Aug 6, 2013
Executives
Courtnee Ulrich - VP, IR Greg Maffei - President & CEO Chris Shean - CFO Mike George - CEO, QVC Claire Watts - CEO, QVC US
Analysts
Ben Mogil - Stifel Nicolaus David Gober - Morgan Stanley Matt Nemer - Wells Fargo Securities Barton Crockett - Lazard Capital Markets Tom Forte - Telsey Advisory Group Matthew Harrigan - Wunderlich Securities Victor Anthony - Topeka Capital Markets
Operator
Good day everyone, and welcome to the Liberty Interactive Corporation Q2 2013 Earnings Call. Today’s call is being recorded.
At this time for opening remarks and introductions, I would like to turn the call over to Ms. Courtnee Ulrich, VP of Investor Relations.
Please go ahead ma’am.
Courtnee Ulrich
Thank you. Good morning.
Before we begin we’d like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about financial guidance, business strategies, market potential, future financial performance, new service and product launches and other matters that are not historical facts. These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including without limitation, possible changes in market acceptance of new products or services, competitive issues, regulatory issues and continued access to capital on terms acceptable to Liberty Interactive.
These forward-looking statements speak only as of the date of this call and Liberty Interactive expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in Liberty Interactive’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. On today’s call, we will discuss certain non-GAAP financial measures, including adjusted OIBDA.
The required definitions and reconciliations, preliminary note and Schedules 1 through 3 three can be found at the end of this presentation. And now, I’d like to introduce Greg Maffei, Liberty’s President and CEO.
Greg Maffei
Thank you, Courtnee, and good morning to all of you. Today speaking on the call besides myself we’ll have Liberty’s CFO, Chris Shean; QVC’s CEO, Mike George; and QVC US CEO, Claire Watts.
Onto some of the highlights. At QVC we had reasonable U.S.
results with more challenging results in the international markets. We were negatively impacted by currency moves in Japan and less so in the UK.
Notably, Q2 dotcom penetration in the U.S. was 42% and within that 28% of that volume was mobile.
At the eCom Group, we had continued momentum from Q1, good results overall with a few one-time events in last year’s results and a fewer numbers in this year’s results. Adjusted OIBDA grew 13% notably Bodybuilding set records around its 14th anniversary promotions.
We had impressive order growth at CommerceHub driven by many new accounts, Provide Commerce’s RedEnvelope is implementing a new product strategy with a redesigned merchandise offering and we believe it’s showing promise. Notably, we also repurchased $220 million of stock in the quarter.
That was somewhat reduced by the rise in the stock price during the quarter and relatively low trading volumes including such periods as July 4. And looking at Liberty Ventures, TripAdvisor posted very strong results.
Across the board it had robust metrics and excellent traffic results, traffic growth rather. Metasearch its new offering, resonated with users and had improving monetization.
With that let me turn it over to Chris Shean to talk about the financials in more detail.
Chris Shean
Liberty Interactive Group’s revenue increased 1% in the second quarter while it’s adjusted OIBDA was flat. QVC’s net revenue and adjusted OIBDA decreased 1% for the quarter.
Liberty Interactive’s other eCommerce businesses grew revenue 12% for the quarter while adjusted OIBDA increased 13%. Now, let’s take a quick look at the liquidity picture.
At the end of the quarter, Liberty Interactive Group had attributed cash of $591 million and $4.7 billion in principal amount of attributed debt. QVC’s total debt to adjusted OIBDA ratio as is defined in their credit agreement was approximately 2.1 times as compared to a maximum allowable leverage ratio of 3.5 times.
With that I’ll hand the call over to Mike George for additional comments on QVC.
Mike George
Thank you, Chris. In Q2, our consolidated revenue and adjusted OIBDA grew 2% on a constant currency basis.
However, due to the continued FX headwinds most notably the 19% drop in the value of the yen, our dollar denominated results declined 1% in both revenue and OIBDA. We experienced a somewhat more cautious and promotional consumer spending environment which coupled with an increase in international return rates due primarily to the growth of our fashion businesses caused constant currency revenue growth to moderate somewhat from the pace over the last several quarters.
Nonetheless, we remain very confident in our direction and in our growth potential. And we are encouraged by several positive developments as we continue to build a highly engaging immersive digital shopping experience around the world.
We were especially pleased with the strong performance at both new and reactivated customers, with sales up 6% and 11% respectively in constant currency. This is the strongest growth we’ve seen in new customer sales since the fourth quarter of 2011, clear evidence of our ability to continue expanding the relevance and the reach of our brand.
The growth in our digital platforms also remains strong. eCommerce increased 12% worldwide on a constant currency basis to 37% of revenue, up from 34% a year ago, and mobile continues to grow at a rapid clip up 64% worldwide in constant currency to 30% eCommerce orders.
Our leadership in social commerce will accelerate with the launch of 2gether, a highly innovative social platform developed from our Oodle acquisition. This new platform is currently being tested in a beta release and will be launched for general availability in the U.S.
in September. Claire will share more on this in a moment.
We’re delighted with the continued success of our newest markets, Italy and China, and we’re exploring several other markets for potential entry. And we were pleased with our ability to maintain high and stable OIBDA margins in the face of the soft economy that will also continuing to invest in the business, in building out leading digital platforms and experiences, in creating destination programming, operating new headquarter and broadcasting facilities in some of our markets and driving global expansion.
And despite the heavy promotional environment, we actually reduced clearance activities below last year’s level in most of our markets. Although this did we think contribute to softer sales in June especially in the U.S.
as promotional activity elsewhere heated up. And finally, we were thrilled to welcome a new Senior Executive to our team.
Ted Jastrzebski joined us as our Chief Financial Officer a couple of weeks ago. Ted comes to us from the Hershey Company, where he spent the last eight years in global leading position, most recently as President of Hershey Americas.
He also spent 14 years at Procter & Gamble and various financial leadership roles in the U.S. and internationally.
Ted brings the wealth of global financial and general management experience to QVC and we are excited to have him on the team and to have him help lead our global growth strategy. Now, turning to the results by market.
The U.S. increased revenue 3% with strength in beauty, home improvement, home décor and apparel partially offset by softness in jewelry and health and fitness.
Our eCommerce growth in the U.S. remains very strong up 10% to 42% of total revenue, a three point improvement, and mobile grew 72% and now represents 28% of our total eCommerce orders.
Adjusted OIBDA grew 2% with a slight margin decline of 22 basis points. We had improvements in product margin due in part to the slower clearance activity and gains in warehouse and customer service productivity, but these were offset by a decrease in credit card income on our QCard due to increased reserve requirements associated with the U.S.
regulatory environment. We also faced an increase in inventory obsolescence expense as we anniversaried the benefits of cleaning up inventory last year and the cost of absorbing the Oodle acquisition.
In Japan, shipped sales grew 6% in local currency but a 160 basis point increase in return rates lowered net revenue growth of 3%. We saw strong gains in fashion, in health, beauty and electronics, and similar to Q1 the growth of our fashion mix along with the shift away from make to order jewelry largely contributed to the increase in return rates.
Our adjusted OIBDA and local currency was up 1%. As I shared on our last call, we are incurring greater operating expenses for our new facility as well as a step-up in one of our major carriage contracts.
Adjusted OIBDA growth would have been up 4.3% without these impacts which will anniversary early next year. Excluding these one-time factors adjusted OIBDA margins expanded on strong fixed cost management partially offset by some pressures on product margins and freight.
Our results in Germany were disappointing, and while we are pleased with improvement fundamentals in many areas we are not yet seeing this translate in a consistent earnings momentum. As you may recall, in Q1, the team’s efforts drove improved results, but in Q2 net revenue declined 3% in local currency despite a healthy 5% shipped sales growth.
Our return rates increased over 500 basis points due primarily to a significant increase in our fashion mix along with a 165 basis point true-up from prior periods. Sales were also hurt by flooding, the flooding that impacted the country in June with over 25% of our customer base affected.
Now, the growth in fashion did contribute to a 100 basis point improvement in product margins but this was more than offset by increased freight cost associated with higher returns, higher inventory obsolescence, and higher IT personnel expenses associated with the development of our European technology platform resulting in a 14% decline in adjusted OIBDA. A bright spot in the quarter in Germany we continue to see a very rapid shift to digital with eCommerce revenue up over 20% and mobile up nearly 300%.
The continued strong growth in eCommerce now that we are fully anniversaried the roll-out of our Global WebSphere platform is especially encouraging. As we’ve shared in prior calls, we are highly focused in German on the fundamentals and we made good progress this quarter increasing accounted new items and new shows, increasing product rotation, and increasing the proportion of business done at non-promotional pricing.
We do believe these efforts along with driving eCommerce and mobile commerce will pay off in the financial results. However, we need to bring more category balance to the business as well.
This along with tight expense management and stabilizing returns remains a strong focus for our team. The UK posted a strong quarter with revenue growth of 2% and adjusted OIBDA growth of 29% in local currency.
We saw strength in beauty and most home categories partially offset by continued weak jewelry results. The OIBDA expansion was driven in large part by anniversarying last year’s lease cancellation costs and double running cost from the move to our new headquarters.
We also saw higher product margins as we shipped at a greater proportion of the business to non-promotional pricing, improvements in warehouse and customer service productivity, and lower obsolescence expense. These were partially offset by severance costs related to several efficiency initiatives the team is pursuing.
We continue to be encouraged by our performance in Italy with strong sustained growth despite the weak economic situation coupled with high customer loyalty and repeat purchase rates. Revenue increased 59% in local currency and adjusted OIBDA loss represent to €3 million.
We also achieved a major milestone in July as we began receiving the first shipments at our new third-party logistics operation in Italy. Previously as you may recall, we had handled product distribution out of our German facility.
With this transition, which will be completed in the fall, we expect to reduce our delivery time by up to three days to our customers and in 2014 we expect to reduce our fulfillment cost by about €3.5 million. And finally, we are delighted with the continued strong performance of our newest market China.
Our CNR Mall joint venture increased revenue 42% in local currency and the adjusted OIBDA loss declined 9% to just over $2 million. Last month marked the one year anniversary of the launch of our JV and we are now really beginning to see the impact of our efforts to instill QVC operating fundamentals.
Our sales margins are up over 1000 basis points and our return rates are down nearly 900 basis points. And we're also bringing the customer enhanced product offerings with 26 international brands launched in just the last three months and over 40 more untapped for the remainder of the year.
Including both domestic and international products, the number of new items we’re introducing weekly has doubled over the rate from a year ago. And with the strong support of our partners at China National Radio, we’ve expanded our distribution to 61 million homes, up from 22 million at the end of Q1 and just over 41 million at launch.
And now, I’ll turn it over to Claire to discuss the U.S. results in more detail.
Claire Watts
Thank you, Mike. QVC US remains focused on reimagining the world of shopping, entertainment and social as one by offering our customers a unique ever-changing duration of products and programming through our integration of broadcast, website, eMarketing mobile and social platforms.
In the U.S. we achieved strong growth in our overall initial product margins.
We experienced favorable return rates compared to last year. Our inventory remains very well controlled and we actually have 25% less distressed inventory than we did at this time last year.
We are delighted with the results of our efforts to engage new customers, our accounts have increased by 4% with sales to new customers increasing 12% compared to the prior year. We saw great momentum in our beauty business.
Our customers responded to our first ever beauty with benefits of that in partnership with Cosmetic Executive Women with participating brands including Laura Geller, Mally Beauty, Philosophy, Bare Escentuals, [Conique], Wen Hair Care and StriVectin. As a result of this multi-media event QVC donated $650,000 to Cancer and Careers as a part of our ongoing commitment to promote the success and wellness of women through the power of real relationships.
Our Home division generated very strong results particularly in home décor and home improvement. Standout brands include Serta, Cottage Farm, Northern Nights, KitchenAid and Vitamix.
We are seeing continued strength in the home business as we just wrapped up our Christmas in July event to help our customers get a head-start on holiday shopping. Our customers responded and we saw strong sales in viewership, new customers and an enhanced social engagement.
Our proprietary design alliance such as Susan Graver, Isaac Mizrahi Live and LOGO by Lori Goldstein are driving our apparel business. We are also listening closely to our customer understanding her preferences and taking step to enhance the shopping experience across all of our digital platforms.
Today, mobile commerce represents more than 28% of total eCommerce orders representing explosive growth over the last three years. This past quarter we made significant improvements to both our QVC for iPad and iPhone applications.
We redesigned the QVC for iPad application with improved functionality and an interactive customer experience. Customization, social interaction, video content and an enhanced mobile shopping card are just a few of the features offered on the updated app.
It allows each customer to discover QVC content built around her unique preferences while also providing click access o familiar content such as Today’s Special Value, the Live TV program and of course the Program Guide. In addition, our QVC for iPhone application now has the enhanced shopping card functionality with capabilities that mirror our shopping card on qvc.com.
These mobile enhancements allow us to foster deeper connection between our customers and our brand and delivers a frictionless shopping experience. We understand social shopping like no other retailer and we are finding innovative ways to bring like-minded people discovering great signs together.
As Mike mentioned, we’ve created 2gether. It’s a new social experience that brings magic of what we do on TV everyday into the digital space.
It’s an online gathering place for people who love to shop. It’s our passionate customers, program hosts, our designers and investors behind all of our brands.
It allows our current customers and new customers to be entertained, discover unique products, share what they love and why they love it with their friends and followers. This ground rating differentiated online gathering place helps us capitalize on the growing consumer trend of discovering interesting signs via social and allow QVC to leverage our brand essence of real relationships on all of our digital platform.
We are looking forward to the forward release this fall. We are also improving our service experience at every touch point.
We have dedicated team members responding to questions our customers ask on social platforms and helping our customers during their purchase experience. We’ve added features to our orders status page to provide easier information or access to information and we are creating efficiencies to improve the speed of delivery of our products to our customers.
We have a number of exciting initiatives planned for third quarter. In July, we have QVC presents Super Saturday LIVE from the Hamptons.
It’s a multiplatform programming event that raises money for the Ovarian Cancer Research Fund. We’re launching our second broadcast channel QVC Plus.
This is a distinct channel that offers the same programming as our main QVC channel with a three hour delay. We believe QVC Plus will generate additional sales that bringing viewers who are either new to us or who love QVC and want to see the shows that they might have missed at another time during the day.
And we’ll provide everything our customer needs to make talk fall come live with non-stop Fashion Days a fall edition of tooking on queue which is one of our customer favorites and accessories to update her style for the season. And with that let me turn it back to Chris.
Chris Shean
Thanks, Claire. Let’s take a quick look at the liquidity at Liberty Ventures Group.
At the end of the quarter the group had attributed cash and liquid investments of $1.8 billion and $2.5 billion principal amount of attributed debt which includes $616 million of cash from TripAdvisor cash and liquid investments from TripAdvisors and $385 million of their debt facilities. The value of our equity method securities and available for sale securities attributed to the group was $1.8 billion and $917 million respectively at the end of the quarter.
During the quarter, we sold all of our AOL shares and some of our Time Warner shares to help fund the repayment of the three-and-eight senior exchangeable debentures that were due 2023. We also issued new senior exchangeable debentures due 2043 with an interest rate of 0.75% with an underlying basket of Time Warner, Inc.
and Time Warner Cable Securities. Now, with that, I’ll hand the call back to Greg.
Greg Maffei
Great. Thanks to Mike, Claire and Chris.
QVC faced some challenges this quarter but we are confident with the management team’s plan for the second half of the year. We are pleased with results of our eCommerce Group and Trip Advisor and continue to see the outstanding job they do creating value for our shareholders and their users.
Once again, we appreciate your continued interest in Liberty Interactive and Liberty Ventures. And with that, I’d like to open up for questions.
Operator?
Operator
(Operator Instructions). And we’ll go first to Ben Mogil with Stifel Nicolaus.
Ben Mogil - Stifel Nicolaus
Hi, good morning, and thanks for taking my question. Mike, your comments I thought were very interesting on sort of the balancing act between margins and promotional activity and the impact on sales.
So, as you call that in the second half of the year and what do you see say since July started, any change to that strategy or any sort of new thoughts on where the consumer sits and, more importantly, on how you react to those changes?
Mike George
Ben, thanks for the question. I don’t know that I see any fundamental changes in our strategy where it’s fundamentally not a highly promotional retailer.
June and early July always an interesting time for us because it’s one of the most, from seasonal standpoint, one of the most intense promotional times for most retailers. We generally fit that out and so depending on exactly how aggressive the rest of retail it is, it can have some impact on us.
Certainly, when you move into new goods and fall selling that’s really our power alley. We were, as Claire mentioned, encouraged by the performance of our Christmas in July which you never for sure if it’s an early indicator of holiday but you hope it is and felt good that when we started to talk about new product the customer was there.
So, we feel good about our strategy, recognized the depending on the environment at retail sometimes it plays better and sometimes it impacts our sales momentum, but generally we would stick to it. I don’t know, Claire, if you have anything else to add?
Claire Watts
No, that’s exactly right.
Mike George
Thanks.
Ben Mogil - Stifel Nicolaus
And then on the QVC Plus the new channel being launched, should we expect any kind of SG&A increases or is this sort of part of your existing carriage deals?
Claire Watts
From an SG&A perspective, it is a delayed signal. So, very minimal cost from operating it.
There will be cost that will incur from the carriage fees and we are working through that now.
Ben Mogil - Stifel Nicolaus
So, do we see some most carriage fees already in the second quarter or that will be more third quarter at times?
Chris Shean
That would be more third quarter.
Claire Watts
Third quarter.
Ben Mogil - Stifel Nicolaus
Okay. That’s great, that’s it from me.
Thank you.
Chris Shean
Thanks.
Operator
We’ll take our next question from David Gober with Morgan Stanley.
David Gober - Morgan Stanley
Good afternoon, guys, thanks for taking the questions. Greg, one for you on the buyback.
I know you mentioned there were a couple of things kind of holding you back in 2Q but I guess when you look at the first half in totality and about $500 million a little bit less of buyback, seem like you are running a bit below the pace, you talked about at the Analyst Day last year understanding that was necessarily hard and fast guidance or anything. But just curious as you think about the back half, do you think about making up the distance between that the $1 billion, $3 billion for space that you guys are talked about previously versus some of the one time stuff we had in the first half or do you think you would continue on it at around the same pace?
Greg Maffei
I don’t think we’ve mapped a hard and fast number but I think we continue to believe the return on capital via share repurchases the right strategy for the LINTA stock and I’m sure we’ll be at these numbers or higher between now and year end.
David Gober - Morgan Stanley
Understood. Thanks.
And for Mike and Claire, the commentary on 2Q was very helpful in terms of the promotional environment. I was just wondering if you could kind of compare and contrast 1Q versus 2Q.
1Q seemed like you are really gaining some momentum in terms of just domestic sales growth and 2Q obviously was a little bit slower. Outside of the promotional environment, was there anything else that you could point to in terms of the strategy that really changed there?
Claire Watts
Thank you for the question. This is Claire.
I would say so Q1 we had a very strong performance; we had early seasonal response that was very good compared to most retailers who would struggled through the cold weather. So, we sold a lot of regular price and early sale.
Q2 was really a mix bag for us domestically. I would tell you there were swings within the quarter.
In April, it really felt like more external pressure. We’ve had softness that started to occur across the board and we started to heard that in retailing in general, and then in May against a strong performance all of our seasonal path categories worked very, very, well.
As we hit June, we had a disappointing June according to our standards and some of it definitely want clearance; we do have 25% less distressed inventory that we had last year which is good new and bad news that put us some very good position to receive the fall receipt, but it does heard a little bit of a top line. But we also had some missed step on a couple of our bigger items, our today special value in June that was softer than we expected.
So, a little bit of up and down some external pressure, some internal pressure, but again overall feel proud about where we are going.
David Gober - Morgan Stanley
Claire, just a quick follow-up that the new customer metrics that you talked about obviously were very strong relative to what we have seen recently. Is there any more you could kind of tell us about the characteristics of new customers?
Are you seeing improved performance with younger demographics with more males, anything you could kind of point to in terms of where you’ve been having success?
Claire Watts
So, maybe three points of insight. First is electronics and some of our home categories which are typically strong performance for us a new name really delivered in the second quarter.
So that was good to see that come back. The other thing I’ve interested is that the delta the increase of new names actually coming from the mobile platforms, and the mobile platform customer tend to be a little bit younger, little bit more affluent.
Now, I’m not going to tell you that every new name is younger because it’s not but that growth and new name did come from mobile in the second quarter but that’s a little bit of a insight. Does that help you?
David Gober - Morgan Stanley
Very much. Thank you.
Operator
We’ll take our next question from Matt Nemer with Wells Fargo Securities.
Matt Nemer - Wells Fargo Securities
Thanks for taking my questions. First, I just wanted to piggy back on that last question and see if there, if you could isolate some of the factors that you think let to the accelerated new customer growth beyond mobile and the electronics mix shift.
Is there anything else in terms of marketing etcetera that’s driving the accelerated level of growth? And then, can you comment at all on best customer performance during the quarter?
Claire Watts
Sure. So, there are some things that we’ve been piloting in our marketing area.
I would prefer to hold back on them until we meet again, but we’ve been doing some outreach to new customers and we had a model that we’ve been looking at from a category predictability stand point. So, not a lot of signs around it but some of the early read from the responsive marketing we were encouraged with.
So, it is the category, it is the events that we put into place, it is the net mobile platform, and there is some piloting some exercises going around on outreach and marketing that once I have more solid numbers I will be glad to build that back in. And I’m sorry what’s the.
Matt Nemer - Wells Fargo Securities
Best customer performance?
Claire Watts
Best customers, yes. So, our best customers we did see spend increase and it’s in the categories that you would expect some of the softer category.
So, we are pleased with our best customers; we have had expanded 7% in the quarter.
Matt Nemer - Wells Fargo Securities
Okay. And then, secondly, just following up on mobile there has been a lot of chatter in retail about higher mobile growth rates and increased penetration to mobile.
Could you just provide a little big picture view on the financial implications of that? Beyond the carrier commission, how are the order economics different for a mobile order?
Do you think this is mainly a channel shift or are we getting some truly incremental sales and profit dollars?
Claire Watts
So, from a cost perspective, obviously that the major difference is the oncall that we don’t take which is the famous QVC.com. We have not completely proven incrementality.
We know that there is some, and again we would like to get through a full year cycle really setting that but we do see incrementality for our best customers and, as you know, our customers that is all of our platforms spend the most of any of the segments that we have. So, cost saving from oncall, saving some fall and it does look like some activity of incrementality.
I'd say the other insight that we have from mobile is we put the full cart into our act and that has driven significant conversions and initial sales lift. So, whether that’s all incremental at this point, I would not commit to that, but we’d definitely seen an increase in sales and converted with the full cart.
Matt Nemer - Wells Fargo Securities
Okay that’s helpful and then just one last question the LINTA structure, which is given the improved public market values for some internet companies and come eCommerce related companies. Just wanted to get your current thoughts on the structure of LINTA and potentially separating the eCommerce assets from QVC?
Greg Maffei
Well we are never low to re-shop or the portfolio and look at new ways to provide better transparency and clarity on our operating assets and divisions. And so, certainly, we do noted that and pay attention and it’s something that we’ve talked about in the past as potentially something we might execute on, but we have nothing to announce today.
Matt Nemer - Wells Fargo Securities
Okay. Good luck in the second half.
Mike George
Thank you.
Operator
We’ll go next to Barton Crockett with Lazard Capital Markets
Barton Crockett - Lazard Capital Markets
Okay. Thank you for taking the question.
I wanted to ask a question about Liberty Ventures. So, in the contest of that the very divergent performance we have seen very recently from Expedia and Trip, does that have any influence on your consideration of relative waiting of those two stocks and ventures and any impact on your consideration of ways to maybe address those investments over time?
Greg Maffei
Barton, I think overall a lot of our investment decisions they are not pure because they are waited by the fact is around having low tax spaces in the assets and controlled deferred in the assets. And so, we kind of way all the factors around what are the economic prospects for the business and versus what are all alternative on a after tax basis to realize on those and reinvest and what is the potential to eventually achieve control as we were successfully able to do so in Trip.
So, I think we were what we stepped up and bought the incremental Trip shares we were pleased that not only that we feel that we got rewarded for control but the operating performance accelerated. And we watch Expedia closely.
It’s a valuable asset; it’s a business which has improved a lot over the last couple of years barring last quarter. We root for them, we do recognize that in some ways Expedia and Trip are increasingly moving from a cooperation phase into a co-opetition phase and we weight all those factors.
Barton Crockett - Lazard Capital Markets
Okay, great. And then if I could follow-up with a question on Liberty Interactive.
Could you just walk us through how you see the bridge going from EBITDA to free cash flow in terms of CapEx working capital, cash taxes, what should we expect in terms of those lines?
Chris Shean
I think that’s complicated Barton because the working capital swings evolved over the place that is the biggest moving item and perhaps why don’t we take that offline and have or I’ll walk you through that because we can, we have pretty good knowledge of CapEx on an annual basis we have pretty good knowledge of the other items.
Greg Maffei
Cash taxes.
Chris Shean
Cash taxes. Cash taxes have had their own issue because in various yeas we have had cases where we had a capital gain or capital loss and it impacted the current year’s result.
So it’s some variables now we’d be probably better to walk offline.
Barton Crockett - Lazard Capital Markets
Okay, great. Thank you.
Operator
We’ll go next to Tom Forte with Telsey Advisory Group.
Tom Forte - Telsey Advisory Group
Great. Thank you.
So I had two questions one was I was hoping, Mike, you could give us a little more detail on our international expansion and where you stand with the France, Spain and Brazil. And then, the other question is on Germany when you think about QVC Germany have you finished rolling out your play book there and it’s a matter of waiting time for you to take place or there are still more leverage that you can pull to get the performance where you wanted to be?.
Thank you.
Mike George
Hey, Tom, thanks for the questions. On international expansion, we continue to work our way at France, Spain and Brazil.
These always tend to be difficult to correct if any precision when we might be ready to move forward. I do think we are making progress and certainly we’d love to be able to announce a new market over the next several months, but when and which one is a bit hard to read, but I would say all are kind of in place.
Numbers starting to kind of a also slightly broadened the lend and start to look at other markets more developing markets Turkey we are visiting Mexico. So the three you mentioned I would say are still kind of highest on the list and may be most likely for near term action but good that we are also starting to sort of broadened the view as well.
On Germany, I don’t know that we never totally finished the play book that the joy and challenge of this business is you are always finding way to do better. I do think they have been on this nice even though we haven’t seen it in the results clearly.
I do think they have been on this nice trajectory of getting again what we called the fundamentals we made a new product introduction the rate of product rotation that mix in the business that the diversity in the business getting those two levels that we that feel better at some times it actually hurts your sales because for example we have taken our top 10 brands and reduce the frequency of TS fees for our best brands that tends to hurt sales in the short term but we think it’s healthier in the long-term. This is an ongoing process active it’s about a three quarters to maybe not quite a year of the momentum in that and the bigger, so therefore I think that will continue and the bigger challenge is just we just and probably due to our actions and partly due to kind of consumer response we just found the business shifting much too rapidly to fashion.
And keep in mind that Germany as a country not just, do we see has extremely high return rates that’s to evolve distance retailers in Germany and fashion is the highest return rates within our business. So, when the shift moves rapidly to those categories you can have the kind of double and triple hits on EBITDA that you heard us talk about on today’s call.
So that’s the process. We’re working to try to shift their time to other categories and I think that will take sometime and we may have some bumps along the way.
But I would certainly hope that you’re going to see at least the moderation of the trend that you saw in Q2 of the big spike in fashion and the big spike in return rates. I would expect to see that moderate to at least some degree.
Tom Forte - Telsey Advisory Group
Thank you.
Operator
We’ll take the next question from Matthew Harrigan with Wunderlich Securities.
Matthew Harrigan
Thank you. There is sort of tremendous expansion and interest in Mexican retailing with Peña Nieto and deregulation down there and I know you mentioned it in passing but one theme that Televisa and (inaudible) or other companies have had is really addressing that even larger U.S.
market Hispanic market as far as buying power. It seems like that could be a natural and almost obviously a little bit more aggressive I think (inaudible) plus but is the framework down there getting easier?
Have the regulatory changes down there made Mexico more attractive or interesting? And then secondly the growth in new customer activity was tremendous but I was curious if you could talk a little bit more about ratings for some of the advanced programming and even how some of your theme shows like cooking compared to say some comparable shows in something like food network?
Wunderlich Securities
Thank you. There is sort of tremendous expansion and interest in Mexican retailing with Peña Nieto and deregulation down there and I know you mentioned it in passing but one theme that Televisa and (inaudible) or other companies have had is really addressing that even larger U.S.
market Hispanic market as far as buying power. It seems like that could be a natural and almost obviously a little bit more aggressive I think (inaudible) plus but is the framework down there getting easier?
Have the regulatory changes down there made Mexico more attractive or interesting? And then secondly the growth in new customer activity was tremendous but I was curious if you could talk a little bit more about ratings for some of the advanced programming and even how some of your theme shows like cooking compared to say some comparable shows in something like food network?
Greg Maffei
Thanks, Matthew. Let me take the fist one and I’ll have Claire pick up your second question.
So, I do think Mexico is looking more interesting for the reasons you touched on. I wouldn’t tell that we’ve put in lot of work against that right now but it’s an area of a little bit of focus and growing focus for us.
We still think Brazil just in terms of sheer size and near term potential is may be a notch more interesting. And then I think there is big wild card you touched on, which are the bigger Spanish language strategies then just entering Mexico.
And we’re in I would say very realistic discussions on some partnerships and some ideas in that area very early lot of question marks but something that yeah something we’ll continue to pay it and Claire you want to touch on the second?
Claire Watts
So, on programming it tends to be our events that we put on have very strong viewership for the most part. So, you asked about kitchen.
So, one of our most popular shows is In the Kitchen with David every Sunday. It has high viewership every single Sunday.
When we do our cooking on two events, we also have tremendous viewership. I don’t have the latest that how it compares to other channels that something that I can - I get for you but those tended to have lots of eyeballs.
The same thing with if you had just recently had two major events one with Christmas in July our viewership was very, very strong and our fashion based event over the weekend we’ve a two day fashion event (inaudible) very strong viewership and have very strong sales. So, when we tend to put together these destination event that’s where we see particular strength in viewership also some of our what we call static so PM Style is a fashion show that’s Lisa Robertson host every Monday night very strong viewership very – strong repeat viewership.
Same thing with, we anchor another fashion show on Saturday morning called AM Style. So, again, where there is some predictability and a mix of merchandise in the category we’ve very strong viewership there.
Matthew Harrigan
Thanks, Mike. Thanks, Claire.
Wunderlich Securities
Thanks, Mike. Thanks, Claire.
Operator
We will take our final question from Victor Anthony with Topeka Capital Markets.
Victor Anthony - Topeka Capital Markets
Thanks for putting me on. Just two questions.
One on international specifically China and the exposure to China through the JV maybe you could help us on frame how big of an opportunity you see in that market over the next several years and is there an opportunity for you to own greater than 50% of that asset? Second, I just want to go back to an old question with regards to your ownership stake in HSN is there an opportunity for you to extract value out of that asset outside of an outright purchase?
And following on that and may be you could just give us an updated view of where you stand on pulling that asset in? Thanks.
Greg Maffei
Well, Mike, why don’t you guys talk about China and I’ll cover HSN
Mike George
Great. So yeah, China, we’re just very bullish on China.
I think it had substantial opportunity. We feel a little uncomfortable a year into it to make any predictions to try to size that opportunity, which is still like we’ve got to get more experience.
Certainly if you think about one dimension of the opportunity simply homes reached so the fact that we’re up from 41 million homes a year ago to 62 million right now is very encouraging. We certainly have 100 million homes within the next three to four years is very doable.
Many things could seed with that but from what we can see today we think 100 million homes over the next three to four years is very doable. The hard one to predict for us is the sales performance.
The developing market obviously they have lower income but so it’s a little hard to read exactly where we can get the repeat purchase rate in the sales per home we’re pretty good at that but how our experience translates into an emerging market its the harder one to read it but some of that you could envision that business several 100 million in revenue over the next several years. And we think that the economics also look attractive in term of the P&L structure.
You heard us, you heard me mentioned that we’ve seen a strong improvement in product margins. We have fairly low product margins when we began the joint venture those have moved up nicely.
The expense structure is fairly modest other than the cost of carriage but the cost of carriage is fixed as you add in more carriage. So, as the revenue ramps you’ll see a lot of leverage on that.
So, we like the business quite a bit. We think it has a lot of potential but its little early to be more specific than that.
In terms of ownership it really isn’t feasible it is by China Law that we’re going to only own 49% then I think the likelihood of that changing is fairly low. We’re thrilled with the partnership and that’s working very well for us but I think it’s unlikely that we would own more than 49%.
Greg Maffei
Turning to HSN not sure what you’ve ideas for extracting other value. I’d comment the nature of our agreement at the time it was spun prohibited us from buying more than 35%.
We did by that. We’ve actually increased our percentage I think maybe 36%, 37% somewhere in that range because of their share repurchases.
As far as taking it in, we can make an offer for the whole company. They have the opportunity to say no.
We’re probably reluctant on bunch of reasons. We’re not sure of the synergy levels between the two businesses.
We think there are some but we don’t really know the totality and they already are trading at a couple of multiple point premium to us. And while this last quarter they probably had better results in the U.S.
than we did in some of the promotional. Over the last several years they really haven’t had significantly different results in our U.S.
business and so we’ve been reluctant to look at incremental capital particularly the premium to the market when the market is already two multiple points higher than us. We’ve been reluctant to look at incremental capital on the HSN versus our own share repurchase and I think that remains our position today.
We like the relationship. We like having the equity ownership but we’re probably happy where it stands today that may change in the future.
Victor Anthony - Topeka Capital Markets
Thank you.
Greg Maffei
Thank you. Thank you for your interest in Liberty Media and Liberty Interactive.
Operator
This does conclude today’s conference. We thank you for your participation.