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Executives

Hans Söhngen – Head-Investor Relations

Joost Farwerck – Managing Director-Netherlands

Eric Hageman – Chief Financial Officer

Analysts

Jonathan R. Dann – Barclays Capital Securities Ltd.

Paul C. Sidney – Credit Suisse

Dimitri Kallianiotis – Citigroup

Sasu Petri Ristimaki – Merrill Lynch & Co.

Luis Prota – Morgan Stanley

Stuart Gordon – Berenberg Bank

Russell A. Waller – New Street Research LLP

Ulrich W. Rathe – Jefferies International Ltd.

Emmanuel Carlier – ING Bank

Royal Kpn N.V. (OTCPK:KKPNY) The Outcome of the Dutch Spectrum Auction Conference Call December 17, 2012 8:00 AM ET

Operator

Good afternoon ladies and gentlemen. Thank you for holding and welcome to the KPN conference call. At this moment, all participants are in listen-only mode, and later we will conduct the question-and-answer session. I would like to hand over the conference to Hans Sohngen, Head of Investor Relations. Please go ahead, Sir.

Hans Söhngen

Good afternoon everyone. Welcome to KPN's conference call and the outcome of the Dutch spectrum auction. Today our CFO, Eric Hageman and our Managing Director Netherlands, Joost Farwerck, will take you through our main considerations and address your questions during Q&A. I would now like to hand over to Joost Farwerck.

Joost Farwerck

Okay, thank you Hans and good afternoon everyone. Ladies and gentlemen we have obtained a highly attractive combination of high and low frequency licenses and I'll tell you exactly what we obtained and what we are going to do with it. The spectrum package guarantees the continuation of our existing services and also the introduction of new services, mainly our 4G LTE services we are going to introduce next year. And this is for a long period, for a good period of 17 years ahead of us.

So this will enable us to continue offering the highest quality of mobile services both in consumer and business markets. We are in the Netherlands, the leading provider of mobile services and we serve around 10 million mobile customers and we do that with the highest quality networks and services. Our current 2G and 3G networks offer the best coverage and we offer the best quality voice services in the Netherlands. Our 3G network provides the fastest and most reliable mobile broadband services in Dutch mobile markets.

So now we will introduce our 4G LTE network and we will do that at the start of next year. And the new 4G LTE licenses will be very important for us and it will be important since we're going to introduce superfast mobile broadband services for all our customers. And this allows our customers to experience speeds of up to 10 times faster than current already available over our current 3G network.

Now the five main mobile spectrum bands available across Europe and included in this Dutch spectrum auction are used to provide the different services. We have 800 MHz band and that will be used for 4G LTE; 900 MHz for GSM and HSPA’s; 1800 for GSM and also for 4G LTE; 2.1 gigahertz for HSPA and 2.6 gigahertz we will use again for 4G LTE.

It works like this, the low frequency licenses slot are very important to provide high-quality coverage, both deep within buildings and nationwide we as a company have a coverage of 99.9% in the Netherlands and indoor and outdoor and so this is very important for us. And the higher frequencies are typically used to add capacity in areas with high traffic volumes.

We invested in sufficient and spectrum to replace the existing 2G and 3G licenses and we invested in additional spectrum, in 800 MHz licenses to enable the deployment of 4G LTE services. It was very critical for KPN to acquire this and to acquire an appropriate combination of low and high frequency licenses in order to offer high-quality coverage and at the same time have capacity to meet the rising traffic demand.

Now given the importance of 4G LTE and our markets leading position in the Netherlands, I am very pleased that we acquired two licenses in the 800 MHz bands because this allows us to offer consistently high quality 4G LTE nationwide on all locations in the Netherlands. We acquired the most effective and complete portfolio of spectrum with a total of 120 MHz. We acquired two licenses in 800, two licenses in 900, four licenses in the 1800 MHz band, one license in the 2.1 gigahertz band and six licenses in 2.6 gigahertz.

So this leads to a total spectrum package for KPN following the auction of another 75 MHz. In mobile broadband, KPN will extend its quality leadership using its existing 3G network while we will roll out 4G LTE network. In mobile voice, KPN will continue to offer its highest quality services to our 2G network.

Now in the recent months, we already upgraded our mobile network to enable 4G LTE. So we didn’t wait until the outcome of the auction but we started four or five months ago with the upgrades over our network. Only limited additional cost and time is required to implement the roll out and we will roll out 4G LTE network as soon as possible.

High population density of the Netherlands combined with our current side grids, allows us to offer 4G LTE services nationwide making use of the combination of 1800 and 2.6 GHz spectrum. So this means that we have – spectrum has had in all mainstream, 4G LTE events to go for the whole 4G traffic and even in locations of highest demands, we will do that also on long term.

Now, as soon as February next year, so in two months from now at the latest, we will start to offer 4G LTE services to our consumers and business customers. And we will start in the northern part of what we call the Randstad area, that’s the area around Amsterdam. We expect to cover 50% of Dutch population already by mid-2013 and we will have a nationwide coverage of 4G LTE in the second half of 2014. All in all, we believe that this acquired spectrum will provide a significant commercial advantage versus competition in relation to both consumers as well as business customers.

We also believe that our spectrum position and our competitive position in Dutch market is better than before the auction. With respect to the mobile market, the spectrum differentiation has become larger. Furthermore, KPN remains the only integrated excess provider in the consumer and business markets, and we are able to offer the highest quality services through our 4G LTE network combined with our 2G and 3G network, and on the other side our hybrid copper and fiber infrastructure. This combination will give us the best position in the Netherlands.

Now, I would like to hand over to Eric Hageman.

Eric Hageman

Thank you, Joost. As you know, we strive for the right balance between a food and financial framework, investments in our business, and shareholder remuneration. To strengthen this balance, we have decided to invest in a vital strategic frequency package for our mobile business in the Netherlands and at the same time adjust our dividend outlook. The spectrum package guarantees the continuation of mobile services for our customers for a period of 17 years translating into a yearly cost of around EUR 18 million. KPN has convinced that the acquired licenses will generate a good return on investment considering our position as the only integrated excess service provider.

In order to accommodate this vital strategic investment, KPN has adjusted its dividend outlook. We will not pay a final dividend over 2012 following the interim dividend payment of EUR 0.12 in July. Furthermore, we announced on Friday that the dividend outlook for 2013 has been adjusted to EUR 0.03 per share. This measure results in a lower total cash out of around EUR 800 million; around EUR 500 million in 2013 and around EUR 300 million in 2014. Furthermore, last Friday, we also reiterated the 2012 outlook for EBITDA, free cash flow, and CapEx.

The purchase price (inaudible) will be financed from existing cash balances and drawings on the KPN EUR 2 billion revolving credit facility. Based on international benchmarks, KPN spectrum holdings are similar to the market leaders in other European countries. The prices paid in the Dutch auction rank at the high end of completed spectrum auction across Europe. The main contributors were the auction model and the reservation of two licenses in the 800 MHz band for new entrants creating artificial scarcity.

Once again I'd like to highlight that we are very pleased with the acquired spectrum and the new balance in the Dutch mobile market. This enabled us to strengthen our already market-leading position. KPN will remain the only integrated access provider in the Dutch consumer and business market offering the highest quality services through a 4G LTE network combined with a 2G and 3G networks and the hybrid copper and fiber infrastructure.

With this I would like to open the floor for Q&A. Thank you. I would like to kindly ask you to please limit yourself to one question during Q&A.

Question-and-Answer Session

Operator

Ladies and gentlemen we will start question-and-answer session (Operator Instructions) The first question is coming from Mr. Jonathan Dann, Barclays. Go ahead please, sir.

Jonathan R. Dann – Barclays Capital Securities Ltd.

Hi, guys. Could you just update us on any inorganic steps to reduce leverage quicker than the sort of just reducing the dividends?

Eric Hageman

Sure. As you know that the auction has been relative expensive due to the auction model and the reservation for new entrant. We're very happy with the high-value the combination of spectrum that we have obtained because it does guarantee the mobile services for our customers for the next 17 years. So we're convinced that this will give us a very good return on the investment that we have done. As I said we also want to make sure that we have the right balance between our financial framework, the investments in our business and also shareholder remuneration, so we think with the dividend cult that we have found the right balance there.

So where we are on the divestments, I think we have put out a press release for everything that we have auctioned this year and the most recent one we’ll send out this morning, and so the year has almost gone and I think we have finalized what we set out at the beginning of the year to do with regards to divestments whether those are the assets within the rest of the world segment, but also that our sales which we did in the Netherlands and Germany.

Operator

The next question is from Mr. Paul Sydney, Credit Suisse, go ahead please sir.

Paul C. Sidney – Credit Suisse

Yes, thank you very much. I'm just wondering, in light of at the end of the auction, what was at levels Eric, of M’s net EBITDA and are you kind of comfortable going forward in terms of that key ratio, I just want to understand why you said that now. Thank you.

Eric Hageman

We obviously recognized that we are outside of self-imposed financial framework and as we said at the end of our Q3 results, we expect this situation to continue for the coming quarter. Our focus now is on finalizing our strategic plan for 2013 to 2015, and of which we will update you at the full-year results, which are in six, seven weeks time on the 5 of February, if I'm not mistaken.

Paul C. Sidney – Credit Suisse

Great, thank you very much.

Operator

The next question is from Mr. Dimitri Kallianiotis, Citi, go ahead please sir.

Dimitri Kallianiotis – Citigroup

Hello, thanks for taking the question. My question is on the, you got now a new CFO; Dutch Mobile is also running the Dutch fixed. I was wondering, how do you plan to differentiate on integrated offers, because also expecting Ziggo and UPC, probably come up with their own mobile offers or integrated offers. How will you differentiate Koninklijke against the cable operators, whilst these guys also launch mobile. Thank you.

Joost Farwerck

Joost Farwerck, like I just said we indicate that we remain only integrated access players especially after the outcome of this auction, we are the only ones in the Netherlands owning both assets to put it simply we have a very good fixed broadband network, and on the other side we are the biggest player in the mobile market as well. And of course our mobile network operators and cable can offer integrated services as well, but they will do that as unbundlers on the fixed side via our cable or via our network, or via MVNO and they have to buy network services from one of the operators. So we distinguish ourselves from all the players in a Dutch market as only a real integrated service player. And of course, what people will do is, see for MVNO or wholesale broadband deals to be able to do the same. But we are able to offer a highest quality service to our own 4G LTE network combines with of course 2G and 3G and our own hybrid copper and fiber infrastructure.

And I think that's very important and big difference. Just having a fixed or mobile network is not sufficient to our customers a seamless transition between fixed and mobile networks and real integrated networks as you also see broader are required for such as seamless transition. So therefore, we are perfectly place to maintain strength in our markets leading position. In terms of network quality and quality of services. I really see future for quad play, so we are working on for the coming years to introduce several packages on quad play and that means it be for our customers are really going to combined triple play services with mobile super fast broadband services.

Dimitri Kallianiotis – Citigroup

Thank you.

Operator

The next question is from Mr. Sasu Petri Ristimaki, Merrill Lynch. Go ahead please sir.

Sasu Petri Ristimaki – Merrill Lynch & Co.

I have two kind of inter related questions please. One is, are you worried about your – maintaining your investment grade credit rating or do you think the market is overreacting and has concerns. And secondly, do you actually meet to get regular further consolidated in 2014 or could you envisage retaining that as associated company spaces for a number of years longer?

Eric Hageman

Okay, let me answer your first question first. We obviously in very close contact with the rating agencies since last week as you can imagine. Of course, I cannot speak on their behalf and it's up to them to make their own assessment, which some of them are doing it now you might have seen the fetch comment earlier this afternoon. The good thing there is that they are fully aware of where we are in with our business plan, but also they really understand where we are with our strategic investments. And certainly with regards to the spectrum auction that is a very fundamental one to the future of our business as we said and we secured 17 years.

What again we were able to explain to them is, as we did earlier this year mainly in January with the share buyback and the dividend got in July is again we were able to take a substantial measure by adjusting the dividend outlook for 2012 and 2013. So, yes the $1.3 billion cost for the spectrum package was higher than we expected and most people were expecting around $500 million $600 million, but we are able to mitigate this by the adjustment to what dividend outlook buy not paying this final dividend of 2012 and adjusting to dividend to $0.03 for 2013. We have an $800 million lower cash out in those years. So the rating agencies have to do what they have to do, we keep them very closely involved on why we do, what we do, and the steps that we are willing to take again what they have seen on Friday afternoon in the press release that we are willing where it's necessary to take action and I’m referring to the dividend outlook.

With regard to Reggefiber, I think we put out the position paper very clearly in November last year, I think all the options are in there, we hence up recently and you know this executed option one, which meant that share of that company has increased, but we are not yet consolidating this the next steps are in 2015 and 2017 standing where we are standing today that's a long time into the future. I think we are very happy when we updated you to into Q3 results with the commercial progress that we are making there. We see clearly the commercialization of a fiber initiative is paying off in those areas where we have fiber, we can clearly see the KPIs with regards to ARPU and churns being much lower than the areas where we don’t have fiber, so actually the business case where fiber continues to improve week-after-week.

Sasu Petri Ristimaki – Merrill Lynch & Co.

Okay, thank you.

Operator

Your next question is from Mr. Luis Prota, Morgan Stanley. Go ahead please sir.

Luis Prota – Morgan Stanley

Yes, thank you. The question is on your LTE coverage announcement, and whether this was already planned or this implies any acceleration? And whether this would have any potential impact on your CapEx expectations for 2013 and 2014 above the €2.2 billion that you are currently targeting? Thank you.

Joost Farwerck

Okay. Well, yeah just explained as we are working on a large scale rollout of 4G LTE and we started with that months ago and we anticipated the outcome of the auction as one thing, but on the other hands, we also were working on an upgrade of our 2G and 3G networks, because it’s very important for us to be the highest quality mobile network operator in the Netherlands. We had these programs in place. And therefore for us, it was very efficient to immediately also work on the upgrade of 4G LTE. So we do that together with 2G and 3G and that’s why we are already so far as where we are today.

Now that means that from a financial point of view, this is in the current operations already for the half year and so also in our investment run rate. So to be quite honest, I don’t expect that we will change our investment better next year due to this. We are already working on the upgrades and that’s one thing, and the second thing is that we are efficient in doing that.

We are multi-standard radio solutions equipment handling all three 2G, 3G and 4G networks in future. So I see limited traditional costs with respect to the investments. And of course investing in high quality mobile networks is a very important part of my business plan for the coming years to make sure that we stayed the best player in the market.

Luis Prota – Morgan Stanley

Okay, thank you.

Operator

The next question is from Mr. Stuart Gordon, Berenberg. Go ahead please sir.

Stuart Gordon – Berenberg Bank

Yeah, good afternoon guys. I just wanted to pull back to something you said early on quad play and triple play, and the seamless handover and that you’ll be ideally suited because you’re the only person who is able to do that. And have your discussions with Opta as to whether they would permit you to be the only one, people to do that, because certainly the commentary coming out at the EU that seem to whilst they would be willing to see less regulation on a fiber world, one of the key tenants of permitting that to happen would be equal access to all. So I just wondered what discussions you’d had with just regulator in that…?

Joost Farwerck

Yes, well I have a lot of discussions with the regulator. I visit them a lot and I think it’s very important to understand as we encourage open networker philosophy even on fiber, but it could be done on mobile as well. And what I meant is that we owned the assets and we are best in operating and handling 100% really build one service because we are one company.

What we do is on fiber that we give access to all parties in Netherlands because I think it’s very efficient on one hand and secondly it’s wanted for our business case if we encourage others to invest in fiber as well. So we have at least two companies in the Netherlands competing against us on our fiber network and I will encourage them to do so, because it’s good for the business.

That can we done on mobile side as well. We have MVNOs in the Netherlands that means that you can make money by having a competitor in it, and it will help us in the copper broadband network as well for instance companies like T-Mobile and Tele2. They are important customers of ours and we both make money in their broadband business.

So there is enough room from a regulatory point on of few but also my own business opinion is there. There is room for others to play part in this business as well. Yeah, for KPN accounts, we make a lot of money with our assets. Connectivity is our core business and that’s why I think that at the end of course we are very good integrated access player.

Stuart Gordon – Berenberg Bank

And could I just have one follow-up question on financial side that this seems to be some increase in speculation that you’re going to do a convertible bond in the market, is that so hybrid financing something that you are considering in terms of how you’re fund to the payment for the spectrum?

Joost Farwerck

Now the way we pay the spectrum, I think we said that in the press release on Friday, so we entered the third quarter with a very good cash balance 1.5 billion we said at the time. In the meantime, what we have done, we redeemed a bond for just under 1 billion. But we also sold the German towers on top of that some small asset that we have sold mainly KPN Spain and few other things. On top of that obviously, we generate cash in the fourth quarter. So from that cash balance plus some drawings under the revolving credit facility, we are able to pay this $1.3 billion for the spectrum auction.

Now with regards to your broader balance sheet, questions Stuart, we are finalizing our plan, as I just said and following that, we will do the announcement then at the full-year result, as we always do with regard to what the plans will look like, what the outlook will look like, including any of these other questions that we don’t have to address.

Stuart Gordon – Berenberg Bank

Okay, thank you.

Operator

The next question is from Mr. Russel Waller, New Street Research. go ahead, please sir.

Russell A. Waller – New Street Research LLP

Yeah. Hi, thanks for taking the question. Just the first question is, when I look back your bidding strategy in Germany, you clearly walked away from the expensive 800 MHz. I’m not very clear with the time that you’ve talked about the decision would have no impact on your business in Germany. And yet, it looks as over to kind of the split of the different bands, in the Netherlands you have chosen to pay out for the 800. And I just wonder if you could just explain the thinking, also maybe what has changed in your thinking or why you have different strategy in the Netherlands to Germany. And then second question just gives a lot of emphasis on the importance of being certain integrated player. And I was just wondering again what the invitation is for Germany or Belgium where you don’t really have sort of fixed assets and if you look back something you’re going to be looking to address. Thank you.

Joost Farwerck

Okay. Yeah. On your first question, KPN is an incumbent that a market leader in the Netherlands in both consumer and the business market where we offer fixed, but also mobile services to our customers. In Germany, E-Plus is very much a mobile-only player executing a challenge of strategy, also the choices that we made on the different, on the spectrum packages reflects also this disposition that we have, and also this strategy that we have in both markets.

In the German auction, we were also interested in 800, but only at the right price and the rollout obligations in Germany for the 800 MHz as we – as they were stipulated and that meant that for us, ultimately paying $1.3 billion for 800 in that market, and did not make sense in combination with our rollout obligation. So we really had a much better business case to go for both 1,800 and 2,100, and upgrade the network from there with our network partner, ZTE. And so there is a big difference between, are you an incumbent and are you active in all markets, and certainly the fact that we have high strong market position in the business and the corporate market at Netherlands meant that we have to go for 800. That’s the main difference.

If I now look forward to your second question with regards to, so what does it mean then for Belgium and Germany going forward? As I just said in my – also to your first question, we have a very clear strategy to do more, but only in Belgium and Germany that has really paid off in the last couple of years. if I look, for example, the way Belgium continues to perform even in the third quarter, I think we’ve been proven right that that is the right strategy for us. The Netherlands, very different discussion with all the [constant] customers that we have are fixed on mobile that there was no different choice that we could make. so we are the uniquely positioned to be this integrated access provider and that’s the choice that we’ve clearly made during the spectrum auction.

Russell A. Waller – New Street Research LLP

Thank you.

Operator

The next question is from Ulrich Rathe, Jefferies. Go ahead, please sir.

Ulrich W. Rathe – Jefferies International Ltd.

Yeah, thanks very much. My first question would be which should be interested in network sharing to a twin principle? And my second question is, why did you essentially decide on $0.30 next year dividend, why didn’t you just compare to there, what to see purpose beyond that? Thank you.

Joost Farwerck

Yeah. so on partnerships, like network sharing, I can say that we do not rule out any potential partnerships. for example, I can get you the pilots we started before the auction and we will continue after the auction with Vodafone on fastest network sharing. And for us, it’s very important to look at the operating model into the Netherlands, as I call it can be more efficient then if we have to do that by a possible partnership than I am not against it. but of course, it depends on, yeah, all the opportunities that are in there.

Eric Hageman

Yeah. and on the second question, Ulrich, this is relatively simple. as for a very long time in our sector books, and also in our stock, we have the first specific income funds. Those income funds really need a certain dividend per share. and so for us, it had to be a meaningful number, as we said it earlier, a nominal amount. Now we have some discussions around that number, and this is what we ultimately have decided. So we have to recognize that these people are in our shareholder register, and we’re very happy to have them and we would like to have them in the future as well and the $0.03.

Ulrich W. Rathe – Jefferies International Ltd.

Thank you.

Operator

Next question is from Emmanuel Carlier, ING Bank. go ahead, please sir. Please proceed sir. your line is open, go ahead. Mr. Carlier?

Emmanuel Carlier – ING Bank

(Inaudible)

Eric Hageman

Okay. ladies and gentlemen, I believe that’s it. I would like to thank you for joining us in this conference call. And please do contact the Investor Relations team for any further questions. Thank you.

Operator

This concludes the conference call of KPN. Thank you for attending. and you may disconnect your line now.

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