Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Liberty Global second quarter 2020 investor call. This call and the associated webcast are the property of Liberty Global, and any redistribution, retransmission, or rebroadcast of this call or webcast in any form without the express written consent of Liberty Global is strictly prohibited. At this time, all participants are in a listen-only mode. Today's formal presentation materials can be found under the investor relations section of Liberty Global's website at libertyglobal.com. After today's formal presentation, instructions will be given for a question-and-answer session. Page two of the slide 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 facts. These forward-looking statements involve certain risks that could cause actual results to differ materially from those expressed or implied by these statements. These risks include those detailed in Liberty Global's filing with the Securities and Exchange Commission, including its most recent filed Forms 10-Q and 8-K as amended. 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. Fries.
Thanks, operator, and welcome everyone to our Q2 results call. First of all, I hope you're safe and well, and as always, we appreciate you joining us today. Our plan is to run through the slides and prepare remarks for about 20 minutes or so to be sure you're level set on the key messages this quarter, and then we'll spend the majority of our time answering your questions. As usual, I've asked a handful of the key execs to join me on the open line, and I'll be sure to get them involved in the Q&A session as needed. I'll kick it off on slide four for those who are following along with a summary of the key highlights from the quarter. It's a pretty comprehensive slide, so bear with me.
I want to be sure to hit each point, beginning with a few remarks on how we've been navigating the COVID-19 pandemic. Obviously, this is on top of everybody's mind, so I'll spend a couple of minutes upfront, and then we'll get into some more color and detail through the course of the presentation and Q&A. Clearly, our primary focus has been and remains the safety and well-being of our people, 85%-90% of whom continue to work from home. Like most companies you've heard from, working from home can and does work, and we're no exception, of course. In our case, you have to balance that with the need to be in the field, building and maintaining plants, and installing and servicing customers.
We're also governed by different local regulations and protocols in each country, most of which have required that we open up offices slowly and carefully, and that's exactly what we're doing. As we get back to normal, everyone in our sector is working on bottling the magic, so to speak, whether it's record customer satisfaction levels or faster, more agile ways of working, and I'm really excited about the progress we're making here, which I think is going to be definitely positive for us down the road. Now, while the macro environment in Europe has been severely challenged by COVID-19, the region on the whole has weathered the crisis pretty well and better than many expected.
As anticipated, Eurozone GDP fell 40% in the quarter and 12% sequentially, but there are some bright spots there, not the least of which is, by all accounts, a pretty effective handling of the pandemic. Nearly all of our core operating markets in Europe have successfully flattened the curve, with daily confirmed cases anywhere from 75%-95% below peaks in March and April, and fingers crossed staying pretty constant. Just as impressive, while every death is tragic, mortality rates have fallen to levels at or near zero in most of these countries. If you contrast that with the U.S., it's pretty striking.
The crisis has also brought the region together. In addition to stimulus measures rolled out at the national level, the EU recently adopted a EUR 750 billion recovery fund designed to help businesses rebound, reform those economies hardest hit, and protect against future crises. It appears to us that confidence both among consumers and investors seems to be on the rise. You can see that in the euro's recent strengthening against the dollar by about 10% since mid-May. Against this backdrop, our business continues to perform well, very well, in fact, fueled by record NPS levels, lower churn, robust and reliable networks, and significant steps to give customers more, more speed, more data, more content. And that's a theme I know you've heard from, you know, heard about from many of our peers.
In our case, broadband net adds were the highest we've seen since Q3 2017, and customer additions, driven mainly by the UK, were the best we've delivered in over two years. Now, while COVID had a modest impact on reported revenue, and Charlie's going to dig into that in a bit, nearly all of that shortfall occurred in low or zero-margin line items, which allowed us to deliver better than anticipated EBITDA and operating free cash flow. The latter was up 14% year over year. Not surprisingly, we're reconfirming our original 2020 guidance, and quite frankly, we hope to exceed those levels. Switching gears, I'm pleased to report that our U.K. JV with Telefónica is off to a great start. As we reviewed on our last call, this will be a transformational deal for the U.K., our respective customers, and for shareholders. It's a win-win-win, as we like to say.
And after a couple of months of pre-merger planning, my excitement level for this combination is even higher. I'm not going to review all the details again. I'll just remind you that we're talking about GBP 6.2 billion in synergies, a great valuation for Virgin Media going into the deal, and expected proceeds to Liberty coming out of the deal of about GBP 1.4 billion. I'll talk about the fixed mobile convergence in a moment on the next slide, but when you combine the U.K.'s fastest broadband network with the country's largest and most admired mobile company, the long-term value creation opportunity is extraordinary. It's also good to hear that the teams are working extremely well together, the financing is falling into place, and the regulatory process is underway, so everything's on track for the completion of this deal.
Just a couple of additional points here on capital allocation. As we indicated on our last call, we definitely front-loaded our buyback activity into the first half of the year, which you would expect us to do given the price volatility. That means we've already purchased around 750 million of stock in the last five months. To preempt the question I know you're going to ask, we don't have any announcements today about adding to the buyback program. We're always reviewing those options, of course, but we have 250 million remaining on the plan, and we'll be putting that to work for the time being, and then finally, our treasury teams were really active in the capital markets this year, refinancing over 10 billion of debt, extending our tenor to over seven years, and reducing our fully swapped borrowing cost to 4%.
So to recap, we delivered strong subscriber results. EBITDA and operating free cash flow are ahead of consensus, and we're confirming our original guidance for 2020. And then, of course, we're making great progress on the JV with Telefónica in the U.K. Speaking of the U.K., I thought it would make sense to revisit the fundamental logic underpinning this deal and the other fixed mobile combinations we've orchestrated recently. This is a very clear and powerful strategy at work here. Since 2015, we've completed or announced five fixed mobile mergers with a total deal value of over $80 billion. And in each case, the fulcrum asset was our broadband network built over the last two decades through organic growth and national consolidation. In certain of those transactions, we enabled the creation of a fixed mobile champion through the sale of our cable operations to a mobile-only player.
That was the case, of course, with the sale of our Austrian business to T-Mobile for EUR 2.2 billion, or 11 times EBITDA in 2017, and the more recent sale of our German business, along with some smaller operations to Vodafone, for EUR 22 billion, or 11.5x EBITDA. These were highly accretive deals for us, right, where we were exiting at premium multiples and banking significant returns on our long-term tax-efficient investments in these markets. You've all seen the numbers. But by all accounts, these were also home-run deals for Vodafone and Deutsche Telekom, because whether you're a seller or a buyer, fixed mobile convergence works.
In fact, I think it's one of the most important strategic developments I've seen in Europe in my 30 years. It drives scale, it drives massive synergies, it drives sustainable cash flow, and ultimately, it drives better valuations, which is why in Belgium, Holland, and the U.K., we chose to create our own fixed mobile champions by either acquiring or combining with a mobile player in those markets. And the strategy is working brilliantly for us. Slide five provides some numbers to support that. On the top left, we highlight the scale of our combined operations today in these markets. In Belgium and Holland, we've surpassed the incumbent in fixed B2C services, and we're number one in broadband and TV. And in both cases, we're gaining share in mobile with convergence ratios exceeding 40% and growing.
In the UK, we'll start the JV with the number one share in mobile, and on footprint, we'll be number two in TV and number one in broadband. We know that roughly 80% of Virgin customers are using someone else's mobile product today and are highly interested in a converged bundle from us, and as we continue to expand the reach of our gigabit broadband network, we'll reach more and more O2 customers. Now, scale also drives strategic leverage and opportunity in these markets. What does it do? It enhances our ability to shape the political and regulatory agenda, which you all know is critical, and it puts us in a position to take advantage of ancillary opportunities in areas like content and new services and infrastructure.
It's not surprising, and it shouldn't be, that VodafoneZiggo was the first to launch 5G. It's also not surprising that VodafoneZiggo 's success with fixed broadband is anchored by a 1 gig rollout in the strongest sports franchise in Holland. Telenet similarly acquired a free-to-air channel and is now launching a new Belgian Netflix to supplement its OTT content offering. They also recently announced a project with the largest utility company in Flanders to own and control the network of the future. A nd the merger with O2 in the U.K. makes our previous expansion and network expansion strategies and infrastructure modernization ideas even more compelling, in my view. Now, second, as you've seen, synergies in fixed mobile transactions are a significant source of value creation.
Just in the three deals where we remain directly involved, Belgium, Holland, and the U.K. announced synergies totaled over EUR 12 billion on an NPV basis, and as we've demonstrated again and again, these synergies are real, achievable, and sustainable. In fact, we've never missed a synergy target, and in Belgium, we've exceeded expectations, and in Holland, we expect to do the same. This bodes really well for the UK and accrues to the benefit of shareholders, of course, but also the customers as we get smarter, faster, and more responsive to their needs. Fixed mobile mergers also generate real growth anchored by stable free cash flow. You can see that on the top right of the slide. In the case of Belgium and Holland, we were able to turn around the EBITDA trajectory and, even more important, deliver significant distributable free cash flow of over EUR 4 billion.
These results are derived from what are increasingly predictable outcomes: the realization of synergies, better customer experiences, reductions in churn, increases in NPS, and the inevitable repair that occurs over the longer term when markets rationalize and consolidate. And lastly, investors, particularly in Europe, are assigning higher valuations to fixed mobile platforms. On the bottom right, we show you a half dozen examples, including companies like Swisscom, KPN, and Tele2, and you can add your own or take these off. It's up to you. But on average, these stocks are trading at 8x EBITDA with operating free cash flow multiples in the mid-teens and mid-single-digit levered free cash flow yield. So clearly, scale, synergies, and stable free cash flow are desirable investment characteristics, especially when you're a national champion or national challenger.
This underpins our prospective interest in public listings, to be frank, where it makes sense for us in certain instances to try to take advantage of these market valuations. Partly because higher valuations and greater transparency and sustainable free cash flow should support our own valuation at the parent company, regardless of whether you look at us on a sum of the parts basis, or you use proportionate EBITDA or operating free cash flow, or if you focus on levered free cash and the annual dividend streams we collect from these high-margin operating assets. Speaking of operations, we have our usual updates for each operating company in the presentation for your information. But in the interest of time, I'm just going to hit a few high points here from each market, and then we can address any questions or thoughts you might have during the Q&A .
I'll start with Virgin Media, which by all accounts had a strong quarter with 24,000 fixed customer additions, including growth on both the Lightning and BAU footprint. These results were supported in part by reduction in churn and 33,000 broadband adds, which we estimate to be 75% of all broadband adds in the U.K. Fixed customer ARPU was impacted by COVID, particularly pausing on the premium sports, but on a normalized basis, ARPU was flat. We added 93,000 homes to the Lightning footprint in the quarter, bringing our cumulative build to 2.3 million and total gigabit-ready homes in the market to 15 million. Nobody has a faster or more robust network than Virgin Media. It's not even close. Virgin had another strong quarter on mobile with 85,000 post-paid adds on the back of our Oomph quad play bundles, adding 3 points to the fixed mobile ratio.
Lutz and the team, I think, are really starting to hit on all cylinders, and that sets us up really well leading into the merger with O2. The Swiss market remains highly competitive, by the way, and you know that, which is why we've invested last year in a nationwide 1 gig rollout and our new video platform and digital initiatives across the customer operation. Good news is these investments are beginning to pay off with commercial momentum building in Q2 and operational trends improving. For example, NPS is at an all-time high, and sales in June actually exceeded both last year and pre-COVID levels. We also announced an agreement with Swisscom that rationalizes sports in the market and ensures that each of our customers will have access to both Teleclub and MySports going forward.
Now, as you've heard us say many times, we're particularly focused on free cash flow in this market, and you'll see that operating free cash flow was up 10% in the quarter, which supports our full-year forecast of $170 million of levered free cash flow. Strategically, what can I say? We remain opportunistic. You'd expect me to say that. This market still requires rationalization. By the way, we don't think the announcement by Sunrise and Salt to jointly build some fiber over the next five to seven years, if they can get the financing to do that, changes much of anything, really. We already reach 75% of the country with gigabit speed, so the competition had to articulate some sort of plan, which is what we think that adds up to.
Moving to Telenet, they had a strong quarter on a number of levels with their best broadband and digital TV net adds since 2015. Customer ARPUs rose 2.4% year over year. That was supported by a higher proportion of fast broadband and quad play subs. Speaking of quad play, the fixed mobile base now stands at 600,000, and the total convergence ratio, or mobile attach rate, exceeds 40% in Belgium. While there was a revenue impact from COVID, particularly handset sales and advertising, underneath it all, you'll see that subscription revenues are growing and above target. That's a good thing. Not surprisingly, Telenet confirmed the 2020 guidance they gave in April, and it stuck to its original free cash flow and dividend forecast for the full year.
Then finally, Vodafone Ziggo also performed well through the pandemic. The investment in networks and infrastructure continues, with nationwide 5G coverage now available and new 20-year spectrum licenses just acquired a few weeks ago. The rollout of 1 gig is also back on track, with nationwide coverage slotted for the end of 2021. Vodafone Ziggo's results in the second quarter were solid. The team managed to mitigate the revenue impact of COVID in the mobile space, mostly roaming related, with 6% ARPU growth in the fixed business and proactive cost controls, which drove normalized Q2 EBITDA up 6%. So as a result, Vodafone Ziggo also reiterated their full-year guidance, including positive EBITDA growth and EUR 400 million-EUR 500 million of free cash flow available for distributions to shareholders.
Now, before I hand it back to Charlie to talk through the financials, I just want to take a moment to switch gears here and recognize the passing of one of our board members, a dear friend and mentor to me, J.C. Sparkman. You might have seen his obituary in The Wall Street Journal. I'll just say J.C. was a legend in the cable industry. In John Malone's words, the TCI was built on J.C.'s back over the 25 years that he was chief operating officer. And he brought that same energy and operating wisdom to our board over the last 15 years while he was part of the Liberty Global family. He will be sadly missed by all of us.
I don't want to end on a sad note, but I just want to be able to make sure I have a moment to recognize him and his great contributions to our company over the last 15 years. With that, Charlie, over to you.
Thank you, Mike. I'm on the slide entitled Q2 Impact of COVID-19. Overall, of our 4.3% Q2 consolidated year-on-year revenue decline, we estimate that the COVID impact is roughly 4% or around $110 million. Within that, we estimate that the reduced revenues from premium sports accounted for $34 million and increased late charges around $8 million. B2B fixed and mobile impacts were around $19 million, and reduced mobile roaming and reduced handset sales contributed $17 million and $10 million, respectively. We also saw reduced revenues at our Irish and Belgian broadcast businesses, which we estimated $21 million. When you consider the estimates of the COVID impacts, the revenue trend is actually in line with recent quarters. We estimate that the overall impact of COVID on adjusted EBITDA in the quarter was minimal. Many of the impacts, such as premium sports and mobile handset revenues, are low margin.
And we also benefited from reduced churn and lower sales and marketing expenses, which helped to offset more material impacts. As a result, we believe that our Q2 adjusted EBITDA growth rate was in the aggregate, largely unaffected by COVID. On the next slide entitled Group Overview, we show the key financials for the group. Despite the revenue decline of 4.3%, adjusted EBITDA declined 0.4% for the quarter versus a decline of 3.6% in Q1. Property and equipment additions were 21.6% of sales in Q2, and without the impact of Lightning, we're 18.8% of sales.
As a result, we saw strong operating free cash flow growth with pre-Lightning construction OFCF for the quarter at $678 million, a 12% year-on-year improvement, and after Lightning CapEx, $601 million up 18.3% year-on-year. Group liquidity remained strong at $9.8 billion, and at quarter end, our gross debt was 5.3x adjusted EBITDA and 3.8x net. Having completed a number of refinancings in Q2, our average debt tenor remains beyond seven years with an average cost of 4%. On the page entitled P&E Additions, we provide more detail around our CapEx, which we continue to analyze in five major buckets. COVID did have an impact on our CPE spend, which was down 34% year-on-year. However, with the upgrade of our set-top box and Connect Box estate, we expect to see a reduction in spend in this category even without the impact of COVID.
Despite COVID, we continued to invest in the other CapEx categories and laid a platform for future growth. Project Lightning build volumes were down modestly year-on-year, but we still constructed 93,000 homes in the quarter. Cost per premise trended down with a cost per premise of £626 in the quarter versus £665 cost per home across the project to date. Capacity investment was down 18% as we benefited from the completion of the large spectrum upgrade in Belgium and much of the 1 gig upgrade in the U.K. We increased our spend in the product roadmap 18%, supporting our mobile platforms in the U.K. and Belgium, as well as the IT investments required to drive digitization efficiencies. Baseline, which is our major platform maintenance category, was broadly in line with previous years.
In the aggregate, we spent $1.2 billion in the first half of the year, or around 22.2% of sales. Without the Lightning construction CapEx, this figure would have been 19.1% of sales. With the completion of significant projects in the connect and video space, as well as the major capacity and IT upgrades behind us, we expect that our capital intensity excluding Lightning to remain below 20% and trend lower in the coming years. Turning to the divisional overview, which breaks down the figures by our key major subsidiaries and provides a roadmap to analyze the free cash flow of our major assets. The U.K. and Ireland saw a revenue decline in the first half of 2.1%. Adjusted EBITDA declined 2.5%, and OFCF was strong at $749 million before Lightning construction CapEx and $573 million after.
Underlining that it remains a strong cash flow generating asset despite our new build investment. It also benefits from significant tax loss carry forwards, meaning a higher free cash flow conversion on this OFCF than, for example, Belgium. In line with the group as a whole, Belgian revenue in the first half declined 2.8% but recorded positive adjusted EBITDA growth of 2.2% and operating free cash flow of $428 million. They recently confirmed their free cash flow guidance at the low end of EUR 415 million-EUR 435 million. As Mike discussed, the repricing in the Swiss market continues to put pressure on the top line, and despite operating efficiencies, adjusted EBITDA declined 12.9% in the first half. OFCF for the period was $140 million, and we remain confident that for the full year they'll realize around $170 million of attributable free cash flow at today's exchange rate.
As Mike highlighted, the standout performer of our major assets was Vodafone Ziggo. Despite COVID in the first half, they reported 2.6% revenue growth, 8.1% adjusted EBITDA growth, and increased OFCF to $562 million. Turning to the adjusted free cash flow for the group as a whole, after the first six months, operating free cash flow before Lightning CapEx was just under $1.3 billion. We had half-year interest of $600 million and cash tax of $57 million. The joint venture paid interest on the shareholder loan of $22 million for the first six months, and we would expect the remainder of our 50 percent of their EUR 400 million-EUR 500 million projected shareholder distributions in the second half of the year.
Working capital for the first half was - $323 million, consistent with previous years, and we expect the working capital impacts to be broadly flat for the full year. As a result, adjusted free cash flow before Lightning CapEx was $315 million and after CapEx $139 million. We remain confident, subject to no major further disruptions from COVID, of realizing our full-year free cash flow target of $1 billion even after Lightning construction CapEx. So in conclusion, the U.K. JV with Telefónica remains on track. We're continuing to navigate through COVID-19, where so far the impacts have been manageable. Despite COVID, we were able to achieve record high NPS in Q2 and positive customer additions. We're encouraged by our first half financials and actually optimistic for the remainder of the year.
We are confirming all of our 2020 guidance metrics based on no return to the full lockdowns that we saw between March and May and assuming a gradual economic recovery. Given the uncertainty of this backdrop, we're not raising our guidance at this time, and we'll take questions now.
The question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star or asterisk key followed by the digit one on your phone. In order to accommodate everyone, we request that you ask only one question. If you are using speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll pause for just a moment to give everyone an opportunity to join the queue. We'll go first to Steve Malcolm with Redburn.
Thanks for the presentation. Just coming back to slide five and your multiples, I guess the Telenet multiple kind of jumps out a bit, you know, trading at north of 10% free cash flow yield. I mean, just really a question for you and the board, Mike and Charlie. I mean, are you? It seems like you're not getting tremendous equity value from that stake in Telenet and the Vodafone Ziggo stake. You know, why do you think that is? And is the board happy with the status quo? I saw you quoted in a recent sell-side conference saying you'd love to own more of Vodafone Ziggo.
Just sort of interested to hear your thoughts on why you think the stock market is not giving you, you know, what you clearly think is fair value for your stakes in those joint assets and what you can do to sort it out.
Sure. And that was really the point of that slide was to, you know, talk about the FMC strategy, but with the punchline being that we believe if we continue along this path, which we are, of course, continuing on, that the valuations, at least in the underlying businesses in those local markets, will be there. And I think you raised Telenet. That's a good example. You know, traded at a premium to us on a number of levels. Are we getting that valuation in our stock? But I think it begins with the underlying businesses. And I think that the path we're on to drive these FMC champions to greater free cash flow yield, greater stability in operating performance is the starting point.
And it's clear also that local investors in many of these markets prefer to own these businesses and understand the benefits of stable and sustainable free cash flow. And as a result, as you can see on the page, are giving these businesses higher multiples and you know, better valuations. So, if we're able to achieve those same results and the results we've already been achieving and we can get, for example, Vodafone Ziggo public or perhaps even O2 UK someday, Virgin Media in the U.K. someday, that could be a real positive event for the stock. I'm not saying that's the only reason, to, to look at it. And it's not explaining the entire gap that we have today between underlying value and the stock low, but it certainly will help bridge that gap.
And, you know, we're, we're all about, as I've talked many times, bridging that value gap. And I think that the strategy we're pursuing here is the right one. And investors need to see a few things, and it wouldn't be surprising. They want to see these transactions get done. So we need to get the transaction with Telefónica in the U.K. completed and approved, a nd of course, that'll be a positive when it is. We need to continue to show and demonstrate the sort of strong performance and cash flow that we're demonstrating out of these businesses today. No question, we have to put some of that money to work. I think the money on our balance sheet isn't helping today on for some investors. They'd like to see that money be put to work, a nd we, we appreciate that.
We're in the same boat, wanting to put money to work. So it's a combination of things. But hopefully the slide shows that the path we're on is the right path for creating long-term valuation. And, you know, that's, that's where we're sorry.
No, no, that's also right. It's Charlie. J ust said, I think we do feel Telenet's pretty undervalued. I think that, you know, it is, it's not clear to us why it would trade so distant to KPN, Proximus, which have less attractive growth profiles, less stability in their cash flows, et cetera. And that's something we're certainly working with Eric and John on because I think there's a number of possibly technical reasons around the liquidity of the stock and/or could it be around clarity around shareholder distributions, you know, the balance between buybacks and dividends. So, you know, I wouldn't say that we feel comfortable with the value of Telenet. We think it's a more reliable asset.
Right, Charlie, that was really my question. Yeah. That was really my question, that it doesn't seem like the current structure where you earn 60% of Telenet and 50% of Vodafone Ziggo, you know, is doing a great deal either for, I mean, you mentioned local listings, but it's not really working with Telenet at the moment. And I guess if that's where Telenet trades and Vodafone Ziggo arguably trades below that despite really good numbers this quarter. That was really my question as to whether you think the current setup works.
Well, actually, but I think it might, Steven. Yeah. But Steve, I think we can make the case that Vodafone Ziggo has superior growth to virtually any telco in Europe. So they would trade substantially as though they've just beaten KPN on every single metric. So I think it's fair to say that the valuation of them, we would expect to be inside KPN, not the other way around, particularly with the synergies ahead. I think the Telenet valuation is a head-scratcher, and we're certainly aware of the disconnect, and we're talking a lot with them about it. But it's fundamentally a very strong company, very predictable cash flows. And I think at this stage, for whatever reason, isn't getting the valuation. But to echo Mike's point, even at that valuation, we're trading at a discount to that is our point.
Yeah. But I guess unusual, I'm agreeing with you. I'm just trying to figure out, you know, whether there's a better structure out there that would close that, you know, and it's undervalued within you. And then it's the local listing itself is clearly at a big discount to companies like Telenet, but I, I think it's probably performing better than that at the moment. Anyway, it's a, for another time.
Yeah. I mean, we're a bit more leveraged than some of the stocks on this page. Of course, at Telenet and Vodafone Ziggo. But I think the, you know, the answer is the same, which is fundamentally Telenet might be undervalued. We're clearly undervalued, but the strategy of creating transparent value has to be a good thing over time based on where we're trading.
Okay. Thanks a lot.
All right. I'll put in the next question. You got it.
We'll go next to David Wright with Bank of America.
Yeah. Hi, guys. Thank you very much for taking questions. Just on the U.K. trends, obviously, you know, strong internet ads, cable ads. You guys committed to maintaining quite a lot of the provisioning through the lockdown period, which will surely have supported the trend, but it still does stand out as a much better commercial performance. Could you maybe just add a little color on what you think is driving that? Was it perhaps that, you know, the UK consumers reacted a little bit less than you thought to the new end of contract regulation? What is it you think has really driven that market outperformance? Thank you.
I'll just say a couple of things, and then Lutz, I'll let you chime in here. You know, from my perspective, the fact that we were still installing customers actively in the field certainly advantaged us. We didn't stop installations. We felt that that was critical and central and continued to make, you know, products and services available to consumers, which was important, and then secondly, at times like this, there's usually a flight to quality, and, you know, when we're offering 500 meg across the country and the competition is a 30 or 50 or maybe 100 in some cases or slightly more, that certainly matters. Those two things, in my mind, resulted in certainly better, you know, better performance than we'd expected, together with reduced churn in each other numbers. So, Lutz, you want to add to that?
Yeah, I think exactly what you said, Mike. I mean, what we did was, we came up right at the beginning of the crisis with a generosity program for our customers. So offered them more speed, offered them mobile data packages, offered, removed any caps on voice, came up with free of charge broadcasting channels, Hot Picks , and stuff like that. And so NPS has increased rapidly. So that's number one. Number two is, I mean, employee satisfaction also is increasing since quite some time. And our field people stayed committed to the company. And so they decided to keep installing and keep expanding across those, which was also a great contribution to the success. Thirdly, we quickly moved to digital, right? I mean, we started a journey to digitalize Virgin Media.
And now our sales channel, our digital sales channel has increased by 50% from Q1 to Q2. So the sales channel percentage of digital has increased to 68%. And on the churn side then, higher NPS leads to lower churn. Then also, obviously, Openreach, they have stopped installing, so therefore, you, you could not really churn to another network, and, but also you'd see that our quarterly churn has gone down over three consecutive quarters in a row, so therefore, we have sales momentum, we have momentum and lower churn, and we have higher NPS. And also, as Mike said, higher speed and higher quality matters when the connectivity is the connection to the outside world.
And could I, could I possibly add then, we know that Openreach was back in the market in June, with a lot more installations almost back at kind of full run rate. Can you kind of give us any indication of the sort of inter-quarter trends and whether, you know, you're kind of exiting the quarter, you know, maybe a little bit more normally rather than that kind of initial spike? Was the real outperformance sort of through, you know, April, May, and June maybe a little bit more muted?
So from the sales perspective, we actually accelerate momentum. So we have not felt that our competitors are back in the market. From the churn, you see, I mean, we have been in, I think, May and April on our churn numbers, right? I mean, they were dramatically low. The churn level has come up a bit more, but it's still lower than it used to be.
Okay. Very interesting. Thank you.
We'll go next to James Ratcliffe with Evercore ISI.
Hi. Thanks for taking the question. Two, if I could. One is a big picture one, a lot of discussion on fixed mobile convergence and, you know, the, the rationale to go for the U.K. transaction. Can you talk about what the pitch to the customer, what the compelling proposition for the customer is on fixed mobile convergence beyond just maybe you get a bundle discount? And secondly, you know, clear commentary about customers dropping sports packages in the, in the wake of COVID and the lack of sports. And I know, you know that they're low margin, but aren't sports a big part of the reason people take pay TV? So can you talk about the longer-term impact of, a lack of sports?
And secondly, how profitable is the TV business for you at this point? I mean, U.S. operators seem to have pretty much thrown in the towel on it. But, you know, how beyond as a churn reducer, how lucrative is the TV product itself?
Mm-hmm. Quite a few questions there, James. Let's see. Lutz, you can work up what we're doing with Oomph in the U.K. and at least give one example of a fixed mobile proposition to consumers today and how that might evolve, you know, in an O2 environment. I'll say on the TV business, of course, we evaluate this very closely across every marketplace. We still deliver and generate pretty good gross margins on our TV business in comparison to, say, the U.S. industry. And that's principally because we don't have massive expense in the basic package for sports. And so our gross margins, you know, vary by market, but they could be as high as 60%-75% in our TV business. That's, you know, from our point of view, a nice piece, a nice contribution to the EBITDA and something quite important to us.
And we don't intend to sort of let it go, if you will, as you think you implied. We do realize though that the overall economics of TV have to evolve and are evolving. And so what we're spending quite a bit of time on is reducing the cost of our, the device we put in the home, of ensuring that things like sports are available on a premium basis and integrating OTT apps so that your experience is seamless, so that, you know, you turn the TV on, you just say, "Play Netflix, play Amazon, play BBC," and you're ready to rock and roll. And so we do think the entertainment platform we've developed has longevity and has relevance to consumers because we're integrating apps, because it's cheap and easy to utilize. And we intend to continue to drive the cost of that down.
So there's margin in the TV business, there is profitability in the TV business. From the sports point of view, yes, when sports paused, we did lose a handful of customers, but most customers just paused. Fortunately for us, whatever money we lost from sports customers pausing, we ended up getting reimbursed essentially and not having to pay those costs back to our providers. So it was largely a wash for us, a zero margin wash. The last point I'll make is that we know, because we've researched this, that the entertainment component of the bundle matters to broadband customers. You know, vast majority of broadband customers want to see a TV product in the bundle, and that is hugely impactful for their intent to, their purchase decision.
So you can't just eliminate the entertainment product, and we wouldn't do that anyway. It's a big part of our revenue and contributes to EBITDA. but on the other hand, just to point out that it is still a highly relevant part of the bundle for consumers across Europe who watch a lot of free-to-air television still and who are, you know, embracing OTT apps, but thankfully embracing them on our platform. So Lutz, you want to talk about the Oomph bundles in the UK and how you see that evolving with O2?
Yes. I think it's not only a discount, which brings the customer to buy a fixed mobile converged product. I think it's a combination of benefits. So what we've done with Oomph is we are offering consumers higher speed. Actually, now they are going to get 600 Mbps when they get the highest Oomph package. So the speed they don't get without that. H igher mobile data package, so two gigs instead of one or 10 gigs instead of five, something like that. And then also, a special customer service hotline, where they have great support. This combination, I think, creates a strong momentum. For some customers, fixed speed is more important. For them, it's a mobile package. For them, it's a combination with great service.
So it's much more than a discount. I mean, the discounts have been in place for years, but the fixed mobile converged customer base has not increased the last, I think from 2016 till 2019. Then when we came up with Oomph, now it has increased big time, and we have now increased three percentage points. Now, when you take that to O2, I mean, that simply provides a huge opportunity because 80% of O2 customers do have a different fixed broadband provider than Virgin Media. Two-thirds of them, we have made some market research, are actually interested in such a converged bundle we just talked about. And, the brands are very close, and, they would prefer, a product like Virgin Media.
So therefore, now it's all about understanding different segments and then coming up with the right product combination and then offering that. And this, is then, I think, the tailwind for the revenue synergies, in the case.
You can see it, you know, you would study the Vodafone Ziggo results in the second quarter, but on almost every metric, you know, we've outperformed KPN. And that's because, you know, we're finding the rhythm that matters to consumers in that fixed mobile space. You know, and it is speed. It is not just reducing costs. It's giving people more. Sometimes it's more for the same, more for more, maybe even more for less, depending on the combination. More matters, and that's exactly what fixed mobile convergence delivers.
Great. Thank you.
You got it.
We'll go next to Robert Grindle with Deutsche Bank.
Yeah. Hi, there. Going back to the U.K., you seem to have played lockdown very well indeed and perhaps benefited by some of your peers not playing so well. But last week, Ofcom reckons that more than 60% of your broadband customers are out of contract. So that number has been moving up quite a lot recently. Do you intend to address this, perhaps in H2, within the construct of your guidance? Thank you.
Lutz, you want to tag on that?
Yeah. Yeah. We have talked about end-of-contract notification, I think in the previous quarterly call. I can confirm the message I've given there. Actually, the impact of end-of-contract notification is less than we had planned for. What does that mean? That means that customers are simply less challenging to get additional discounts to stay, as we had planned for. I think that's number one. I think number two is that we think that speed matters more than ever, right? I mean, when you have four or five household members, mom and dad are doing video calls, the kids are playing or video streaming, you need speed and you need reliable speed. And therefore, our average speed in the U.K. is two and a half times higher than the average.
And we are working on increasing that delta, right? We, and therefore, we think that our customers, if they perceive value for money, that we are actually not so concerned about that 60% of our customers are not in contract. And we don't think that we should overwhelm them with big discounts to stay. And if you look at our NPS numbers, they're improving, and our churn numbers. We are on the right path here.
Yeah. I would say when we, you know, the end-of-contract notification period began, before COVID really hit, then it was largely paused by most in the industry. But during the period of time that it was, you know, active, as Lutz said, we saw the churn, which may be more or less what we expected, but the discount required to keep customers was also significantly less. And so at least in the short period of time we had pre-COVID, the end-of-contract impact, at least for our business, was less than we expected. We've only more recently gotten back to engaging with customers on this. And we'll let you know when we get to our third quarter results. But so far, so good.
Yeah. We have been 10 days offline. And obviously, also to support what Mike said, right, and also a bit, in regards to our guidance, there is now Average Best Tariff Notification coming, and we will start with that in fall. And obviously, we are careful in our planning as we have been with end-of-contract notification, but we will see it at the end. That's what I'm saying. Mm-hmm.
Thank you.
Yep. Operator?
One moment. Hello. I'll take our next question from Nick Lyall with Société Générale.
Hello, everybody. It was a question, sorry, on Switzerland, if that's okay, Mike. I mean, you mentioned in the release that. Yeah. Horizon's not quite widespread, so gigabit convergence is coming up. And also, you've got the Swisscom Sports deal on the way, but the EBITDA is still down about 11%, ex the one-off. So could you just try and weigh up, you know, between the, you're obviously making some operational changes to the business, but how long before you can start to think about stabilizing revenue and EBITDA, if at all, because it still seems quite a long way away? Thanks.
Sure. Listen, the turnaround plan remains as it's been described in terms of our tactics and our strategy. So it's all about 1 gig, getting the TV box, the EOS penetration maximized, trying to retain some of the, you know, record NPS that we've been delivering and driving the fixed mobile convergence, which has been a steady, you know, success story for us every quarter and then lastly keeping, you know, ensuring that our customer operations continue to be smooth and the digital transformation process also there is working quite well. So there's a lot of positive things happening. Having said that, as I mentioned, the market is competitive.
You know, we have to stay competitive, which means we have to be thoughtful on price and offers and packages, and I think, you know, as we didn't really provide anybody, I don't believe, specific details as to when we would be break-even EBITDA, when we would be back to growth. We continue to evaluate that timeframe, of course, and I don't know that we've made that public, and I'm not sure we will at this point, except to say that we still feel very positive about the plan. Even if the plan were to take a bit longer, you know, we're in this for the long term.
The plan itself is solid and sound, and it looks to us like it's working. I don't know if Baptiest is on it. Do you want to add anything to that, Baptiest, around recent momentum and current things that we're seeing on the ground? Go ahead.
Yeah. This is Baptiest. I think it's like Mike says. It continues to be a very competitive market, but we're building commercial momentum. And Lutz was saying that he saw growth in the quarter, and the same we can say for Switzerland. So June was better than May, and May was better than April in terms of sales. And I would like to point out that Switzerland is past the point of all the investments. If you look at the operating free cash flow margin back to 28% in the second quarter, that's not an incident. So we have passed the investments of the 1 gig network and the new video platform. We've now taken the opportunities to really simplify the business. So this continues to be a very strong cash-generative platform, and there is sales momentum coming now.
Okay. Thank you.
Yep.
We'll go next to Matthew Harrigan with Benchmark Capital.
Oh, thank you. Your industry association, ETNO, and a number of consultancies have really pointed out that a lot of the innovation and investment in your network is really just kind of translated to a free rider effect almost for guys like Facebook and, and Google. Now you've had, you know, even more acceleration of pulling forward maybe five years ago on some broadband businesses. You've got 5G in the offing. You've got even more value on your network now with, some of the latency issues between DOCSIS, you know, 5G, LTE being addressed.
Is there any possibility that you could capture a nice chunk of that and accelerate the growth over time? And I know right now when you look at the COVID numbers, you're kind of looking at, you know, layers and some of your revenues have been hurt and your costs have been hurt. And at the same time, your cost structure is probably improving off some of the things you've been forced to do. So revenues probably grow a little bit faster longer term. But can you kind of layer that out and just talk how you feel that the character of your business has changed, off COVID and then, you know, the fixed mobile convergence and hopefully getting more of the benefits of the network owners as opposed to people who are using the network, other companies? I'm a little long-winded. I apologize.
Hey, Matt. I just want to be sure I followed the question. It sounds like you're asking a couple of things there. I mean, our network strategy, which I'm going to take and jump in here and talk about, shows us continuing to drive speeds from 1 gig to 10 gig over time. So the strategy is clear, you know, whether it's through DOCSIS 4.0, whether it's through Fiber to the Home. By the way, half the homes we built in Lightning or Fiber to the Home build. We're going to continue to lead, wherever we can, the speed race, and that matters considerably to consumers. With mobile and with fixed mobile convergence, the same can be said on the wireless side. So 5G and 1 gig are a powerful combination. 5G and 10 gig are even more powerful.
But 5G and 1 gig is sort of the killer app. And, and if you look across the markets we operate in, we're the only ones really providing those options today. And in the U.K., once we get the, the deal with O2 closed, we'll be providing that option there as well since they've launched, I think, the 60 cities already. It's, you know, the growth over the long term is, is not an accident. I'm not sure. Or it's, it's certainly something that's quite deliberate and purposeful and driven by all the things we've described. On the cost side, you've got lower costs. You've got synergies. On the revenue side, you've got less churn. You've got higher NPS. And you innovate, you continue to innovate on the network and in the bundles and the products.
Consumers have shown everywhere we operate that you can not just drive sustainable EBITDA growth, which matters, but also, and just as importantly, significant free cash flow margins and, and free cash flow. That is where, you know, we're headed, which is ensuring that all these operations are able to deliver sustainable, high-margin free cash flow. Whether we dividend that to us, to ourselves, whether we're taking those assets public and looking at market values, you know, we, we know that there's an opportunity to capitalize on, on this infrastructure and these retail relationships in a way that we haven't done historically. So that is, that is basic strategy. I'm not sure if I've addressed your specific question, but.
Yeah. I guess that's a very more sophisticated way to frame it. What would it have just been, you know, given the increased utility of your network and use? Do you think you're going to be able to grasp that pricing more than you have historically? Because, I mean, the value of your network has increased. I mean, people are thinking outside companies are really benefiting from your network. I mean, do you think it just translates to better, you know, pricing power over a period of time?
Can I?
I do.
Can I help you out, Mike?
Yeah. Sure. Go ahead.
Just one idea. Just one idea, right? I think our strategy shows us that we are combining four products now, right? So we are combining fixed, mobile voice, mobile broadband, and video. And the video product is getting more and more OTT product. What we are doing is, with the help of data, we understand our customer in a perfect way. With the help of digital, we really offer a combination for all these customers, all these at the right level, and therefore, then we are creating a high stickiness of our customers. Going forward, therefore, when we are successful with that, we can also sell other stuff, and this will give us, will bring us in the position where we are successful with that to also increase our margin and our pricing, right?
There are operators who have done that successfully, and when you think about quad play, and you think about that, there's an opportunity to get there, but I think the first step is that we are able to offer quad play in a perfect way to all our customers, and this is the FMC step. I don't know if that helps.
Oh, it does. Thanks, Mike. Thanks. Sorry to pause us from meandering a bit.
Okay. No worries, Matt. Operator, we have time for one more? Are there lots or?
Yes. We'll go next.
You have a couple more up there in the queue.
Christian Fangmann with HSBC.
Yeah. Hey, guys. Thanks for the question. You know, coming back to this, to Switzerland, I mean, it's, you know, I would say that the weak spot in overall pretty good results. And you mentioned that, Mike, earlier, around Switzerland and Salt, you know, joining forces with Sunrise on the fiber to the home front. What are your strategic options in Switzerland down the road? I mean, the deal last year failed, so I would be interested in your thoughts there. And then a bit of a follow-up to Baptiest's point, what are we seeing in terms of market aggressiveness? ARPU, and I've seen that B2B is also now going backwards. So, what are the trends that you're foreseeing, roughly speaking, for the second half? Is it as bad as in H1, or can it be better because of lower investments? Thanks.
Okay. Baptiest, you can work up an answer on the second one. On the first one, the strategic options remain the same ones that we've always articulated. And I'm not going to get into speculating which of these make the most sense. But clearly, as I mentioned in my remarks, we think the market would benefit from rationalization. We are trying to do our part in that. Of course, a very small part we achieved in the second quarter with the announcement of the sports deal with Swisscom.
I wouldn't underestimate that. I think that's going to have a major impact long haul, both on our own investments and our sports product, as well as our consumers, and the benefit to our consumers of having access, reciprocal access to both sports products. You know, we have a strong MVNO agreement with Swisscom, a very rational MVNO agreement with them that gives us great pricing. In fact, they reduced pricing further in this latest agreement. And so many of the operators in the marketplace, us and Swisscom in particular, are starting to make decisions and work in a manner that we think heals the marketplace. As I mentioned on the Swiss fiber announcement, if you parse through that and you break it down, you know, we're reaching already 70%-75% of the homes with a 1 gig product.
They hope to build 1.5 million out of about 4 million homes in five to seven years, if they can get the financing to do that. And, you know, that makes sense to us. If I were in their shoes, I would certainly look at something like that. They see the infrastructure capital sloshing around. They figure, "Why not us?" And let's try to put something to work that relies that makes our reliance on Swisscom less. And I appreciate that strategic decision. Those things will take time and will be expensive. And let's see what the ultimate, you know, market situation looks like in five to seven years. In the meantime, you know, we just keep our heads down and push the benefits of our network and our products, which are pretty strong, you know.
And I think it's, you know, I'm not going to give you guidance here on when the numbers start to continue to look, you know, better on the financial front. But you can see that, you know, customer adds certainly better than the last two quarters or same as last quarter, better than the quarter prior to that. And, you know, market improvement here is going to take a little bit more time than we probably thought. But the trajectory looks good, and we're still confident. And the number one thing here is to drive free cash flow. You know, put whatever yield you want on the $170 million of free cash flow. There's meaningful equity value in this business. We continue to drive free cash flow. That's the, you know, that's the metric that matters in this particular instance.
Baptiest, do you want to provide some color on the ARPU and B2B business?
No, no. I think, I think the free cash flow of this quarter confirms the $170 million going forward and that it's intrinsically in this business. Secondly, the top line of Switzerland has these low-margin COVID impacts that Charlie explained. If you look under the hood, the B2B business continues to grow. So the core B2B business still grows 2% if you take out the low-margin impact of COVID. In the consumer business, we deliberately look at broadband lines. That trend starts to improve. We found our way in new advertising. We found our way with better distribution. We found our way in the promotion price points.
And I just would like to reiterate the exit run rate of the quarter is good. And NPS, the net promoter score, has never been as high as we can call back for UPC in Switzerland. So the momentum is there. It's a matter of time now with forming stable free cash flow platform.
All right. Thanks, guys.
Yep.
We'll take our last question from James Ratzer with New Street Research.
Yes. Thank you very much indeed. I have two questions, please, just coming back to the U.K. The first one is kind of bigger picture one around your strategy. I mean, I was wondering if you are kind of pivoting the strategy now to becoming a little bit more price competitive. I mean, I've seen that you've been sending letters out saying no price rises this year, and you've extended your introductory offer period from 12 to 18 months, both of which would seem to be making you more price competitive versus the competition. So I was wondering if this is a little bit of a pivot in strategy to help support KPIs, and then the second question I had really was just trying to quantify the impact of end-of-contract notification and the best tariff notification as well.
I mean, you were saying excluding sports, ARPU in the quarter seemed to fall from about 1.2% growth to being flat. How much of that is actually driven by end-of-contract and best tariff? What percentage of your customer base now actually have had these notifications? So I mean, you're telling us it's landing in line with expectations. Maybe you could steer us towards what you think that impact will be when it's worked its way fully through the base. That would be great. Thank you.
James, I don't think we provided any guidance, specific monetary guidance on end-of-contract at the beginning of the year. We said in our original guidance that there was about GBP 100 million of headwinds, which included end-of-contract and annual best tariffs, as well as rates, network taxes, and things of that nature. So I don't think we've broken that down into components. Which in what we said is that the end-of-contract experience prior to COVID was better than expected, not as expected, in the sense that the churn numbers were largely what we expected them to be. But the amount of discount we had to offer to achieve those levels was less. And I think we've only got kind of only it's only been a very short period of time that we've reactivated end-of-contracts. So not much color to give you there.
But third quarter, when we get back on the phone in November, we'll certainly have a longer track record to give you, you know, a sense of how things are moving. And, you know, Lutz, you can dig in on the price increase, which, yeah, did you correctly say has been postponed here? And I think that makes total sense in the environment that we're in. You know, taking into consideration this uncertain time for customers, it seemed to, you know, from our point of view, a very appropriate thing to do. But Lutz has a great plan, which we just approved, to go ahead and actually neutralize the impact of that price increase not occurring in the fourth quarter through greater volume growth. So you can talk about that quickly, Lutz.
Yeah. So, first, you asked your question. the development of the ARPU, from Q2 2018 until Q2 2019, right? So exactly a year ago, was an ARPU growth of 0.5%. Now, if you now look at the ARPU development and you exclude the COVID impact, we have an ARPU growth of 0.1%. So the delta between the two years is 0.4%. And we have pulled the price rise one month forward, which explains the majority of it because of the different phasing of the price rise. So therefore and the rest is a bit end-of-contract notification. So therefore, I think what, what I'm saying is there's not a deterioration on the ARPU in general other than a bit from end-of-contract notification, and this is lower than we estimated. Second, on the price rise, we have decided not to do it in 2020. And we have, on the one hand, absolutely paid respect to the situation.
We also looked at sensitivity. So when a certain higher reaction would have kicked in, that would have been also margin diluted for us. The current momentum we see on net adds is compensating for that in 2020, and the momentum, if we can get it to a certain point, can also compensate that for a certain time in 2021. To finish with your question, are we more price aggressive to make some cosmetics and customer net adds? I would say the answer is no. Our ambition is to create a long-term OFCF growing provider. So therefore, it is not about customer net adds. Having said that, the market has been , so w hen you watch acquisition price levels across different speeds, it has come down over the years, and also in the last 12 months by 6%.
And obviously, we are reacting to that to get a fair share. But the idea is absolutely not to change the price position, the value price position we have in the market, compared to competition. That is not our strategy.
All right. Thank you.
It's, well, yeah. Well, listen, thank you, everybody. I know we're at the top of the hour here, a little bit past. So appreciate you joining us as always. And we appreciate your support. Hope you stay well and safe for the rest of this summer. You know, we've got a lot of positive things happening. We talked about those today, the UK transaction on track, great performance, all things considered to all of our markets, in this COVID pandemic period. And we're coming out of it with a lot of positive momentum. So look forward to talking to you in November. Take care.
Ladies and gentlemen, this concludes Liberty Global's second quarter 2020 investor call. As a reminder, a replay of the call will be available in the investor relations section of Liberty Global's website. There, you can also find a copy of today's presentation material.