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Hans Söhngen – Head, IR

Eelco Blok – Chairman and CEO

Eric Hageman – CFO


Paul Sidney – Credit Suisse

Jonathan Dann – Barclays Capital

Luis Prota – Morgan Stanley

Tim Boddy – Goldman Sachs

Fred Boulan – Nomura

Sasu-Petri Ristimäki – Merrill Lynch

Dimitri Kallianiotis – Citigroup

Stuart Gordon – Berenberg

Akhil Dattani – JP Morgan

Ulrich Rathe – Jefferies

Royal KPN N.V. (OTCPK:KKPNY) Q1 2013 Earnings Call April 23, 2013 4:30 AM ET


Good morning, ladies and gentlemen. Thank you for holding, and welcome to the KPN Conference Call. During the presentation, all participants are in listen-only mode and later we will conduct a question-and-answer session.

I would like to hand over the conference to Mr. Hans Söhngen. Go ahead please, sir.

Hans Söhngen

Good morning, everyone. Welcome to KPN’s First Quarter 2013 Results Conference Call. Today, our CEO, Eelco Blok; and CFO, Eric Hageman, will take you through our first quarter results, and address your questions during Q&A.

Let me briefly point out the disclaimers applied to this presentation and that any forward-looking statements made in this presentation do not differ from those already made in the press release published this morning. Because of the announced rights issue, we are constrained in what forward-looking statements we can give and as a result, we may not be able to answer all of your questions in detail. So please bear with us.

I would now like to hand over to Eelco Blok, CEO of KPN.

Eelco Blok

Thank you, Hans. Good morning, ladies and gentlemen. Back in February, we announced a €4 billion equity equivalent capital raise to strengthen our financial position and create the flexibility to drive forward with our operational strategy. In the meantime, we have taken a number of important steps in this process. In March, we successfully issued €2 billion of hybrid bonds in euro, sterling, and U.S. dollar currencies. We expect these hybrids to receive 50% equity recognition by the rating agencies.

Two weeks ago at our AGM, our shareholders voted in favor of a €3 billion rights issue, which we expect to launch shortly. Our group financials in Q1 were according to our plans and shows a number of key developments. Revenues were impacted by the sale of Getronics International in May last year and by increased competition across all mobile markets. EBITDA in Q1 reflected our commercial investments to grow in specific areas of our business, mainly in underpenetrated areas in Germany, but also our triple play customer base in consumer residential.

CapEx was €75 million higher this quarter, following an increase in customer-driven investments such as handsets and TV activations and higher mobile network investments in the Netherlands to support the upgrade of our 2G mobile network combined with the rollout of 4G. And free cash flow of €85 million Q1 reflects phasing within the year, which is recurring trend throughout the last years. We are on track towards our operational and financial outlook but have adjusted the dividend outlook, more on this later.

I will now look at some of the highlights of the first quarter, starting with the Netherlands. On the 4th of February, six weeks after the Spectrum auction was completed, we launched 4G services in the Amsterdam area.

This made KPN the first mover on 4G in the Netherlands and we are making very good progress with the rollout as we have currently covered around 30% of the Dutch population. The investments we made in our consumer residential segment are yielding results. The positive development of operational KPIs continued in Q1.

We are showing increasing RGUs and increasing ARPUs. TV market share grew by 6% points to 24%, thereby surpassing UPC as the number two player in the Dutch TV market. Furthermore, the introduction of KPN Compleet, KPN’s new proposition showed promising initial results. These good operational results are reflected in growing revenues in consumer residential.

On the cost side, we made meaningful progress with the FTE reduction program in The Netherlands which will be – which we will complete by the end of this year.

In Germany, our improved high-speed data network enables us to increase our presence in under-penetrated areas and focus on postpaid and data growth. In Q1, we have increased commercial investments such as customer acquisition costs and marketing to support the update of postpaid and data propositions. This is reflected in our record postpaid net adds in the first quarter, but also led to a lower EBITDA margin which was I line with our expectations and is expected to improve in the second half of the year.

We are seeing intensifying competition in Belgium. But base to continue to show positive underlying service revenue growth.

Before reviewing the Q1 results in more detail, let’s now look at the capital raising process. As I already indicated, we have taken a number of important steps in our €4 billion equity equivalent capital raise. First of all, we raised €2 billion in hybrid bonds in three different tranches in March resulting in €1 billion of equity equivalent capital.

Secondly, on the 10th of April, the general meeting of shareholders voted in favor of the rights issue thereby granting KPN the authority to raise €3 billion of equity through our rights issue.

As indicated with the announcement back in February, KPN remains committed to an investment grade credit profile. The capital raise gives us the financial strength and flexibility we need prior to pursue to our strategy. The proceeds will be used to continue to invest in KPN’s operations and reduce KPN’s net debt level. We target a net debt over EBITDA ratio between 2 and 2.5 times at the end of 2013.

With respect to timing of the rights issue, I can say the following. We expect to launch the rights issue shortly. As you may understand, I can’t be more specific at this moment. We are pleased that America Movil has already indicated that they will subscribe pro rata to their shareholding, which is around 30%.

Let’s move to the next slide. Also following the Q1 results, we are confident that the Netherlands will stabilize towards 2014 and that commercial investments in Germany will lead to service revenue growth. As such, we are on track to realize the outlook which we announced on the 5th of February.

With respect to the dividend outlook, we have decided to pay no dividend for the financial years 2013 and 2014. Our operational and financial outlook has not changed and we made this decision because we expect to launch the rights issue shortly and due to the fact that the rights issue will lead to a higher number of shares outstanding. In line with our previous outlook, we expect to start paying dividend again thereafter subject to our operational performance and financial position.

Now I would like to hand over to Eric for the financial review. Eric?

Eric Hageman

Thank you, Eelco, and good morning everyone. Let’s start by looking at the first step we took in the €4 billion equity equivalent capital raise. In March, we successfully completed the issuance of €2 billion of hybrid bonds consisting of three tranches across different countries. €1.1 billion were the first call option in September 2018 and with coupon of 6.18%; $600 million with a first call option in March 2023 and a coupon of 7%, which after the swap to euros was 6.34% and £400 million with the first call option in March 2020 and a coupon of 6.78% both swapped to euros of 6.78% percent.

Under IFRS, the euro tranche is accounted for as equity and the sterling and U.S. dollar tranches as liabilities. Coupon payments on the euro tranche are therefore not reported as interest paid but as equity distributions and will not fall within the scope of our free cash flow definition.

As you can see on the top left of this page, growth debt and net debt in the first quarter increased by around £500 million. To be more precise, bottom left you can see that in the first quarter net debt increased by £444 million driven by the payment of £1.3 billion before the Dutch spectrum licenses on the 9th of January partly offset the by £1 billion contribution of the hybrid bonds, of which 50% is treated as equity in KPNs growth and net debt definitions. The remaining £105 million higher net debt can be explained by an increased financial leases and some smaller other movements.

Now let’s move to the next slide. Net debt over EBITDA at the end of the first quarter was 2.8 times. The slight increase was driven in part by the £444 million higher net debt and in part by the £150 million lower 12-month rolling EBITA.

The higher net debt mainly relates to the spectrum auction payment, a plus of 0.3 times which was partly offset by the positive impact of the hybrids at minus 0.2 times.

As Eelco indicated earlier, we target a net debt-to-EBITDA ratio between two and 2.5 times at the end of this year. The first call dates of the three hybrids perfectly fit in our bonds redemption profile with the Eurobond nearly positioned in the slot we had available in 2018. Following these transactions we have smoothened our profile with around €1 billion to €1.5 billion of annual redemptions in the coming 10 years.

Please be informed that approximately €1.5 billion of the total €2 billion hybrid proceeds have already been used. We repaid drawings from our revolving credit facility which we needed to pay for the Dutch spectrum auction and there was a €540 million bond redemption on the 18th of March.

The average coupon of our senior bond is now 5.1% including the hybrid bond that is slightly higher at 5.3%. The average maturity of our senior bond is now 7.1 years.

Let’s now move to the Q1 group results. Total revenues for the first quarter were down 8.8% impacted by the sale of Getronics International in May last year, impacting the results by 3.9% and regulation with 1.7%.

Total revenues in our NetCo business, Germany and consumer mobile segments decreased year-on-year while consumer residential showed a €43 million revenue increase in the first quarter. Our operating expenses were down €143 million or 6.9% in the first quarter due to the sale of Getronics International in May last year. Lower cost of materials due to the handset lease model partly offset by higher commercial investments in Germany to support postpaid and data growth also in the underpenetrated regions.

Mainly as a result of lower EBITDA in Germany, our group EBITDA excluding restructuring cost decreased by €139 million or 12% year-on-year. Depreciation increased as a result of increased investments we have made in customer equipment in our mobile and residential businesses.

Let’s now move to the group cash flow. In the first quarter of 2013, we generated €85 million in free cash flow, €48 million more than in the same quarter last year. First of all, let’s look at the positive change in working capital year-on-year. This is explained by €27 million positive change in working capital in the first quarter this year compared to a negative change in working capital of €270 million in the same quarter last year. The sizable difference between these two quarters is mainly related to pre-payments made in 2012, but also due to a shift from payment made in the first quarter 2012 related to 2011 and other working capital improvements.

The negative effects on free cash flow year-on-year are related to €137 million lower EBITDA, €75 million higher CapEx due to increased customer-driven and mobile network investments in the Netherlands, and €47 million higher interest paid compared to Q1 last year as we had to pay coupons in the first quarter this year related to two bonds; one issued in March, and one issued in August last year.

It is important to know though that free cash flow, €85 million in Q1 reflects the usual phasing within the year that we see in our business whereby a large part of free cash flow is generated in the second half of the year.

Let me briefly update you on our pension funds. The average coverage ratio of KPN pension funds was 107% at the end of the first quarter. As the coverage ratio was higher than the 105% hurdle to beat, no recovery payment related to Q1 2013 will have to be made in the third quarter. A recovery payment of €90 million will have a need to be made in the second quarter related to coverage ratio at the end of last year. The €90 million top up payment related to the coverage ratio of Q3 2012 which was due in Q1 was already prepaid in the fourth quarter last year.

I will now like to move to the financial reviews of the individual segments. Underlying revenues and other income in our Dutch division were down 6.1% year-on-year corrected for the negative impact from M&A, incidentals and regulation. EBITDA excluding restructuring costs decreased by €20 million or 2.5% year-on-year. The lower revenues and net negative impact from incidentals and regulations were partly offset by lower cost of materials due to handset leases at consumer mobile and cost savings as a result of the FTE reduction program.

EBITDA margin was 44.4% in Q1 2013 compared to 40.5% a year ago. The increase is mainly driven by the sale of Getronics International which was a low-margin generating business, the handset lease model in consumer mobile, and the positive impact of our FTE-related reduction program.

Let’s now look at the Dutch segment in more detail. Revenue growth at consumer residential was a solid 9.4% year-on-year driven by continued customer growth in TV and fiber-to-the-home and supported by a positive contribution related to the acquisition of fiber service providers in the fourth quarter of 2012 and a €30 million incidental. EBITDA margin excluding restructuring cost at consumer residential was lower compared to last year at 19%, due to increased distribution, marketing, content and service cost mainly related to the growth of our fiber-to-the-home and IPTV products.

Furthermore, the lower fixed voice traffic led to a continued decline of high margin traditional services. Revenues at consumer mobile were down 8% year-on-year. Service revenues were down 4.9%, although supported by €7 million of incidentals. Regulation had a 1% negative top line impact in the first quarter. EBITDA margin excluding restructuring cost at consumer mobile was 36.6% in Q1, also supported by the handset lease model.

Revenues and other income at our business segment were down €45 million or 6% year-on-year due to lower traffic, continued price pressure and decline in traditional services, as well as reduced order intake of corporate customer projects due to adverse macroeconomic conditions. Revenues this quarter were also impacted by lower hardware sales.

The EBITDA margin was relatively stable at 25.8% as price pressure on higher subscriber acquisition and retention cost were offset by lower personnel cost as a result of the FTE reduction program.

Revenues at NetCo were down by 9.2% year-on-year driven by the revenue decline at business and lower wholesale traffic revenues, related to lower volumes as well as pricing. EBITDA margin at NetCo was stable at 57.2%.

Let’s skip one slide and move to the domestic OpEx breakdown. We have included the breakdown of operating expenses within the Netherlands. Please note that this overview excludes Getronics International. Overall, our operating expenses in the Netherlands declined by €72 million in the first quarter or 6.9% year-on-year.

Let’s look at some of the OpEx building blocks. Employee benefits decreased by €14 million or 4.3% year-on-year due to lower personnel cost as a result of the FTE reduction program. Cost of materials were down €86 million year-on-year due to a handset lease model at Consumer Mobile and lower hardware sales mainly in our business segment. Work contracted out increased by €36 million as a result of higher cost of goods sold such as TV, content cost at consumer residential and fiber-to-the-home access cost at NetCo, and higher outsourcing costs.

The next slide shows you the good progress we made with the FTE reduction program in the Netherlands. Since the start of the 4,000 to 5,000 FTE reduction program, we have realized around exits and remain on track to finalize the full program by the end of this year, around 1,100 FTE reductions were realized in the first quarter of this year alone, mainly within NetCo, business, and consumer residential.

Let’s now move on to the financial review of Mobile International. Revenues and other income in Germany decreased by €34 million or 4.3% compared to the same quarter last year, mainly due to a regulatory impact of almost the same amount. Underlying service revenues declined by 2.5% year-on-year.

This was driven by competition in the ethnic prepaid segment which remains fierce and a continued impact from customer optimization both in terms of customers optimizing their tariffs as well as their usage. The delta between revenues and service revenues is explained by hardware sales needed to support the uptake of data.

In the bottom-left hand graph, you can see the individual elements that explain the EBITDA movement compared to the same quarter last year. First of all, correcting for €20 million of regulation impact, you can derive the comparable EBITDA for the first quarter of 2012 which is €283 million. The revenue decline, I have already explained.

The EBITDA decline in the first quarter is largely related to 63 higher investments in growth compared to the same quarter last year. These investments will support growth in postpaid and data, and are mainly related to customer acquisition costs such as dealer commissions to expand our addressable market, and marketing cost to expand our presence in under-penetrated regions.

E-Plus also saw somewhat higher network cost in the first quarter related to a larger scale network which are required to improve and maintain the quality of our data network.

We are confident that these investments will lead to service revenue growth, albeit as we said during the full-year results on the 5th of February, had a lower margin. As a result, the EBITDA margin was 25% in the first quarter.

The EBITDA margin in Germany is expected to improve in the second half of this year towards a medium term margin range of 30% to 35% as the next phase of our Challenger strategy will lead to increased service revenue growth.

Revenues in Belgium declined by 4.2% year-on-year as increased competition in the mobile market impacted top line, also regulation had a negative impact to the tune of €11 million. Having said that, they still managed to continue to show positive underlying service revenue growth of 1.9% in the first quarter.

The EBITDA margin in Belgium was 25.1% negatively impacted by regulation, IT transformation cost related to temporary projects and one-off costs related to the launch of SNOW, our fixed line product in Belgium which was introduced in the first quarter. More on this later.

I will now like to hand over to Eelco for the operating review of our first quarter results.

Eelco Blok

Thank you, Eric. The positive developments we have seen in consumer residential in the last quarter continued in Q1. Revenue generating units in ARPU per customer continue to increase driven by an increasing number of triple play packages and pricing discipline in the market. Triple play is mainly driven by the continued strong growth of our IPTV product which generated 116,000 net adds in Q1. As a result, our TV market share increased 6%-points year-on-year to 24%.

Our leading TV product and regional marketing approach supported our growth in customer base with 15,000 net adds thereby keeping our growth in market share stable as 41%. Fiber-to-the-home continues to show good performance with 31,000 net adds in Q1 leading to a fiber-to-the-home penetration of 30%.

Another positive development is the fact that for the second consecutive quarter, we experienced a net line gain now at 10,000. All in all, growing ARPU per customer, growing TV market share and the growing broadband customer base are now more than offsetting the decline in traditional voice, leading to growing revenues in this part of the business.

To expand the success our consumer residential segment into our mobile business, we introduced KPN Compleet in January as a first step towards quad play for KPN’s existing triple play and mobile customer base. We have seen a promising initial uptake with more than 30,000 activations for Q1 2013.

As you can see on this slide, we focus on providing additional value to our customers, not discounts. The additional values provided through free TV channels, free unlimited calls within the family and the doubling of total voice, SMS and data credits. Following positive customer feedback, we will upscale the commercial rollout of KPN Compleet in the coming periods.

Let’s move to consumer mobile. In consumer mobile, we have seen that service revenues and ARPU remained under pressure due to the competitive market and increasing share of SIM-only propositions versus propositions including handsets. However, we managed to maintain our total Dutch mobile service revenue market share at 45% in Q1. Retail postpaid net adds were positive again in Q1 at 7,000, but as I said, mainly driven by SIM-only propositions. The prepaid segment continue to be impacted by migration to postpaid and competition in the ethnic segment.

Let’s have a look in detail at our successful 4G launch. On the 4th of February, seven weeks after completion of the Spectrum auction, we launched 4G services in the Greater Amsterdam area and have since then reached other large cities such as The Hague and Rotterdam. 4G coverage is currently at 30% of the Dutch population this makes KPN the first mover on 4G creating a head start versus competition.

Another positive development is that the number of 4G-ready handsets has increased from four available types at launched in February to 12 4G-ready devices currently making 4G accessible to our customers.

How are we offering 4G to our customers? We have integrated our 4G services in the existing high value 3G propositions for both consumers and business customers. We are differentiating on speed and data quantity available to our customers. With respect to 4G, we are focused on value and intent to upsell our customers to higher data bundles in order for them to access 4G services.

4G is only available for customers that have our premium data bundle. In the consumer markets, 4G is offer to customers with a 2.5-gig data bundle and we introduced a new 5-gig data bundle as well. For business customers, 4G is available on all data bundles of at least 1-gig.

We are encouraged by the positive feedback we receive from our customers and are working hard on creating a strong brand perception in the Dutch market.

Let’s now look at the business segment. Also in the business segment wireless service revenues an ARPU remained under pressure driven by price pressure as a result of the challenging macro environment. Traditional wireline services continue to decline. Importantly however, we managed to maintain a stable market position.

In the coming periods, we continue to put a strong emphasis on data-centric fixed mobile propositions to further improve our positioning in the business market. We are encouraged by the continued good performance of our Challenger brands and the growth in new services such as specific services for the health sector.

In Q1, we agreed to sell infrastructure services and projects which generated revenues of more than €100 million and had around 600 FTEs. This is a business that’s focuses on the installation and maintenance of cabling infrastructures for data and voice connectivity and on-premise data centers. The transaction was approved by the Dutch Competition Authority on April 15.

Let’s continue with the operating review of Germany. The underlying service revenue decline in Q1 was 2.5%. This was due to a continued difficult prepaid environment as competition and lower usage of mainly SMS impact the total service revenues. Strong growth of postpaid net adds continued in the first quarter at 265,000 supported by our commercial strategy to drive the update of postpaid and data propositions. As a result of the increased number of postpaid and data subscribers, data revenues increased strongly by more than 60% year-on-year.

Both the postpaid and prepaid ARPU were lower year-on-year at €20 and €5 respectively. Postpaid ARPU was mainly impacted by regulation, while prepaid ARPU was also impacted by customer optimization and strong competition.

Let’s look in some more detail at the progress of the execution of the German data centers Challenger strategy which we announced at our full-year results. As presented by Eric, we have significantly increased our growth related investments in Q1 2013 compared to the first quarter last year. We have indicated that there will be a strong focus on postpaid and data.

First of all, this requires a high quality data network. We have again been able to significantly improve the network quality both in terms of speed, as well as capacity. Customers can currently experience speeds up to 21 megabit and we have already planned to increase the available speed to up to 42 megabit in the second half of the year as we roll out 3G dual carrier.

The network capacity has also increased compared to Q1 last year as the average throughput has more than doubled to 3.3 megabit bringing this at least on par with competition. The improvements in network quality subsequently allow us to increase our presence in underpenetrated areas and offer postpaid and data propositions over a high quality data network.

As a result of the higher commercial investments in Q1, we have already seen a strong growth in postpaid net adds and data revenues. The total postpaid net adds have been high in the last four quarters and accelerated to 265,000, 160,000 higher compared to the same quarter last year.

As shown at the bottom of this slide, the growth investments are related to expanding our addressable market. We do that by increasing customer acquisition and distribution investments through third party channels, but also by expanding our own network of shops in underpenetrated regions. In Q1, we have opened 34 new shops in target regions while we have closed a number of shops in more saturated regions. Marketing costs are increased to raise rent awareness.

We maintain a strong focus on improving our underlying cost structure in Germany which will improve our margin in the medium term. Progress is made towards structural cost reductions through partnerships. We have renegotiated the IT outsourcing contracts with other companies. Furthermore, also in Germany, we are disciplined on the FTE side. We are expanding commercially but at the same time are reducing on FTEs.

Let’s move to Belgium now. Although underlying service revenue growth remained positive, it slowed down to 1.9% year-on-year. This results from increased competition in the Belgium mobile market. The new telecom law was introduced in October last year, essentially making every customer contract free and the competitive mobile market environment has impacted the number of postpaid net adds in Q1, which were negative at 8,000.

Prepaid net adds were lower year-on-year at 45,000. Postpaid ARPU was impacted by regulation and pricing pressure in the market. To restore our challenging position in the Belgium market, we introduced new mobile propositions for both consumers as well as B2B customers last week.

Customers are not bound by contract term anymore and they serve plans offer flat fees including unlimited voice and SMS. For consumers, Spotify is available in the premium bundles and B2B customers have the opportunity to purchase Internet anywhere.

Customer experience will be further improved by increase in the available speed. The recent introduction in April 2013 of 3G dual carrier results in speeds up to 42-megabit, which are currently available to more than 60% of the Belgium population.

In Q1, we have introduced our fixed line services, a simple and transparent proposition at a significant discount to competition. The triple play products now is available for €39, which still allows a good return.

To conclude, we have taken two important steps in the €4 billion equity equivalent capital raise. We issued €2 billion of hybrid bonds and obtained approval by the AGM to issue €3 billion of equity through a rights issue. The final and most significant step will of course be the execution of the rights issue, which we expect to launch shortly.

Back in 2011, we implemented our new strategy. This strategy has resulted in stabilization of our domestic market positions. For The Netherlands, we envisage continued improvement of operational KPIs in 2013, evidenced by our Q1 results, with financial results expected to stabilize towards 2014.

Creating 4G leadership in The Netherlands is an essential part of mobile business in both the consumer and business markets. Successful launch and speed of our 4G rollout are encouraging and we will continue our strong focus on customer value.

The continued positive operational performance in consumer residential have resulted in revenue growth. This indicates that the investments that we have made are starting to yield results. For Germany and Belgium, the strategic focus is on growth and we expect to do that by executing on the next phase of our Challenger strategy in both countries.

Our strong focus on postpaid has again resulted in record net adds in Germany. Commercial investments have been significantly increased to support further growth in postpaid net adds and data revenues, while the realized network quality improvements enable us to increase our presence in underpenetrated regions.

We are confident that the investments now lead to service revenue growth again albeit at lower margin, mainly feasible in the first half of this year.

While we still have a lot of work to do, I believe that we are well on track with the execution of our strategy.

Thank you for your attention. And now we will take your questions.

Question-and-Answer Session


Ladies and gentlemen, we will start the question-and-answer session now. (Operator Instructions) The first question is from Mr. Paul Sidney. Go ahead please, sir.

Paul Sidney – Credit Suisse

Thank you very much. I have two questions please. And firstly at E-Plus, given the increasing customer acquisition and marketing costs in Q1, I’m a bit surprised at the postpaid adds were not higher. I was just wondering if you could just give us some a bit of an explanation what happened in Q1 and how you see the postpaid trend developing in future quarters.

And then just second question, given that you’ve got line growth in the Netherlands now, and have been for the past couple of quarters. Is there’s a strong case for increasing prices like for example, we’ve seen in the UK over the past few years? Thank you.

Eric Hageman

Let me start with the second question on potential price increases in our fixed business. As we have also done in the previous years, we will increase prices again this year on our fixed businesses. Last year, we have raised our prices during summer and that’s what we expect to do this year also.

Then on E-Plus, the 265,000 increase of postpaid net adds is 160,000 higher than in the first quarter of 2011 and has increased over the quarters during 2012. And we expect to continue our investments and continue to have the high number of postpaid net add growth also in the quarters to come.

Paul Sidney – Credit Suisse

So just to briefly follow up, would you expect the year-on-year trend in postpaid net adds to be substantially higher going forward in terms of the year-on-year trend?

Eelco Blok

The year-on-year trends will not continue to be as high as in the first quarter because we started to increase our investments in the second quarter of last year resulting in a growing number of net adds when you look at quarters of last year and that trend we will continue to see, not the trends up on the number of postpaid net adds, but the high number we have seen in the first quarter of this year.

Paul Sidney – Credit Suisse

Great. Thank you very much.


The next question is from Mr. Jonathan Dann, Barclays. Go ahead, please.

Jonathan Dann – Barclays Capital

Hi there. It’s a question around the consumer mobile business, could you – have you done any analysis on the ARPU sort of stripping out say I guess the handset leasing rental revenues so we can look at the, I guess, revenue – the ARPU at risk. And I suppose a couple of different ways of attacking the same question, do you – what’s your mix of smartphones in your consumer retail base? And say similarly as a percent of that postpaid retail base?

Eelco Blok

Let me start with the question related to the ARPU. We see an increase of our committed ARPU to 70% in the first quarter of this year and we continue to expect a further raise of the committed ARPU on the one hand. But on the other hand, given the increased price competition, we will see a continued pressure on ARPU.

The lease is in the – is included in the ARPU, so the monthly lease fee is included in the ARPU we have on – I don’t know the number of the slide, but somewhere in the pack.

The smartphone, the SIM-only percentage in our current base is around 40%.

Eelco Blok

I’ll let the IR guys get back to you on the mix of the smartphones.

Paul Sidney – Credit Suisse

Okay. Thank you.


Next question is from Luis Prota, Morgan Stanley. Go ahead, please.

Luis Prota – Morgan Stanley

Just – thank you. A couple of questions, please. First, regarding a potential network sharing in Germany, I understand that the 800-megahertz spectrum owned by Telefónica Deutschland might be an issue. But now that you will be getting €3 billion from the capital increase, have you considered to pay Telefónica half the cost of the 800-megahertz spectrum, so around €600 million are neutralized, any negotiation that could drive a network-sharing deal in Germany any time soon?

And secondly, would you give us an update on the status of the 900-megahertz renewal in Germany as well? Were there any changes or still expected a renewal of the annual payment? Thank you.

Eric Hageman

Let me start with the question about network sharing deal in Germany. We are convinced that there is significant story to be created in the German market, so either in market consolidation or network sharing partnership. And then we are talking about a full network sharing partnership including 800 Spectrum. And when balancing payments are needed to be able to create the value, then of course we will take that into account when we discuss a potential network-sharing deal in Germany.

Synergies to be expected would mainly come from the network sharing and the IT. Well, as you can imagine, we remain interested in such deal in Germany when of course it creates value for our customers. That’s where we are on network sharing.

On the 900 megahertz renewal, being outside the regulator in Germany, we’ll finalize their thinking in the next couple of weeks and they will present their preliminary decision and then consultation will start and probably they will be finalized somewhere in the summer.

Luis Prota – Morgan Stanley

Okay, thank you.


Next question is from Mr. Tim Boddy, Goldman Sachs. Go ahead, please.

Tim Boddy – Goldman Sachs

Yes, thanks. Again, staying in Germany, I just wanted to understand a bit better why the cost has come, obviously the cost is going strongly initially but while we haven’t seen a positive response in revenue or a particular large increase in postpaid net adds sequentially, maybe it’s possible just to add a bit more color in terms of for example, how many shops you either have or plan to have in Germany, and how that compares to your competitors? That would just be very helpful. And equally, we’ve obviously seen large price reductions from several of your competitors in the last few weeks. Given that, are you still confident that you’re going to see contract net add acceleration?

Second question would just be in the Netherlands and the extent to which you’re planning to use quad play to defend mobile. A lot of your competitors seem to be discounting mobile on sort of family bundles to try and put more mobile relationships against the fixed relationship. Is that something you’ve considered doing as a way of preemptively protecting your base from what Tele2 will do later in the year? Thank you.

Eelco Blok

Okay. Let’s start with the question about Germany. As we highlighted back in February, E-Plus is executing the next phase of their strategy towards a data-centric challenger. We intend to grow our market share in the underpenetrated regions by leveraging the upgraded data network and a clear focus on postpaid.

We will achieve this by increasing customer acquisition costs, such as expanding distribution channels and targeted marketing on a region-by-region basis.

As such in the first quarter of 2013, we have increased commercial investments such as marketing and acquisition costs, also expand our footprint in underpenetrated regions. For Germany, Q1 shows the execution of the next phase of our challenger strategy, which is expected to lead to service revenue growth combined with lower EBITDA margin, especially in 2013.

And improving thereafter meaning especially the first half of 2013, margin will be lower due to higher commercial investments amongst others to focus on underpenetrated regions as Eric has explained during his part of the presentation. And the second half of 2013 we will improve on the back of these investments and strong postpaid net adds over the last fourth quarter.

So the result of the accelerated growth of net adds at postpaid will be leveraged in the second half of this year leading to full year 2013 EBITDA margin closer to the medium-term margin range of 30% to 35% as we have announced in the beginning of the year and a return to underlying service revenue growth.

Eric Hageman


Eelco Blok

Then the question on the test in Germany compared to competition. As a challenger, we tend to price our offerings competitively. Our no-frame fills postpaid brand Euro Phone for example, which we introduced in the second quarter of last year is priced between €20 to €30. The latter offers unlimited voice, SMS and 1 gig of data and a maximum speed of 7.2 megabits.

If you compared this to our average postpaid ARPU of €20, that’s pretty rational for us. And today, we have no plans to make a more aggressive prices because we believe that the current price level is not only competitive but also very attractive for the customers we a target. And having said that, let me reiterate that our net sales data centric strategy is focused on commercial investments that support our postpaid and data focus also by targeting the underpenetrated regions where we have a low market share compare to our average share.

Then your last question about the mobile markets in the Netherlands. In January, we introduced KPN Compleet which marks the first half towards quad play in consumer market. With KPN Compleet, KPN facilitates the total telecom demand of Dutch households. This corporate product is not aimed at pricing discounts but at services so it has additional TV channels, free calls within the family and a doubling of data, voice and SMS credits. And as I already explained, the results of KPN Compleet are very promising with already 30,000 customers signed up and the most important aim of introducing KPN Compleet is to reduce churn in mobile.

Tim Boddy – Goldman Sachs

Okay, thank you.


Your next question is from Mr. Fred Boulan, Nomura. Go ahead please, sir?

Fred Boulan – Nomura

Hi, there. Two quick questions please. Firstly, on mobile in Holland issue, could you give a bit of color on the breakdown in addition between your different brands and if you’ve seen change in trends? You mentioned specifically postpaid is driven by SIM-only so this one is a loyalty brand on the KPN one?

And I wanted to ask as well about the timing of the contribution within 4G, so should we expect service revenues to improve with 4G in the coming quarters or is it a bit too premature?

And secondly, to come back on Germany, here you talked about the contribution of postpaid divisions to top line, can you clarify a little bit your – the timing you have in mind for this? Should we expect deploying to start to improve from the second part of the year and when specifically do you see growth? Is this possible this year or more realistic in 2014? Thank you very much.

Eric Hageman

The trends in mobile in the Netherlands just on a high level, Telfort is doing very well. KPN stabilizing high under pressure, so that are the main trends we see in the three main branch we offer in the Netherlands. Timing on 4G, of course, it will take some time to have a 4G customer base that’s really will have a visible impact on the service revenue.

We have today, several thousands of 4G customers. We are rolling out in network very rapidly as I’ve said in my part of the presentation for the 4G network is now available in the Amsterdam, the Rotterdam area expounding very rapidly mid of this year, we will have a 50% population coverage. And then when the number of customers, will accelerate then of course, we will see in the future also a positive impact on service revenue.

And then the question on Germany, what was your question, Fred?

Fred Boulan – Nomura

Yes, a question on Germany was more specifically on the timing, if we continue to see good postpaid additions. When do you think we will see a trough in terms of service revenue trends? And when you talk about growth, is this realistic at one point underlying ex-regulation this year or it’s more something you, it’s more of an ambition for 2014?

Eelco Blok

No, we expect underlying service revenue growth already this year and you should think of the second half.

Fred Boulan – Nomura

But it is underlying growth?

Eelco Blok

Underlying growth.

Fred Boulan – Nomura

Okay. Thank you very much.


The next question is from Mr. Sasu Ristimäki, Merrill Lynch. Go ahead please.

Sasu-Petri Ristimäki – Merrill Lynch

Yes, thanks. I had two related questions on handset cost. Firstly, when you gave the domestic OpEx breakdown and in this case, there’s an €86 million improvement in cost of materials. How does this breakdown between the handset lease model improvement and lower hardware sales?

And then the second part would be how significant are handset costs in Germany at the moment? Are they a major contributor to the cost buildup that you’ve had in Q1? Thanks.

Eelco Blok

Yes. So maybe on Germany. So if you think about the three-pillar attack that we have, which is firstly on data 2 and postpaid 3 regionalization, then a part of that is of course related to the handset subsidies from two legs. On one hand, that is typical for a postpaid customer, that’s where part of our growth is coming from. Secondly, it’s also important for accelerated data revenue because that is only possible with what we call the smartphones. So there is a part related to this, so that on Germany. And for the Netherlands, what was your specific question there?

Sasu-Petri Ristimäki – Merrill Lynch

The new citizen €86 million improvement in the cost of materials, and I was wondering how does this breakdown between the improvement from the handset lease model versus just lower hardware sales?

Eelco Blok

Perfect. About half of the saving that I mentioned at the absolute number is related to the cost of the handsets.

Sasu-Petri Ristimäki – Merrill Lynch

Okay. And a quick follow up on Germany, its handsets are clearly a core part of your kind of data driven strategy. Am I correct in assuming it will be difficult to kind of pair it down that handset expenditure at least on a quick quarter-on-quarter basis this year?

Eric Hageman

I think if you – again as I said a big part of the investments that we’re doing – so the €63 million that you saw in the EBITDA bridge, a big part of that is actually not related to – at the direct link between handsets and postpaid. But of course, for every postpaid contract that we have, whether it’s indeed a handset-related, you know there is a direct link with the cost.

So if we continue to grow our postpaid net adds as Eelco indicated in one of the first questions, then obviously that’s how you should see a linear increase there with that part of the cost. But again, a big part of the cost is related to investing in the network. It’s related to investing and opening those stores and closing some of the stores that we have done. It is the commissions that we put in the channel, whether direct or indirect and its related to – in those areas where we have a lower than our average market share to increase our brand awareness.

In Q4, we talked about the city of Kassel where we had a two-year initiative. This quarter, for example, we made a huge stride in, for example, the City of Kassel. That’s actually where the bulk of the investment goes rather than subsidizing handsets.

Sasu-Petri Ristimäki – Merrill Lynch

Okay, great. Thank you very much for that.


Your next question is from Mr. Dimitri Kallianiotis, Citigroup. Go ahead, please.

Dimitri Kallianiotis – Citigroup

Good morning. I’ve got two questions please. The first one is just to come back on your quad play strategy. I mean, it seems you were saying if I’m correct that you don’t want to do any discounts, and we’ve seen in most of European countries that to really push quad play hard, you need to put some discount. So what exactly do you mean when you say you want to upscale the rollout of the quad play? And would you really push the penetration much higher?

And my last question is on the triple play offer that you’ve launched in Belgium. Wonder if you could give us any numbers in terms of net adds from this new offer. And also based on that experience, if you feel you could do something similar in Germany and maybe launching of the triple play product based on the Deutsche Telekom network. Thank you.

Eric Hageman

Let me start with KPN Compleet. We believe that the value-add we offer to our quad play customers is of that more high value to our customers that we don’t need to give them any discounts. And that’s also the feedback we received from the first customers. We open also from our salespeople that the way we have presented our quad play proposition is really doing well. We started with the KPN broadband customers that also have a KPN mobile subscription, and we will have the other brands to our KPN Compleet offering in the next quarters, making it possible to offer quad play to a much larger base than we have started with in the beginning of this year.

As I said, the introduction of our triple play product in Belgium is very, very successful but we have taken the decision not to disclose the numbers we have realized after the launch in the first quarter. From a price perspective as I said, it’s a very attractive offer in Belgium. And then to Germany, given the very low price levels of broadband and TV services in Germany, it makes not really sense to start offering a similar type of play package in Germany given the rather small gap between the local low prices and the retail prices of broadband and TV services in Germany.

Sasu-Petri Ristimäki – Merrill Lynch

Thank you.


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

Stuart Gordon – Berenberg

Yes, good morning, two questions, please. First of all on the dividend and obviously, you’re going to be saving €40 million there, which suggests you’re a little bit nervous on the cash flow outlook, given that three months ago, you said it was for many of your shareholders that that was capped. But also, it gives you the option to stop paying interest in the hybrid loans that you’ve just taken out. Will you be categorically committing to pay that interest or does this move just gives you greater flexibility with regard to your cash flows going forward?

And the second question is, on consumer residential top line trends are indeed looking better, but ex the incidental, it’s a 16% margin this quarter. How should we be thinking about margin progression from here or should we be just thinking that current investments that are needed to stabilize the business are indicative of what is required going forward? Thank you.

Eric Hageman

Shall start with the first question? So, if you look at the hybrid documentation that we have, there is the option to defer the coupon payments as long as we do not pay a dividend. However, not paying a dividend does not automatically mean that we will defer the coupons on the hybrid bonds.

So we currently do not envisage any circumstances under which we would consider deferring an interest payment on the hybrids, although we’re aware that legal terms provide us the flexibility to do so. So the decision how to cut the dividend was related to the expectation that the rights issue will be launched shortly.

And then with regards to the cash, given the cash generation of our business and our very strong liquidity position, certainly also after the hybrid issuance, there is no reason to believe that a coupon deferral would be required. As we said, also on the 5th, we reiterated today, we intend to resume the dividend payments after 2014, obviously, always subject to our operational performance and our financial position.

Stuart Gordon – Berenberg


Eelco Blok

Yes, on the margin of residential, yes you’re right. Without the incidentals, it’s 16.8% that we expect this margin to grow up in the next quarters of this year because you need to take into account FTE savings that will help to reduce the cost also. On other cost elements, we have savings programs in place. And as I said earlier, we will increase prices as we have done the last couple of years. That also will have a positive impact on the margin in the second half of this year.

Stuart Gordon – Berenberg

And can I just go back to the first question? Can you give a reason why you chose to cut the dividend now and not in the past?

Eelco Blok

Eric, will you take this question?

Eric Hageman

Yes, sure. So we’ve adjusted the dividend outlook as we expect to launch the €3 billion rights issue shortly. We believe that a large rights issue should not at the same time be accompanied by paying a dividend to the same shareholders that we’re asking for an additional investment, so in order to reflect the impact of the rights issue and the increase in the shares outstanding that one then can expect. We are now cutting the dividend to zero.

Stuart Gordon – Berenberg

I mean, sorry to continue, but can you clarify what has changed then in the last three months because when you knew about the rights issue in February, but you still gave a €0.03 dividend commitment at that time.

Eric Hageman

Yes. The main changes on the 10th of April, so 10 days ago, we had the shareholders’ meeting in which the rights issue was approved.

Stuart Gordon – Berenberg

Right, okay. So the dividend in February was only – you didn’t clarify that, but it was really only a dividend in the event that the rights issue wasn’t approved?

Eric Hageman

What we said also during the AGM is that the dividend per share was €0.03, but obviously, that was with the current shares outstanding as we’re announcing today that we will launch the rights issue shortly, that obviously go as I’ve just said, accompanied by a different number of shares. And so the combination of those two, so the approval of the AGM on the 10th plus the fact that today, we’re saying we will launch the rights issue shortly makes us to also cut the dividend today to zero.

Stuart Gordon – Berenberg

Okay. Thank you.


The next question is from Mr. Akhil Dattani, JP Morgan. Go ahead, please.

Akhil Dattani – JP Morgan

Yes, hi, good morning. Just a couple of questions on your Dutch mobile business, please. Firstly, last week Tele2 on their results call suggested they’d be open to considering a roaming deal or a network sharing deal in The Netherlands as part of their 4G license roll out through the course of this year potentially, if the economics of those were attractive enough. So I just wondered again to that batch, whether you did or be interested in such a collaboration and how you think about potential risk and rewards of doing something along those lines?

And then secondly, if we look at your consumer mobile margin performance this quarter, it’s clearly been very impressive at about 36%. I appreciate over the course of last year, most of the margin expansion was being driven by the move to capitalizing handset costs but I’d assume that that was largely captured by the run rate at the end of last year. So I just wondered, if you could help us understand what this incremental margin improvement reflects? What’s driving that and how sustainable we think that should be?

And then very finally, sticking with Dutch mobile, we’ve seen Tele2 very slowly starting to achieve some improving net additions, they’re talking about improving traction and seem to suggest that trends will improve going forward. So I just wondered, if within that backdrop you’re seeing any sort of impact at all.

Obviously, you’ve already mentioned some of the prepaid losses and things that you’re seeing in your trends but I just wondered, if you feel at this stage whether there’s any need at all to respond to some of the pricing developments in that market? Thanks a lot.

Eelco Blok

Okay. Let me start with the first question about roaming and network sharing with Tele2. Of course we have a healthy view on wholesale and wholesale customers. But I can assure you that we will be very, very, very careful in roaming and/or network sharing deal with Tele2. We don’t want to end up in a situation as in Belgium or France where will give us the new and the opportunity based on a very aggressive price wholesale deal with us. So that’s our position to Tele2.

About the disruptiveness of Tele2 in the Netherlands in our strategic plans, we have taken into account a very aggressive entry by Tele2. As you probably are aware, back in February, we provided a lower minimum long-term total mobile market share in the Netherlands of at least 40% instead of the 45% to focus – to be able to focus on the right balance between market positions and profitability.

And last but not least, I would like to note that the Dutch mobile market is already highly competitive and well segmented with high stocks and a lot of MVNOs already operating in the Netherlands and has Tele2 themselves announced they need to make investments to be able to start using their own frequencies on 800 and 2600. Then looking at mobile margins, you have to take into account that in the margin of the first quarter is €7 million one-off and driven by the handset lease, there’s also a positive impact on the margins that we will continue to see also in the second quarter of this year.

Akhil Dattani – JP Morgan

Just a follow up on your response to the margin question, I guess if I look in your results filed, you disclosed that X per €7 million one-off, the margin is still 35.5% so I guess still quite a nice improvement versus the last quarter or so. Can I just clarify is that still being supported even the underlying performance? Is that still being supported by incremental capitalization of handset costs? Or is there something else that explains that further improvement?

Eric Hageman

The step from the fourth quarter is not driven by additional – or impact of the handset lease.

Akhil Dattani – JP Morgan

Okay. What should we attribute that to?

Eric Hageman

Some cost savings in this part of our business.

Akhil Dattani – JP Morgan

Fine. Okay, thank you.


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

Ulrich Rathe – Jefferies

Yes, thanks very much. Two questions on Germany, one short one, and Netherlands, please. The first one is, so I understand what you’re doing sort of this execution of your strategy as was one way to ask some of the earlier question would be, are you entirely satisfied with what you delivered as a result of the high investments in the first quarter? How do you look at this number in terms of – are they sort of fully on-track or do they fall a bit short beyond expectations as well?

Also I would like to ask in Germany, what do you think about subscriber quality? I mean the big write-off in the fourth quarter of last year suggested that some of this accelerating intake is of lower quality so I was wondering how you see the subscriber intake quality developing at the moment.

And my last question is on The Netherlands, very often when there is the threat of new market entry, you do see the incumbent operators cutting prices in anticipation of the launch only to signal market share defense. Is there any sort of situation or scenario where you actually would be willing to or thinking about cutting price in advance or sort of proper launch by Tele2 or is that sort of all captured fairly lower market share as you described earlier? Thank you.

Eelco Blok

Looking at Germany both from a customer growth perspective, the quality of the growth and financial perspective, the Q1 results are according to plan. So our investment strategy in Germany is doing fine. We are satisfied on-track on plan. So that’s about Germany.

Then on The Netherlands, as I said, we, well, have seen an increase of competition in The Netherlands and we are responding by making changes to our propositions that what we have been doing starting in September 2011. And also during last year, we have made some major changes to our propositions both on the bundles but also on the actual price levels and promotions and subscriber acquisition cost. And that’s what we continue to do looking going forward.

So this on the Netherlands and we have not – well, a plan in place to make a big step. We are just watching very carefully what’s happening in the market. We have adjusted our markets here objective because we expect Tele2 to be very aggressive in the market. So we have the opportunity to balance growth and profitability in the right way.

Akhil Dattani – JP Morgan

Could I just follow up on the subscriber quality. Are you happy with the subscriber quality given this huge write-off of postpaid subscribers at the end of last year which suggests that the subscriber intake in 2012 was at par? Thank you.

Eelco Blok

Yes. We are very happy with the quality of the postpaid net adds. The euro phone ARPU is somewhere between €20 and €25 and the contracted duration is between 12 and 24 months. So we are convinced that this quality growth will deliver underlying service revenue growth in the second half of this year and another very good thing when we look at the quality of the net adds is the much higher data usage in this new set of customers.

Akhil Dattani – JP Morgan

Thank you very much.

Eelco Blok

Okay. I would like to end this Q&A session with this last question. I would like to thank you for listening in. And please, let all the other questions, let them now to the IR Team. And I would – I’m looking forward to speaking to you. Thank you.


Ladies and gentlemen, this concludes the KPN conference call. Thank you for attending. You may now disconnect your line. Have a nice day.

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