bundles will allow us to replicate a 40% penetration and roughly 50 pound ARPU we’re currently generating in our footprint.
To support that we will be taking a sales led approach, where we can prioritize the bill based on demand. Why are we so confident, well be have been running field trials in Glasgow and Teesside that reached 10000 homes with our re-achieved penetration levels of 23% and customer ARPU's at 48 pounds just for the six months and that 48 pound number is actually higher than the 45 pound initial ARPU we modeled in the plan.
You don’t have to do too much math to conclude that this program will generate highly accretive returns and drive meaningful benefits to our revenue and cash flow beginning in around 2017. We believe we can ultimately generate up to 1 billion pounds of incremental revenue with OCF contribution margins of 60% plus by 2020 when the project is moving at full steam and to top it off we assume limited take up of B2B which will obviously benefit from an extended footprint that represents upside to the base case.
Lastly it’s our expectations that project will be predominantly debt financed in the short-term and longer-term, using internally generated cash flow and we will have sense know with [Inaudible] committed buyback plans. I am sure there is going to be a lot of questions on this and we’re prepared to answer them.
This is a really exciting moment for Virgin Media and for us. Let me wrap it up with a quick overview of our strategic priorities and our guidance.
On Slide 9, I think this is a good visual, if you don’t have it in front of you, you might grab it but I am going to speak to in very general terms and ask you to think about our consumer business in three layers. It starts by providing our customers with superior and ultimately ubiquitous connectivity whether you are plugged into our lightning fast broadband networks or roaming on our 4G mobile platform or linked to one of our 5 million WiFi hotspots which will actually be 10 million by the end of the year.
You are always connected to us and with innovations like DOCSIS 3.1 which will take us to 1 gig speed and beyond, we’ll always provide you the fastest and most reliable experience available. That is the foundation of our business.
You then layer on top of that the most powerful and beautiful user experience which we call it Horizon and you make it available on all devices wherever you are, then you ensure that it is cloud based software driven and ultimately very, very scalable. And then you populate that platform with all the apps and all the content you could ever want including national broadcast networks replaying catch up TV and the best channels, thousands of series and movies available on demand, most of it free.
Recommendations at search engines with the popular apps like YouTube and Facebook and with that plug n play proposition which we are implementing right now we are confident that we can continue to achieve steady subscriber growth but also importantly, maybe more importantly pricing power. We just this year we already implemented 3% to 6% price increases across our major markets without disruption.
Consumers can see the benefits of our network investments, platform innovations, and our product offerings. Then you add on top of that two other accelerators, first our B2B business which is growing faster than our consumer business after a new focus on SOHO and some new opportunities and scale benefits from larger and larger footprints and a built in synergy plan that should result in additional 500 million in annual cash flow benefits over the next few years on top of what’s already been realized from the integration of Virgin Media and what we’re expecting from the consolidation of Ziggo and the combination of our Swiss and Austrian operations.
When you put all that together we’re confident of our guidance targets for 2015 just as we were last year and most targets include mid single digit OCF growth and mid teens adjusted free cash flow growth to $2.5 billion. SO good news in all fronts in my view.
Growth is strong, our product leadership is actually improving overtime, synergies are kicking, and even with an exciting new billed project in the UK we remain committed to driving value for you for shareholders with our capital structure and $4 billion of pending stock buybacks over the next 2 years. With that I’ll turn it to you Bernie.
Bernard G. Dvorak
Thanks Mike, a quick note before I start with my presentation. When we referred to our year-to-date 2013 combined results in this presentation, they include Virgin Media for that full period even though we did not own Virgin Media prior to June 8, 2013.
And our 2014 results include approximately 7 weeks of Ziggo. On slide 11 we present our reported and rebased revenue and OCF results for the 2014 period.
For the year ended December 31, 2014 we reported 18.2 billion of revenue as compared to 17.3 billion of combined revenue for the prior year period. Adjusting for the impacts of FX and acquisitions, we posted 3% rebates revenue growth in 2014.
Our European operations delivered 17 billion of revenue in 2014 with rebates growth of 3%, which is presented in more detail on the next slide. Our Latin American operations reported 1.2 billion in revenue or 4% of rebates revenue growth.
Moving to the right side of the page, we reported 8.5 billion of OCF in 2014 representing 5.5% rebates growth and our best growth rate in 3 years. Our European operations delivered 8.3 billion of OCF in 2014 or 5% rebates growth or our Latin American operations posted 480 million or 16% rebates growth, the later held by a lower wireless deficit in Chile and one wing synergies in Puerto Rico.
Regarding our overall OCF margin, a mixture of cost controls and integration synergies mainly related to our Virgin Media acquisition help drive 110 basis point year-over-year OCF margin improvement to 46.7% in 2014 and with the exception of the Netherlands, our OCF margins expanded in all of our operations in 2014. On slide 12 we take a deeper dive into the 2014 financial performance of our big 5 markets that represent over 80% of our total revenue.
That figure excludes revenue from Ireland and Austria, which will be integrated into our UK and Swiss operations respectfully. UnityMedia in Germany delivered rebates revenue growth of 6% and rebates OCF growth of 9% in 2014.
Our year-over-year growth was primarily due to continued volume and ARPU growth adding over 500,000 of RGUs and increasing ARPU per customer by 6% during 2014. Telenet in the top middle of this chart posted rebates revenue in OCF of 4% and 7% respectfully.
These results were driven by the success of WAAP [ph], triple play bundles and continued mobile postpaid additions during the year. Our Swiss operation reported 5% rebates growth for both revenue and OCF.
UPC cable com delivered its best annual revenue performance since 2008 supported by a strong underlying broadband services and continued ARPU growth. Annual OCF growth in Switzerland kept pace with revenue growth despite higher cost in Q4 associated with the integration of our Swiss and Austria operations and office relocation expenses.
Moving to the bottom row, our UK operation reported 3% rebates revenue and 7% rebates OCF growth for the full year this was driven by Virgin Media’s 4% rebates growth in cable subscription and mobile subscription and B2B rebates growth of 9% and 5% respectfully. This growth was partially offset by lower inter connect revenue and reductions on our non cable DSL reseller business which we are in a process of disposing.
Virgin Media’s full year rebates OCF growth of 7% benefited from a strong Q4 performance with 11% rebates growth. The full year results were driven by top line growth and faster than expected synergy realization.
And the Netherland the market dynamics continue to be very competitive as led to 1% declines in both rebates revenue and OCF during 2014. 2014 results were a significant improvement from the declines in rebates revenue and OCF of 2% and 5% respectfully that we reported in 2013.
Slide 13 focuses on our property and equipment additions and adjusted free cash flow. Our P&E additions as a percentage of revenue showed a slight decline in 2014, as compared to our combined results in 2013 and in line with our 2014 guidance.
For 2014 we reported P&E additions of 3.9 billion or 21.4% of revenue as compared to 3.8 billion of combined P&E additions or 21.8% of revenue in 2013. For 2015 we anticipate our capital intensity to range from 21% to 23% including the initial expenditures associated with Project Lightning in the UK.
Assuming a full completion of its 4 million homes build out plan, our expectation is that we will stay within this range over the 5 year life of the project. Turning to our adjusted free cash flow performance, as Mike highlighted we exceeded our adjusted free cash flow guidance and delivering 2.1 billion in 2014 without Ziggo and 2.2 billion including Ziggo for the last seven weeks of the year.
Excluding Ziggo this is an 18% increase on a combined basis compared to 2013, supported by strong organic OCF growth and favorable net working capital movements. As Mike said we expect to deliver 2.5 billion of free cash flow in 2015 which represents mid teens growth on an FF mutual basis when compared to our 2014 adjusted free cash flow, as adjusted to include Ziggo and the impacts of its new capital structure for all of 2014.
Slide 14 shows our leverage and the status of our share repurchase program. We finished 2014 with total debt of 46.2 billion, up 5 billion from Q3 primarily as a result of the Ziggo acquisition.
We’re normalizing our OCF to take into account a full quarter of Ziggo, our gross and net leverage ratio stood at 4.9 times and 4.8 times respectfully. We continue to take advantage of attractive capital markets and refinanced 3.5 billion of debt in Q4 2014, at lower rates.
With these transactions our maturity profile and cost of borrowing continued to improve as we now have an average tenure of more than 7 years while our fully swapped borrowing cost decreased 60 basis points year-over-year and now is at 6%. At year end our consolidated liquidity stood at 5.2 billion consisting of 1.2 billion of cash and 4 billion of aggregate borrowing capacity under our credit facilities.
Subsequent to December 31, we began reorganizing our credit pools through the extraction of UPC Netherlands and UPC Ireland from our UPC credit pool. In February, we transferred UPC Ireland to our Virgin Media credit pool and in March we expect to combine UPC Netherlands with Ziggo, the former regional credit pool in the Netherlands.
We believe these regional credit pools will be attractive for investors and will allow us to operate the combined businesses more efficiently. In terms of share repurchases we completed 1.6 billion in share buy backs during the year.
This includes 644 million that we repurchased once we are able to resume our repurchase program after November 11th acquisition of Ziggo. We look forward to repurchasing the remaining 1.9 billion in equity that is left on our original 4.5 billion repurchase program and our Board approved another 2 billion that we plan to repurchase through 2016 which should bring our total buybacks to 16 billion since the company was formed in 2005.
In summary we are very pleased with our 2014 results and subscriber growth was strong supported by our innovation engine and our superior broadband network. We feel confident about our growth prospects heading into 2015 given our current operating momentum, recent price increases, and the synergies we expect to realize in particular from the Ziggo integration as it begins to hit full stride.
At the same time we look forward to repurchasing close to 4 billion of incremental equity through 2016. And lastly we appreciate your support in the upcoming vote our LiLAC tracker and with that operator please open it up for questions.
Operator
[Operator Instructions]. We’ll take our first question from Tim Boddy with Goldman Sachs.
Michael T. Fries
Tim?
Operator
Tim, please pickup on your handset or check your mute function. Alright I am hearing no response, we’ll go to Ben Swinburne with Morgan Stanley.
Michael T. Fries
Are we set up operator?
Operator
Alright there we go, Ben your line is open now?
Benjamin Swinburne
Can you hear me now?
Michael T. Fries
Got you.
Benjamin Swinburne
Okay, hey good morning. Mike can you talk a little bit more about the Project Lightning plans.
I guess two big questions, what are you assuming the competitive responses if any from BT and your 40% penetration target in three years, that’s a pretty impressive ramp. Obviously the trials have gone really well and then I am curious can you talk a little bit more about the B2B assumption because when I look at the ARPU and the 4 million premises it would seem like that’s an enormous opportunity that I think you are leaving out of the base case at this point, I mean if you could shed some more light on that as well.
Michael T. Fries
Yes, well I will address those quickly and then I think Tom is on the line too. You are right about the B2B, I will start with that.
We -- I think we have taken conservative approach in planning of the business and so we don’t have any B2B revenue associated with this plan today. And the 50 pound ARPU, 45 going to 50 overtime does not include any B2B.
That’s our consumer ARPU and consistent with what we’re generating elsewhere in the UK. So you are right about that, that’s point one.
In terms of a competitive response we’ve asked that question and Tom can provide color too, we do expect of course competitive response but UK is already a very competitive market and we’ve achieved in these trials rates that exceed our own expectations in terms of our ability to satisfy what is a strong demand for broadband speed. I mean we’re going to be launching with 150 megabits, we can go higher than that.
We will have 3.1 so it’s been -- it’s been pretty successful so far in the trials. And of course as I mentioned it will be a demand led build so we will have an opportunity to pre-sell and know ahead of time what a competitive response might be when we enter into certain areas.
So we feel pretty good about it, our ability to offer sort of promotional opportunities for consumers as we build out and to get build excitement around the extension we think is quite high. So certainly a competitive response and lots of moving parts in the UK market which we can talk about but we think the 40% is achievable especially based on trials.
You are adding to that Tom I don’t know if you are on, I think you are.
Tom Mockridge
Yes, Mike thank you. I am here in Birmingham with Charlie Bracken.
In fact we just had the Prime Minister here meeting our apprentices and some of the other workers to mark this announcement. He has been very supportive and we are obviously pleased by that and of course that does help us with publicity.
We have already had enormous response today to Cable My Street, portal was already opened. We’ve had over a million people already view social media references to the project.
So we are very pleased with what is admittedly, I mean if he is. But the point as Mike said, we consistently beat our combined competitors comprehensively in homes where they have cable today.
We generally have a 50% market share or 40% penetration in the homes where we have cable today. And we’ve shown through these trials which were in two area Teesside and Glasgow which are not particularly prospective for us.
Those are not bad areas but they certainly were not sweet spots that we can go after. We’ve already build that to 23% and we have a high degree of confidence with good effort, good execution that we can market, sell, and install these customers and then with this much better improved churn rate we time those customers.
Benjamin Swinburne
Thanks for all the color.
Michael T. Fries
Yes.
Operator
Alright and for our next question we will go back to Tim Boddy with Goldman Sachs.
Tim Boddy
Hey, thanks. Can you hear me now?
Michael T. Fries
Got you.
Tim Boddy
Great. Yes, I was just going to say it’s obviously very exciting that the size of the opportunity in the UK is as large as you’ve laid out and perhaps larger than I thought, I think the -- I guess it will be helpful to understand what the near-term impact from free cash flow could be going into 2016, it sounds like your 2015 guidance fully baked this in already.
But if you have a sense of this is a cadence of cost through the project you mentioned I think already 2017 as a point of getting to free cash flow breakeven? I also wondered in terms of things that are on base case, there should be quite a big benefit to churn across the existing customer base because I know at the moment I think as much as half of the churn at Virgin Media if I recall correctly is coming from movies who obviously move outside the footprint?
Then just as brief follow up I just wanted to ask a little about Germany where it looks like you settled the case of the KBW, if you could comment on that and if that opens up scope for consolidation in that market?
Michael T. Fries
Sure I’ll work backwards and let Tom also try around the UK questions. In Germany we did settle the case that had been ongoing for quite some time.
With respect to the KBW acquisition, I think that’s really good news for everybody involved. The deal that we had ultimately shot with Deutsche Telecom was a straight game in essence.
We look at that honestly as a very small and marginal increase in the purchase price, around 5% let's say for a business that we believe we paid in the seven times four on a multiple basis and which has over performed considerably from the acquisition case. So while we would have preferred a better outcome through the courts, we realized it would take some time and was not certain and that a resolution of this issue was in the best interest of everybody.
So we are quite pleased with that and it’s not material and for a business that has way over performed our expectation seemed like a smart thing for us to do. I want to make one comment about the project which may or may not have been clear from either my remarks or the press release, it was embedded in your question though which is this happens overtime of course and while we are not giving you year-by-year estimates, certainly there is a little bit built into 2015.
No question as they are less than 10%, maybe over the following two years roughly a third, and a lot of it is back ended which is conservative on our part. And that’s what you’d expect us to do.
But the point I am making is as you go through along [ph] there will be cash flow generated from those homes and so the 3 billion pound figure is really a headline figure that includes in their roughly 2.4 billion pounds for the planning and the construction of the network so approximately 625 plus pounds per home. And then additional money for CPE, and line drops, and all the other things associated with connecting customers if you will.
So some of that 3 billion is variable and the whole project of course is both variable and scalable based on demand. So the point is while it is 3 billion pound headline price, we expect to generate meaningful cash flows through the course of the project and we expect to use those cash flows to finance that investment overtime.
And so the net investment to us is obviously smaller than that which is why we are confident in saying that the IRRs on this type of project are considerable, probably unlevered in the mid 30s, and that this is a really good use of both resources and time for Virgin and for us. That’s what I’ll say about the cash flows and you can do your own math about the impact of free cash, it shouldn’t be that difficult to do.
Do you want to talk about the churn benefits Tom.
Tom Mockridge
We are at the point that in projecting the same case we have I think quite reasonably assumed a continued improvement in the churn rate specifically because this is a input program where we are building into these open centers and thousands of cities across the United Kingdom where we have existing network but haven’t build out. So classic example is here in Birmingham where we have roughly 70% coverage today and as we say when people move they generally tend to move across city in a maximum proportion of people moving further field and this gives us opportunity to entirely capture that.
We have an instrument retention rate well under the 90% for someone moving on to our network. Obviously if I move up there, we are in Europe so there is distinct benefit from that and in any case we had a very good year for June through with three to four days.
I mean there has been a lot of attention other than the business, a lot of detail, a lot of macro issues right across the board and improve that but still high, we will get that advantage irrespectively.
Tim Boddy
Thanks for the color. Just a very brief follow up Mike if I’ve understood you correctly are you reiterating your kind of mid teens free cash flow objective over the medium term despite the project?
Michael T. Fries
Well we are certainly projecting that for this year, it is premature to give to you any mid-term guidance on that but we are pretty comfortable with where we are today.
Tim Boddy
Okay, thanks so much.
Tom Mockridge
Just to talk about the financing base, essentially if you look at slide on page out of Mike's materials. Well you will see, essentially we get to the kind of more or less our target penetration within last two years.
With our working capital management program which we have been using very extensively successfully, it depends on supplies, what effectively it means is we are actually be able to 100% debt financed the cash flow. The cost of this through -- so we are actually forward buying in two years time, 5 times multiple cash flow.
That’s why it’s not material to our leverage and it won't change our leverage targets. And depending on the phasing it might affect our free cash flow but as Mike said it’s a very attractive mid 30s unlevered IRRs I guess you get cash from this but the leverage effect is very, very high IRRs.
Michael T. Fries
I mean just extending on that Tim, if we ended up exceeding our expectations on penetrations rates and ARPU we might accelerate the build. If we felt like we needed to do a better job of marketing, etc.
we might back end the build. So it’s hard to say today exactly what the impact will be except that you can rest assured we’ll manage that as you’d expect us to manage that to optimize our results.
Tim Boddy
Thank you.
Tom Mockridge
And I think it is applicable with our buy back target. If you will notice there is commitment to buying back stock.
Michael T. Fries
The next question Operator.
Operator
Alright, next question comes from James Ratcliffe with Buckingham Research Group.
James Ratcliffe
My question, couple if I could, first of all do you ever read on what portion on those 4 million in incremental homes are Virgin mobile customers today and would be presumably easy to target? And secondly, one housekeeping, just to clarify 2.5 billion adjusted free cash flow for 2015 doesn’t include any CAPEX related to this project?
And I guess third, are you making assumptions in your free cash flow guidance for 2015 on further refinancing of debt and just to sort of generally, I know Charlie you said it if you could refile all the days, bring the rates down below 5, how much of that’s achievable and what sort of time frame? THANKS.
Michael T. Fries
Well, the easy answer yes, the 2.5 billion free cash flow does include 2015 expenditures against this project. And we make some modest assumptions about refile year-to-year but I would say they are not substantial.
So every year we end up exceeding our expectations on our ability to refinance, extend and lower the cost of our debt. So I would say whatever assumptions are in there are modest if any.
Do you want to talk about the Virgin Mobile impact Tom, I am pretty sure its low well go ahead and respond.
Tom Mockridge
Great, it will certainly be less than 20%, let’s say more than 10%. We are just putting in a new IP sector to cross over next month which will allow us to cross index the cable customer database and the mobile customer database much more effectively.
And clearly as these homes are build out in the past it gives us more opportunity to double market to these people. And of course the moment we are Quad-play marketing as positively as we can and we found a Quad-play customer change in the right 5% annually and a much better customer for us.
James Ratcliffe
Great, thank you.
Operator
We’ll take our next question from Jeff Wlodarczak with Pivotal Research Group. Jeff, please pickup on your handset or check your mute function.
Michael T. Fries
Maybe we can come back to Jeff if he gets on. Can we go to the next question operator?
Operator
We’re having some technical difficulties it will be just one moment. And I apologize for the disruption, we will be -- we’re checking into things, be just one moment.
Michael T. Fries
Can we get a question from another shareholder in the mean time or is it the problem with the general line.
Operator
I believe that’s a problem with the general line right now.
Michael T. Fries
Can people hear us operator?
Operator
Yes they can hear you.
Michael T. Fries
Okay.
Operator
Alright. [Operator instructions].
And we’ll take our next question from Jeff Wlodarczak with Pivotal Research Group.
Jeff Wlodarczak
Hey guys, can you hear me.
Michael T. Fries
Got you.
Jeff Wlodarczak
Alright, excellent. For Tom you had an extremely strong quarter in the UK in regards RGUs and that 11% rebased EBITDA growth, can you provide more color on what drove that result in assisting ability of the factors that drove that growth then I have a follow up?
Tom Mockridge
Sure, to be direct it was across the board performance in consumer cable. We benefited from what tends to be in the UK, our back ended market structure, we had a strong Q3 guidance and we built on that in Q4.
The guidance we had in Q3 we are at the back end of the quarter so that gave a full quarter benefit and we had the lower churn rate, obviously contributing to tech growth. We had the benefit of that turn around in business that Mike referred to earlier and that has been a process building through the year.
And in mobile we have continually built that business through the year and there is a back story there just integrating the mobile business better to the cable business which frankly Virgin Media hadn’t done before. And behind that there has been a consistent story of cost savings.
We finished the year, total costs are down year on year 2014 on 2013 and that has involved some headcount reductions. We are running roughly 3000 people below where we were when Liberty ended the business and not being about efficiencies across the business.
It was a whole range of factors and I am very pleased to think that resolved in.
Jeff Wlodarczak
Great, and then on the Netherlands, is it fair to say that KPN got more aggressive around the close of the Ziggo deal, taking advantage of the transition period to UPC. What are you doing to reverse those trends and if you could shed any light on these synergies we should expect in the Netherlands, and how long we should expect these synergies before the synergies kick in?
Michael T. Fries
Yeah, I will take a crack at that, I don’t if you -- I can build on that as well. Yes, I think if you listen to the KPN call, you would have heard the CEO say that they remain commercially aggressive in the fourth quarter and they had not a bad quarter actually in terms of their subscriber results.
But they continue to have relatively additional financial results. I think he is unclear because we don’t know what they are thinking or what they are doing.
It could be that they were ready to take advantage of the fact that we hadn’t really closed the deal much or hadn’t really closed the deal at all and it would take us time to get the real merger and the rebranding done. We do expect by April to have the entire country rebranded to harmonize product offers to get Horizon rolled out and things of that nature.
So, we never had planned on having this thing start achieving the scale benefits we estimated overnight. It takes time to do that.
So, who knows what they are thinking but we do expect over the long run that the market will rationalize. We have said that and generally we have been right about those things in the past.
And we feel very good regardless of what KPN does about our ability to roll out the triple play bundle. We now have got mobile launched, we have got superior speed, we have got the best TV product, my client [ph] in Holland is killing it.
So we feel pretty good about the new Ziggo and its ability to scale across Holland as well as in the B2B space which we have been conservative about thus far. In terms of the timing of synergies, we haven’t been that specific.
I will let Rick correct me but I do believe by -- over a three year time frame generally is what we estimate for the 240 million euro synergies which is up from 150 million euro when we announced the deal. And of course there are some dissynergies in the early years but they are not substantial.
So I think it is -- the thing to focus on is the out years and we think 240 million euro on top of a consolidated cash flow that's pretty substantial is the right number and the timing is probably not that different than what you have seen in other mergers for us.
Jeff Wlodarczak
Alright, great. Thanks Mike.
Operator
We will take our next question from Vijay Jayant with Evercore ISI.
David Joyce
Thank you this is David Joyce for Vijay. We were wondering about the new Premier League rights that BT and BSkyB bought and what is the impact to your business?
Then secondly there were some press report that said [multiple Speaker]. Thank you.
Michael T. Fries
I didn’t hear the second question, I am telling that clearly. There is echo, maybe somebody needs to correct that.
But can you repeat the Telenet question.
David Joyce
There have been press reports that Orange perhaps is interested in Telenet, we are wondering how strategic that asset is?
Michael T. Fries
Yes, we had no conversations with anybody at Orange about Telenet and as one of our largest operations which continues to perform extremely well and it is in a strong market position, it is unlikely we would be exiting that marketplace. So I don’t know where that rumor started or what it is based upon.
Tom you want to address the first question.
Tom Mockridge
Yes, look clearly the football auction results had ended up in the 70% increase of those who got you an increase. From our point of view we buy the majority of the football via Sky and our agreement was then better indexed to their retail products.
So to the extent that Sky contained the increases in its retail price and remitted other components in the retail price because we bought a sports package but there is others sports and there is production cost and the like. So historically the headline products and right cost over a period of time might be equivalent to half the increase in the retail price over the three year deal and Sky as it said absorbs some of this within the cost structure and we will also benefit from that absorption.
So, we believe from a retail point of view we are reasonably secure. But having said that it is still a big increase.
In terms of BT we have optionality, we don’t have any long-term commitment to BT and for the packages they have got we are going to have a discussion with them and make a determination whether we take it or not.
Michael T. Fries
So we do have a deal with BT through mid 2016 on current terms I believe, so we have access to the existing BT product, whatever they might do to it, in the meantime through mid-2016 and beyond that as Tom says there is no commitment and no agreement.
David Joyce
Thanks and if I could just a little bit more on the UK build outs, I saw the chart of your trial and your penetration experience, what sort of penetration do you need for the affilant strategy, will they self funding and within what kind of time frame?
Michael T. Fries
Well/ I am not sure we are providing that amount of detail. But I think you could run the numbers yourself pretty easily if you just apply an ARPU to year-end contribution margin.
You ought to be able to get to 0that math but I think it is not a good idea for us to start getting into interim period or incremental math for you.
David Joyce
Alright, thank you very much.
Michael T. Fries
Yes.
Operator
And we will take our next question from Matthew Harrigan with Wunderlich Securities.
Matthew Harrigan
Thank you. Since you don’t have enough projects going, if you are actually able to get the type ROIs that Charlie eluded to in the UK, how would you conceptualize the comparable opportunity in Germany.
I mean the plan is probably not quite in the same crazy core pattern and I know you are not going to go under the areas of Eastern Germany but it seems like there is an opportunity there as well if you can really boot strap this along? And then secondly when people look at these new builds, I think people say well, now it is economic basically, this was to fiber, look at wireless drop.
I know because the plant these areas are in and areas we already have plant, you are probably going to stay with current topology and you are not going to do too much in terms of how you vary things, but is there any change in the network approach or any innovation on the margin, are you quite content to run the stocks 3:1 and the success you are having with your current plan in the new areas, thank you?
Tom Mockridge
Well I think the short answer to the second question Matt is it is an evolution of the current infrastructure as opposed to wholesale change in the current structure. So fiber will be deeper, in many cases right to the premise but we do think that Dr.
[indiscernible] the advantages of that will be substantial across that footprint. And so, as you can -- as I think I mentioned in my remarks when we model out the build cost it is certainly less than it was several years ago primarily because of technology developments and you should expect that these 4 million homes will be in a less expensive and more effective than if we had done this a couple to three years ago.
There won't be any copper built into the network, so remember the current topology or structure of the UK, infrastructure is both -- is an overlay. There will be no copper.
It will be largely fiber, utilizing more or less the same technologies we had today. And in terms of other markets it is a good question, we as you can imagine are evaluating whether or not there is a Project Lightening opportunity in other countries but we will be careful about that and we will be smart about that and as we have been with this one.
If we get to something, we will make it clear as to when and how and why. And we will hold ourselves to similarly high return expectations.
And the ability to finance and very effectively and accretively use our balance sheet to grow out and build out additional footprint. But that is a good question and we may do that in other places.
But right now we have got our hands full as you say.
Matthew Harrigan
That's great, thanks Mike.
Operator
We will take our next question from Amy Yong with Macquarie.
Amy Yong
Thanks, two questions, one quick housekeeping one, assuming the LiLAC focus group, can you talk about the timing around the tracking stock, how quickly can we expect this transaction to be done? And my second question is on Project Lightening, you ended 2014 growing VMED at 3% and 7% revenue in OCF, how do we think about the growth rates kind of mid-to-longer-term heading into 2017?
Thanks.
Michael T. Fries
Well we are not going to give you unfortunately as we never have done longer-term growth forecast but I would say and talk in flash and color we are encouraged by the performance of Virgin Media. It has, if you look at this, just this year over four quarters, they have driven OCF growth from high 5s to 6s to 11% fourth quarter.
Now will that achievable every quarter, of course not. But the trend is one that we feel very strongly about and their ability to realize the synergies that forecasted; in fact exceeded the synergy to forecast as well as layer in new projects in opportunities like this should bode well for our growth going forward.
But we are not going to get medium term growth forecast. And the LiLAC tracker I believe, I hope Ryan is on but I am pretty sure it is not that far after the vote.
So second quarter we would expect --
Bernard G. Dvorak
When approved it goes effective with the shares distributed on the 1st of April.
Michael T. Fries
That is what I said, early second quarter. So it happens relatively quickly after the vote and we are hopeful that, that gets done.
I mean we understand that it is not that common among British PLCs but it is quite common here and has been quite successful and we encourage you to both look at our documents and compare them to other documents that you have seen on tracking stock. They have very comparable and we feel that in this particular case our history in the region and our ability to create value for you through consolidation opportunities and great operating execution is attractive.
And it is beneficial to both, the Liberty Global business as well as this potential tracking stock. So we are hopeful you will take a look at those, those documents and hopefully you will vote in favor of it.
We think it is a great opportunity for shareholders.
Amy Yong
Great, thank you.
Operator
We will take our next question from Michael Bishop with RBC. Q - Michael Bishop Hi, good afternoon.
Just two questions around UK please. Firstly the areas where you are looking to infill, do you have sort of early perception of which operators, customers currently use because clearly of the other three big you cannot break us, they have quite different churn rates.
So, I was wondering what your assumptions are in terms of this year you might be able to win customers from and whether -- the average of moving into just sort of average UK market share areas or were they materially different? And then just as a quick follow-up, on the 4 million, how much do you assume to infill and how much do you assume for new builds opportunity because clearly there is some political pressure in the UK to raise the number of homes being built, so I was just wondering if you have any views on that, thanks?
Michael T. Fries
I think Tom you can answer the first question for new builds is relatively small in the scheme things. I think it is 10% to 15% of the project is new builds.
Of course most of it is infill which is equally important because customers and regulators and governments want to see superfast product available to Orland and there has to be wall and has in the urban markets. So, I think that's the right answer to that.
Tom you want to address the first question.
Tom Mockridge
On the first question, I think we would find typically in the areas of this urban cities and towns where do have a presence today in network. And we actually in times past that those communities are very similar to the ones where we do have [indiscernible].
And that is exactly the part of the infill. And in areas we do have had a presence, we will normally be at a 50% market share and the other three operators, major operators will be sharing the remaining 50% with Sky and BT, probably joint leaders and TalkTalk bringing up 10% of that.
So, we find we think a similar pattern in these other areas as we go and do the infill and we have got a proven ability to take customers off our competitors and plus there is an ongoing opportunity to lift that 80% penetration progressively through the 90 and ultimately to U.S. labels.
So we think there is an opportunity there to get both completely new customers as well as take customers from our competitors.
Michael Bishop
Thanks for that.
Operator
We will take our next question from Saroop Purewal with Redburn.
Saroop Purewal
Hi, there, this is Saroop Purewal from Redburn. Just got one question on Projecting Lightening and if you learnt anything from your trials in Glasgow and Teesside.
I was just wondering about the lock-in, the contracts for your prospective customers, so for example at BT and Sky and potentially your -- the customers that you are targeting maybe locked up with 12 to 24 months, is that something that is a regulatory issue or you have been discussing with dotcom?
Michael T. Fries
Tom?
Tom Mockridge
The answer is no, we also used contracts if we offered discount to a new customer we will typically require 12 or 18 month contract. We have not reserved ourselves about doing that.
I think it is an industry practice. I think we have shown in these trials that in six months we had gone to 23%, that clearly leads the people who had the ability to come off of their existing deal.
Sometimes people frankly swallow the contract because they want a better service. All these were people who didn’t have it.
The reason why we will need that three years to live to the 39% to 40% is exactly that rate and some people will be on contracts but 12 months comes around, 18 months comes around, and people look around when their contract comes up. It is -- people make a judgment about these things and that's their opportunity.
Saroop Purewal
Okay, thanks very much.
Operator
We will take our next question from Justin Funnell with Credit Suisse.
Justin Funnell
Yeah hi, thanks. Yes, just digging on the UK build outs, obviously it makes a lot of sense with what you were planning to do.
We have seen in one or two markets, third part is from bundlers being able to lob in and get code build rights. And you see that bit in Spain and France.
If I have come a bit sympathetic to that approach in the UK and you are having to share your thoughts with others, would that effect your investment decision? Secondly, obviously expanding the considerable size of the network, does that effect your OPEX in the UK, we are going to get sort of OPEX hits to EBITDA in the first couple of years?
And then thirdly as you become more of nationwide operator in the UK, does it affect your content strategy, can you start to take further more sort of leading role in content acquisition, thank you?
Michael T. Fries
I will address the last one Tom, you can address the first two. I think the content strategy that we have articulated for all of Europe is consistent and holds for the UK as well which is that we are going to be highly strategic, opportunistic in some cases, but also offensive and careful.
So I don’t anticipate personally that regardless of this network extension that we would be changing dramatically our position on content in the UK. Our goal as I said in remarks is to populate our networks which are superior and provide the best connectivity for customers with all of the content available in a marketplace and to ensure that our customers don’t have to give up on anything to be connected to our networks.
So, I don’t know that -- in fact I am certain that this particular network extension which will take years to get to completion will change considerably how we approach content in the UK. Do you want to get the first two Tom.
Tom Mockridge
Sure, Mike on the first, we don’t see any lobbying or pressure in this country for a code build policy. Ofcom tradition I think at this time continues to be very supportive of our infrastructure.
So use that as a particular benefit in UK, certainly historically Virgin Media with its limited footprint has put a lot of pressure on BT and so broadly we see them in support of the prominence to this EBITDA. Very directly champions in this making compliment in we drive investment here.
I think it is evidence of sort of policy support for restructure of the way we have to market at the moment. In terms of the cost issue, if anything I think it is going to be opposite.
We will get unit costs on average down by this line extension because we will be averaging the investment in operating costs, in marketing, in sales and all. It can't be that those issues [indiscernible] customer base.
So I think on a margin basis this will help with improved margins. Clearly we had more customers in absolute terms.
We are going to have more cost but I think this will help us with margin. In the UK we have been getting a lot of operational efficiency in this business, there has been a lot of synergy and Liberty in areas, stuff in store.
We have learned a lot from our colleagues across Europe and we are getting much stronger after the rights here. You get better MDS schools, people pat themselves on their back, like that manager to do, they are happy to do it.
And that is a distinct benefit. So I think we are set to see operational -- on average operational benefits from this investment.
Michael T. Fries
I think Justin in my remarks I mentioned the 60% plus contribution margin to operating cash flow. So we expect, that sort of is right in line with what Tom is saying.
Tom Mockridge
I think the timing effect, there is no sort of upfront effect from this, this should be pretty smooth.
Justin Funnell
Yeah, I think that's it.
Operator
We will take our final question from Carl Murdock-Smith with JP Morgan.
Carl Murdock-Smith
Thanks very much. Two questions please, in the UK what you think of BT deciding that they like to own mobile infrastructure relative to MVNO.
With yourselves seem considerably low at churning Quad-play households does not impact your thinking of your ability to ramp penetration and project lightening against more quarter play focus compared to an ultimately lower churn market overall? And then secondly on the CAPEX base and non-Project Lightening, can you just provide a bit more color on why CAPEX isn’t stepping up until 2016?
Thank you.
Michael T. Fries
The answer to the second question is, we are being conservative and we are already in late February here. The planning required for a project like this substantial and we want to be smart about it.
So, we are being conservative in 2015 about what we can and should achieve in terms of roll out and that's the principal reason. I think I said less than 10% would be achieved this year and that spending if that is the right way to approach it, we could ramp that, we could accelerate that.
I mean I will let Tom add to the BT point but I will simply say that from our perspective it is not a surprise move by any stretch and the fact that they are acquiring an incumbent mobile operator implies for quite a large sum of money, implies to me that they intend to be more rational perhaps than they might otherwise be in MVNO type arrangement. And our booking at the market as we see it in a long-term as a Quad-play opportunity that doesn’t concern us one bit and lastly we have factored that of course into all of our assumptions since it has been known for quite some time and we wouldn’t -- we weren’t surprised by it.
So that still tend to be significant, would you like to add into it Tom.
Tom Mockridge
Yeah, I might just add the point BT has had lots of compliments for export strategy and that strategy has enabled BT to reduce its rate of decline. In the homes where we have cable in front of the homes, we typically get 50% market share and BT is around 20% with overseas guide TalkTalk and sometimes a few other smaller operators there as well.
So where we are face to face, we have got a very good track record in BT because their product is so much better, across the State. And I have still got these issues to make that sort of future investment and of course if I make these choices then maybe they are giving themselves a chance there.
So, nobody wants to -- I am just saying that competition will minimize the challenges but I think and we do have a track record on this business and a hate-to-hate competition of beating BR we extend the network we are practically intending to keep doing that. Go ahead Carl.
Carl Murdock-Smith
I was just going to ask as follow up to that, obviously given Mike your comments about conservatism and Tom your comments about beating BT, by the time that you will be developing the majority of this rollout, BT will also be rolling out gDoc fast improving their own network speed. So, to what extent at that point do you think your network will continue to act as a hook to enable you to gain that very aggressive adoption curve?
Michael T. Fries
We don’t think there is any gDoc fast or any other copper based technology that is going to put us at a material disadvantage on broadband speeds at all. I mean we will be trailing 3.1 this year.
This will get to one gig and as you know ultimately you can get the 10 gig overtime with the right sort of investment, etc. and that rolling out 3.1 for us is a relatively inexpensive, largely variable cost exercise as it was with 2.0 to 3.0.
I don’t know Balan if you are online, you are welcome to add to that but we feel pretty confident in the long-run about our network superiority in any instance there.
Balan Nair
Yeah, I agree with everything you said Mike.
Michael T. Fries
Yeah, listen we appreciate your -- we have gone a little bit over here, so we appreciate sticking around. We promised on the third quarter call that we had great things to talk about in the fourth quarter and for the full year.
I think we have. You know as I look at it all pistons are firing in our business, our growth is strong, our products are incredible.
In my opinion our innovation engine is doing terrific work across Europe. We are benefiting from scale both in synergies and the Project Lightening which allows us to easily extend our footprint and reach.
And the cap structure remains geared to value creation. So we are really feeling like all our pistons are firing and the year started out strong and we appreciate your support.
Don’t forget to vote for the tracker, and we will speak to you soon. Thanks very much.
Operator
Ladies and gentlemen this concludes Liberty Global's 2014 results 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.libertyglobal.com.
There you can also find a copy of today's presentation materials. You may now disconnect.