Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Hans Söhngen - Head of Investor Relations

Eelco Blok - Chairman of Management Board and Chief Executive Officer

Steven Van Schilfgaarde - Interim Chief Financial Officer

Analysts

Polo Tang - UBS Investment Bank, Research Division

Dimitri Y. Kallianiotis - Citigroup Inc, Research Division

Paul Sidney - Crédit Suisse AG, Research Division

Sam McHugh

Timothy Boddy - Goldman Sachs Group Inc., Research Division

Akhil Dattani - JP Morgan Chase & Co, Research Division

Guy R. Peddy - Macquarie Research

Luis Prota - Morgan Stanley, Research Division

Koninklijke KPN N.V. (OTCPK:KKPNY) Q3 2013 Earnings Call October 22, 2013 4:30 AM ET

Operator

Ladies and gentlemen, thank you for holding, and welcome to the conference call of KPN. [Operator Instructions]. I would like to hand over the conference call now to Mr. Hans Söhngen, Head of Investor Relations. Go ahead, please, sir.

Hans Söhngen

Thank you. Good morning, everyone. Welcome to KPN's Third Quarter 2013 Results Presentation. Today, our CEO, Eelco Blok; and interim CFO, Steven Van Schilfgaarde, will take you through our results and address your questions during Q&A.

Let me briefly point out that the Safe Harbor statement applies 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.

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

Eelco Blok

Thank you, Hans. Good morning, ladies and gentlemen. Thanks for joining us. With me on the line is Steven Van Schilfgaarde, who was appointed as our interim CFO in September.

This call is to discuss our results for Q3 and the first 9 months of the year. You should note that the discussion of our results is mainly focused on the continuing operations of KPN Group, so that's excluding E-Plus, which is now classified as discontinued operations under IFRS.

Let's start with the main points from Q3. I will come back to the operational highlights in more detail later. If I had to highlight one, it would be the continued good momentum in triple play, which is driving growth in revenues and profitability at consumer residential. Also, I would like to highlight that even though Germany is classified as discontinued operations, we are still actively pursuing our postpaid and data strategy, underscored by another quarter with high postpaid net adds now combined with an increasing EBITDA margin.

The financial results for Q3 were in line with our expectations. The market conditions stayed pretty much the same as in Q2, that is to say mostly challenging. That continues to put pressure on top line and EBITDA. Also, the year-to-date free cash flow reflects intra-year phasing and was impacted by lower EBITDA year-on-year and by higher CapEx related to 4G and increased customer-driven investments in The Netherlands.

We have nearly reached the finishing line of the cost-reduction program we announced in April 2011. By the end of the year, the cumulative FTE reduction will be around 4,500 to 5,000. The structural decline of Dutch personnel costs is around 10% as we guided last quarter. But we're already looking ahead to the next steps. Joost Farwerck and his team are finalizing plans for a centralized approach towards simplification of products, client processes, networks and IT to kick off in early 2014. This is expected to deliver significant gains in operational effectiveness and financial performance, for example, significant CapEx reduction.

We were delighted that our shareholders gave nearly unanimous approval to sell E-Plus at the EGM 3 weeks ago. It's a great deal that creates value for all parties. So now we are working with the Telefónica Deutschland to get the transaction through the regulatory clearance stage. We are confident about the regulatory process and expect regulatory approval around the middle of next year. Furthermore, the tax agreement we reached with the Deutsche tax authorities, which will enter into effect upon the sale of E-Plus, will offset KPN's taxable income in The Netherlands in the coming years.

As you have seen last Wednesday, AMX formally withdrew its unsolicited intended public offer for KPN. Numerous discussions between KPN and AMX took place since announcement of the intended offer by AMX on August 9. With its intended offer, AMX was looking for control at a EUR 2.40 price and low acceptance threshold. This was not an offer the KPN boards could recommend to our shareholders. Furthermore, no acceptable proposal on content, firmness, duration and enforceability of AMX's nonfinancial commitment to KPN stakeholders and on governance was received.

Finally, my operational management teams will, of course, remain fully focused and committed to execute and deliver on our strategic plans. We'll continue to pursue our successful operational strategy in The Netherlands where we are the market leader and in Belgium where we are a strong challenger. The investments we have made in the last few years in our networks and our customers are delivering and improving operational performance. We are confident that this will lead to an improving financial performance.

In Germany, we'll continue to focus on completing the intended sale of E-Plus. KPN Group will have a strong financial profile following the sale of E-Plus, and a 20.5% stake in Telefónica Deutschland offers attractive synergy and growth potential. We remain fully committed to shareholder value-creation and will resume dividend payments for 2014 following completion of the sale of E-Plus next year.

Let's now move to our outlook. We have reconfigured our outlook for the intended sale of E-Plus and revisited our CapEx forecast for the continuing businesses. The main message is that the continuing operations are on track. We have stabilized our market shares compared to the same period last year and even see growing market shares in some parts for our business. The Netherlands is delivering operational improvements in 2013 that will be the platform for stabilizing financial performance in 2014.

Second, KPN Belgium will continue to do better than competition in a tough market environment. The CapEx outlook has been lowered to reflect expected CapEx from continuing operations. The outlook for 2013 is now below EUR 1.7 billion. And for the 3-year period, 2013, '14, '15, we expect no more than EUR 4.7 billion CapEx. Please note that we have assumed that Reggefiber will be consolidated at year-end 2014. I will get back to the CapEx outlook for the continuing operations in more detail later on in the presentation.

We already told you that we would resume paying a dividend for 2014 once E-Plus is sold. And I confirm that E-Plus is on track with the guidance for growth, but at the lower-margin level, especially this year.

Now Steven will summarize the group financials. Steven?

Steven Van Schilfgaarde

Thank you, Eelco. Good morning, everyone. As Eelco already indicated, the Q3 results are mainly focused on the continuing operation of the KPN Group, excluding E-Plus. However, for the financial profile of the group, we have to take into account the discontinued operations, and we'll also provide you with some pro forma figures, which are just for the sale of E-Plus.

In the third quarter, our net debt level has remained relatively stable Q-on-Q at EUR 9.6 billion. The slight increase is mainly related to the seasonality in cash flows such as interest payments and the first coupon payments on the euro and U.S. dollar hybrids, this has made in Q3. On a pro forma basis, including the expected net cash proceeds of the sale of E-Plus, net debt at the end of Q3 2013 was EUR 4.8 billion.

Please note that if you look at our cost debt level reported in the press release and the fact sheets, this has only marginally decreased in Q3. The EUR 545 million bond redemption in September was partially offset by the issuance of the preference shares B to the foundation, which I record as current debt. Core debt should decrease further in the first half year of next year as we have EUR 1.4 billion of bond redemptions coming up.

Net debt over EBITDA, including E-Plus, at the end of the third quarter was 2.4x. The increase compared to the second quarter is mainly due to the EUR 210 million lower 12 months rolling EBITDA.

Looking at our current financial profile, pro forma the cash proceeds of the sale of E-Plus and adjusting for the last 12 months E-Plus EBITDA, our net debt over EBITDA ratio would be around 1.5x at the end of the third quarter.

Let's now move to the Q3 results. Total revenues, excluding E-Plus, for the third quarter went down EUR 171 million or 7.6% year-on-year. The revenue decline was attributable to our business, consumer mobile and NetCo segments. This was partly offset by the continued positive revenue increase of EUR 32 million in our consumer residential business.

Operating expenses, excluding D&A, were down 3.4% in the third quarter, mainly due to the lower personnel cost in The Netherlands, EUR 39 million, which are partly offset by EUR 90 million impact from a change in handset proposition at the KPN Hi brands. We do not offer handset leasing anymore.

EBITDA, excluding restructuring cost, decreased by EUR 180 million or 30% year-on-year, mainly driven by a decline in revenues. The higher depreciation is a reflection of the significant customer-driven investments that have been made across the group in 2012 and 2013.

Please note that the book impairments relate to the sale of E-Plus, which I include in the results for discontinued operation. This consisted of an impairment of EUR 529 million as of the sale value was lower than its carrying value and impairments to deferred tax assets for tax losses carryforward of EUR 747 million. This was partly offset by the recognition of EUR 932 million deferred tax assets resulting from the announced agreement with the Dutch tax authorities along tax book loss of EUR 3.7 billion.

Let's now move to the OpEx developments in The Netherlands. Total Dutch OpEx, excluding D&A and the restructuring costs, continued to decrease in the third quarter by 2.7% year-on-year. Let me explain the main elements which contributed to this decline. The underlying structural decline in personnel cost remains around 10% year-on-year, similar to the trend in Q2. Cost of materials were flat year-on-year as the increased OpEx as a result of change in handset proposition of KPN Hi brands was offset by lower hardware sales and some other smaller effects.

Work contracted out increased by 6.3% year-on-year. As our TV and Fiber-to-the-Home base continue to increase leading to higher content cost for TV and higher fiber access cost to Reggefiber, outsourcing costs were higher. This was partly offset by lower traffic cost, all segments. We continue to make good progress with our FTE reduction program, and the total restructuring costs since the start of the program amount to over EUR 341 million. This includes EUR 57 million provision for rental contracts related to the empty buildings.

Let's skips 2 slides down and move to the group cash flow year-to-date. In the first 9 months of 2013, our continuing operation generated EUR 225 million in free cash flow, EUR 176 million less than the same period last year. This delta can be explained as follows: EUR 224 million lower EBITDA; EUR 126 million higher CapEx due to the increased customer-driven and 4G mobile network investments in The Netherlands; and EUR 93 million higher interest paid mainly related to bond issues in 2012, deferred coupons in 2013, a shift of a coupon payment from Q3 to Q4 2012 as the payment was due to the end of September, which was not a business day, and the first coupon on the U.S. dollar hybrid issued in March this year. These negative effects were partly offset by a EUR 240 million positive change in working capital year-on-year.

As Eelco indicated earlier, the year-to-date free cash flow reflects an intra-year phasing. Historically, most of the free cash flows are generated towards the back-end of the year.

Finally, a quick word on the status of our pension funds. At the end of the third quarter, the coverage ratio of the KPN pension funds was at 108%, meaning, no recovery payment is expected to be made in the first quarter of 2014. This coverage ratio increased due to an increased value of the pension fund investments, as well as a slight increase in the interest rates.

I would like to hand over to Eelco for the operating review. Eelco?

Eelco Blok

Thank you, Steven. We have a consistent and clear operational strategy in The Netherlands. We aim to give our customers the best services on the best networks. That's how we reduced churn and optimize customer lifetime value. Significant investments we have made in our mobile and fixed networks in the last 3 years have put as well ahead of the curve, not just in The Netherlands, but Europe-wide. And bundled services are at the heart of our strategy. With quad play, we are extending into mobile with converged bundles. And our bundled product in the business markets, KPN ONE, is also showing an encouraging take-up after its introduction in June.

Let's look at our simplification agenda on the next page. We are coming to the end of our FTE reduction program in The Netherlands, which has already delivered structural gains in efficiency and lower costs. But although we've come a long way, there's still a lot more to do in streamlining and reducing complexity in our business processes and improving how we interact with our customers. So now we are starting the next wave of initiatives, which we group together as simplification. We'll tell you more about this and give you some specific details in the coming period. Let me give you a flavor of where we are going.

We've appointed people to run the project on the central level and are currently finalizing the plan. We have focused on reducing the number of products to provide a clear product line up for our customers. Now we are extending our converged offers for retail and business customers, for example, with high joining KPN Compleet. We're also simplifying client process to improve customer satisfaction. With respect to networks and IT, we'll be removing legacy IT systems and cutting complexity of our networks. That will give us flexible, scalable and much more future-proof platforms to will allow a faster time-to-market for new products. One of the measurable benefits of the simplification agenda will be to reduce CapEx and OpEx going forward.

The investments in our mobile and fixed networks and in our product, such as our IPTV, excellently position us to offer seamless quad-play services to our customers. We've invested heavily in our fixed and mobile networks in recent years, especially compared to European peers. But a lot of that is now behind us. We'll continue to make significant investments to further expand our leading network positions, though at a less elevated CapEx level.

In mobile, we'll finish rolling out nationwide 4G in Q1 next year. In fixed, we are ahead of the curve in Europe with our future-proof hybrid Fiber-to-the-Home corporate network. About 70% of Dutch broadband households now get a minimum guaranteed speed of 40 megabits. And in fiber, we have reached 1.5 million homes passed or about 1/4 relevant households. Based on the success of our VDSL upgrades, pair bonding and vectoring, we are reviewing the number of homes per year we will roll out fiber to. So that fits into the revised CapEx outlook we published this morning for the continuing operations in The Netherlands and Belgium.

Let's go through the sectors, starting with consumer residential. Revenues at consumer residential increased again by 7% year-on-year in Q3. This was driven by the growth of our customer base, growth in revenue-generating units per customer, as well as the average 3% price increase we implemented on the 1st of July. EBITDA was supported by these growing revenues and the number of actions we implemented earlier to improve profitability, such as FTE reductions and quality programs. This resulted in an EBITDA margin, excluding restructuring costs, of 21.9% in Q3.

Despite cable competitors making some aggressive promotions in Q3 and the price increases we implemented, our operational KPIs continue to grow, albeit at a slightly lower level than previous quarters. By the way, our year-on-year revenue-generating unit per customer growth is higher than competition, and we aim to continue that trend. Overall, we are pleased to have got to inflection in EBITDA, excluding restructuring costs, now growing at 7% year-on-year. And we think we have a good balance right now between growth and margin.

We showed you at Q2 what the positive effect of bundling services was on churn. The increasing penetration of triple play and leveraging that into quad play are right at the heart of our strategy for the Dutch market. We are the only player in The Netherlands offering quad play over our own fixed and mobile networks. We reached 86,000 activations at the end of Q3 based just on KPN triple play customers who also have a KPN mobile contract. This quarter, we'll extend the offer to cover Hi as well. Eventually, all our mobile brands will likely become eligible for quad play. Finally, our triple play penetration was at 43% at the end of Q3, an increase of 11% points year-on-year.

Let's move consumer mobile. Underlying service revenues at consumer mobile were down by 7.4% year-on-year as the mobile market in The Netherlands remains competitive. The margin was mainly impacted by the introduction of new mobile propositions for KPN on the 1st of July and Hi on the second of September. These propositions don't include the handset lease anymore.

We are pleased with the first-mover momentum we are getting in 4G, where we have seen a significant step-up in customer numbers this quarter. Our propositions are transparent with great available speeds, capacity and reliability, and we are getting excellent feedback from our customers. We continue to target high-value customers through our KPN and Hi brands. We focus on offering the highest quality 4G and quad play services. Telfort and Simyo continue to target volumes and growth in the value-for-money segment, mainly competing with T-Mobile and Tele2.

Once again, I have to report no improvement in the climate in the business market. Despite this, we have maintained our stable market positions. We're doing 3 things to protect our revenue base. First, as we told you in July, we introduced a one-stop model with KPN ONE, offering a full range of fixed 4G mobile and ICT services all in 1 bundle. Second, we are migrating customers to our 4G proposition, and so a large step up of 4G customers this quarter. Of those 4G customers, 2/3 take a data bundle of more than 1 gig. And finally, we are migrating our business customers to flat fees to increase the percentage of committed revenues within our base.

Let's look at Germany now on Slide 25. The main message here is that Thorsten and his team are doing a great job in running the business while they are working towards closing the sale of E-Plus. The operational strategy hasn't changed and is delivering the targeted results. Stripping out a hit from regulation, service revenues declined by 2%, an improved trend versus the first half of the year, which was around minus 2.5%. Our market share remains relatively stable in Q3.

EBITDA fell year-on-year mainly due to higher commercial investments to support the uptake of postpaid and data propositions. But you will note, that the EBITDA margin was higher than in the first 2 quarters of 2013. This is in line with our statements earlier this year.

The success of our network strategies confirmed by the results of the latest market-leading chip network test. This shows that E-Plus currently holds the #3 position in terms of network quality in the German mobile market and is on par with Vodafone on HSPA+ data speeds. Test results published by Computerbild magazine a few days ago confirmed this ranking. More than 80,000 readers of the magazine have voted E-Plus network as the #1 in terms of mobile data availability.

We are continuing the strong growth in postpaid net adds and data revenues. As you can see in the graph at the bottom left of this slide, this is resulting in underlying postpaid service revenue growth, while prepaid is stabilizing.

Let's now move to Belgium. Underlying service revenues in the third quarter in Belgium declined by 7.1% year-on-year. However, BASE expects that it has once again outperformed competition in this highly competitive market. The EBITDA margin was 26%, slightly down versus last quarter, but well below the comparable quarter last year due to lower revenues, higher commercial costs and regulation. The new mobile propositions introduced in Q2 are delivering continued strong operational results, with 46,000 postpaid net adds in the quarter. Our churn rates have fallen back to levels where they were before Telenet launched last year.

Also, in terms of customer satisfaction, BASE currently has the highest Net Promoter Score in the Belgian market. We have a strong focus to have an excellent network position. We are the #1 in voice quality and joined #1 in data quality according to a recent Net Check test. BASE commercially launched 4G in 15 cities on 1st of October. We stepped up the rollout and now aim to get the majority of the population covered by the end of 2014. Finally, BASE will be 1 of the 3 participants in the auction of 3 blocks of 800 megahertz spectrum, which is due to start on November 12.

To wrap up, the sale of E-Plus at an attractive price will provide increased financial flexibility to support our long-term strategy as the market leader in The Netherlands and a strong challenger in Belgium. Our investments in our networks, products and customers are delivering clear operational results. We continue to focus on providing our customers the best services over the best quality networks. Our FTE program is nearly finalized, and we are launching its successor, simplification, to support profitability and reduce CapEx in 2014 and onwards. And we are on track to realize our outlook, with a reduced guidance for CapEx for the continuing businesses in the next years.

Now we will take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is coming from Mr. Polo Tang, UBS.

Polo Tang - UBS Investment Bank, Research Division

Just a few different questions. The first one is about your new simplification program. You've talked about it leading to significant OpEx savings, as well as significant CapEx savings. So today, it looks as if you've announced about EUR 200 million per annum in CapEx savings for 2014 and '15. But could you give us maybe some idea of the quantum of new OpEx savings that we can expect? Will it be as big as the current FTE reduction program? So that's the first question. The second question is really about consumer residential. We've seen good revenue growth and also good EBITDA margin improvement, so I just wanted to know how confident you are that this can continue and are you concerned about more aggressive promotional activity from cable? And the final question is really just about on Dutch mobile, can you talk through whether Ziggo, in terms of the launch of its new mobile service, is having any impact on your business?

Eelco Blok

Okay, let's start with the simplification question. As I said, now that we are reaching finalization of the FTE reduction program, the simplification program will be an important step to reduce CapEx and OpEx going forward, and then part of that, we have already taken into account in the CapEx a revised outlook we announced this morning. Through this program, we will streamline the complexity in our business processes, and we will reduce -- and we will focus at reducing the number of products, simplifying client process, reduce the number of faults we are making and reducing complexity in our networks and IT systems, resulting in a much faster time-to-market and higher customer satisfaction on the one hand. So that will help us to reduce churn and, of course, to reduce the OpEx related to churn. And it will also help us to reduce operational cost, and partly driven by a reduction of the numbers of FTEs, but not at the level that we have seen in the previous program. It will be a significant number, but as I said, not at the same level as the previous program in absolute terms. And it's too early to give you any guidance on the impact on OpEx, but when we share with you the Q4 results and the outlook for 2014, we will share with you more details on the results of the simplification program. So that's one. On residential, we are convinced that we have now the right balance between growth and profitability, and that we will be able to continue the positive trend in this part of our business. Yes, we have seen cable becoming somewhat more aggressive in the third quarter, but we are convinced that the quarters going forward, we will continue to see, in general, rational behavior of the cable-TV operators, with some quarters, they somewhat more aggressive than we; and some quarters, the other way around. On mobile, the impact of Ziggo so far, we see no real impact on Ziggo. But looking at the trends in the Dutch market, we'll see a continued challenging environment looking at price and ARPU, mainly driven by Tele2 in the value-for-money segment, and of course, the shift from voice, SMS to mobile data. And in that respect, we see the increasing relevance of 4G with mobile data becoming even more dominant over mobile voice the quarters to come, resulting in a market where subscriptions are differentiated on data allowance and speed. And given the fact that we are a front runner on from 4G, we believe that we are well-positioned to monetize this change in the mobile markets in The Netherlands.

Operator

The next question comes from Mr. Dimitri Kallianiotis, Citi.

Dimitri Y. Kallianiotis - Citigroup Inc, Research Division

I have 3 questions, please. The first one is regarding your lower mid-term CapEx guidance. I just want to get a bit more explanation as to why you believe you can cut the CapEx, in particular, with respect to fiber? I mean, Reggefiber was running out I think about 250,000 households per year. I was wondering if you could give us an indication if that coverage, if you are going to reduce it significantly? The second question was regarding the quad play, which you've been -- I mean, you've got some offers, but you're not really pushing them very aggressively. Now in light of Ziggo launching its mobile offer with quite a significant discount for quad play, is it something you would follow? But I guess are going to give a discount to your quad play offers, which is something you haven't really done in the past?

And my last question was regarding the offer from AMX. If AMX -- I was wondering if AMX were to come up again in a year time with a new offer, if you would recommended it even if the price is the same, but if they change the structure, or if the price is the main issue there?

Eelco Blok

Let's start with the last question. I really don't know if they will come back. They don't have the opportunity to come back to us in the next 6 months. And when they come back, we will have exactly the same position that, for us, it's about a balanced offer, where we will balance price, governance and non-financial commitment. And price will be an important element that we will assess as 2 boards. On quad play, at the end of the third quarter, we were at 86,000 customers. We will add the Hi brand to the KPN Compleet offering, and we really believe that we don't need to add additional discounts to our KPN quad play product. We really believe that we have an attractive offer, offering the customers free TV channels, free calling within the family and double the credits on voice, SMS and data. And when you add a second mobile subscription to KPN Compleet, you will get an additional EUR 10 discount related to the family discount we have already in the market. And from a pricing perspective and from a value-add perspective, we really believe that this will be enough in the Dutch markets, especially for the time being. When necessary, we can always take the decision to add additional discounts to KPN Compleet. But today, we believe it's not necessary. And often, our quad play product is compared with Telefónica's quad play product's very successful take up, but I think we can copy the same success without having the necessity to add additional discounts to the product. Then on our midterm CapEx guidance, we, well, have guided the market now with EUR 1.7 billion for 2013 and less than EUR 4.7 billion in total for the '13, '14, '15 period. So resulting in less than EUR 1.5 billion for '14 and '15, and that's in '15, including the Reggefiber CapEx. And then back to your question on the numbers of Reggefiber, this year, we are rolling out approximately 350,000 homes passed. For next year, we have taken the decision to reduce that number to, well, around 250,000 additions to the footprint. And you also have to take into account that the CapEx per line is trending down, and will also, in the years to come, continue to trend down. As you know, we started that EUR 1,000 per line. We are now at approximately EUR 800 a line and trending down in the next 2 years. And together with the fact that we will finalize our 4G rollout at the end of the first quarter of next year and some simplification measures we will take, and the fact that the handset lease CapEx will be gone, we really believe that it's possible to reduce the CapEx with the numbers we have guided the market this morning.

Dimitri Y. Kallianiotis - Citigroup Inc, Research Division

Are you -- let me just come back on that last question or last answer. Why did you decide or why do you want to lower the number of household you're going to roll out fiber to? Is it because you see a little bit less demand from fiber, or because you think your copper upgrade is good enough to compete with cable, bear in mind Ziggo is talking about increasing CapEx next year?

Eelco Blok

For the short term, the results of our copper upgrades with VDSL, fiber to the curb, pair bonding and vectoring, is -- will give us the opportunity to continue to be competitive compared to cable. So that's the reason why we have taken the decision to balance the investments in copper and fiber in the way we did the years to come.

Operator

The next question comes from Mr. Paul Sidney, Crédit Suisse.

Paul Sidney - Crédit Suisse AG, Research Division

Just 2 quick questions, please. In terms of your outlook, you say in terms of your Dutch business and you see it stabilizing by 2014, could you really just set out what that exactly means in terms of growth and profitability and free cash flow trends of your Dutch business? And just secondly, assuming the E-Plus deal completes, how should we think about your target leverage ratios going into medium term in terms of where you'll be comfortable, that will be great.

Eelco Blok

Okay. We believe that we can stabilize performance in The Netherlands towards 2014, meaning a continued operational improvement in 2013, resulting in a financial performance stabilizing in 2014 and a first segment where we have approved that we are able to make these changes, the consumer residential segment. And we are convinced that discontinued investment in the market will lead to a new balance of profitability and stable market positions in The Netherlands in 2014. And drivers to stabilize the financial performance in 2014 are, as I said, continued good performance in residential. And at consumer mobile, our multi-brand strategy allows us to target different market segments. And of course, the new mobile propositions we launched this year, together with 4G, will support the ARPU trends and will help us to reduce churn. That's the most important factor in this part of our business, and the churn reduction will also be supported by an increased focus and accelerated marketing and sales effort on our quad play product. Business market, we managed to maintain stable market positions in the past and we believe that, that will be also possible in the near future despite the unfavorable macro environment, and related to that, the competitive pressure. For...

[Audio Gap]

mid this year with a very, very promising update in the first few months. And of course, the benefits from the FTE reduction program that we have started in 2011 with still at least 300 FTEs to go this year. And of course, the positive impact of the simplification program we just have started and will start to help us already in 2014.

Paul Sidney - Crédit Suisse AG, Research Division

Sorry, just to follow up, so if you further pull it altogether, is it really sort of profitability within the Dutch business year-on-year being sort of flattish or actually sort of getting less negative as we move forward?

Eelco Blok

Yes, for -- yes, so, we will see the change during 2014. So less negative and then flat, and then starting to increase. So that, well, is the meaning of the stabilization towards 2014. And then your second question about the E-Plus, after the E-Plus transaction, we will have, as Steven already mentioned, have a very strong financial profile. And we will give you more clarity on the financial framework and details of the shareholder remuneration in the coming month, at the latest, when we present Q4 numbers to the market.

Operator

The next question comes from Mr. Sam McHugh, Sanford Bernstein.

Sam McHugh

Just a couple of questions, please. The first one is a follow-up on the Fiber-to-the-Home one. Can you just remind me whether the reduced of homes passed, this could potentially change the timing of the consolidation and the payment of the final option on Reggefiber? And then secondly, with regard to AMX, I was just wondering, with them not being able to come back for 6 business, which is what you just said, do you still need the preference shares? And could you give us any kind of idea around the timing of when those shares could be canceled, if at all canceled?

Eelco Blok

Okay, on the first one, the reduced numbers for 2014 and onwards will not have any impact on the timing of the consolidation. So we will meet the threshold shortly and then we will start the consolidation process by asking approval with the regulatory body. So no change in timing. On the preference share question, given the fact that the foundation is an independent foundation, we can't speak on behalf of the foundation, but we could, however, imagine that the foundation feels that the interest of KPN and its stakeholders are not at risk anymore and could ask for redemption of the preference shares B. According to the KPN Articles of Association, an EGM needs to be convened in order to redeem the preference shares B. And given the legal boundaries in The Netherlands, you need to take into account that the period between calling an EGM and having the EGM is a period of 42 business days at a minimum. And of course, when the foundation takes the decision to support a redemption of the preference shares, we will make an announcement as you can imagine.

Operator

The next question comes from Mr. Tim Boddy, Goldman Sachs.

Timothy Boddy - Goldman Sachs Group Inc., Research Division

I just wanted to again sort of look at the decision to scale back the role of Fiber-to-the-Home. On my math, you've got just over 4 million homes passed by cable, who are likely to double speeds in the fairly near future. They have just double speed and they're likely to continue with that trend. And at the current rate, even in 10 years' time, you would only just have passed all of those homes. And you're around 1.5 million homes today. So by lowering the rate, and other than you've said how much you're going to lower the run rate to, you're pushing that out to maybe more like a 15-year time horizon. I mean, do you think that's a sensible long-term risk to take that the copper network will be able to withstand that? And then I guess, a different question, just also on the CapEx saving, how much of the CapEx saving is a reflection of the increase in subsidies back in the EBITDA line, which I think is some EUR 20 million this quarter, or is that a separate factor?

Eelco Blok

'14 -- so on the last question, '14 compared to '13, so the 1.5 -- the 1.7 million versus the less than 1.5 million, the impact of the handset lease is EUR 100 million on CapEx, so '14 compared to '13. And then '15 to '14, it's 0, because handset lease will already be gone in '14. Then your question on the rollout of fiber, so this year, we will add another 350,000. And in '14, and probably also '15, the number will be 250,000. So a reduction of 100,000 on a yearly basis. So that's on fiber. And then why have we taken this decision? Because of the success of our copper upgrades. In fiber to the curb areas, we are now already on a level of 40 to 80 megabits on copper. When you start using in all areas, pair bonding, you can double that speed. And it is not, as in cable networks, a shared speed, but a minimum guaranteed speed to our households. So doubling the speed from 40 to 80 is 80 to 160. Then adding vectoring to this, and we will start using vectoring commercially already in the fourth quarter, you can add again another 50%, 60% on speed. So meaning, over 100 megabits to over 200 megabits on the copper network. And we really believe that this will be enough for the short term to continue to be competitive to cable operators. And then not even taking into account the Ziggo fast developments that are going very, very fast today, that will help us to increase the speeds even more in our copper plan. So we really believe that the deceleration of the Fiber-to-the-Home rollout from 350,000 to 250,000 on a yearly base will not have any negative impact on the competitiveness in our fixed network and will be sufficient for the medium term.

Operator

The next question comes from Mr. Akhil Dattani, JPMorgan.

Akhil Dattani - JP Morgan Chase & Co, Research Division

Just a few follow-ups, please, to some of the previous questions. Firstly, on your comment earlier about the shift from capitalizing to expensing handsets in Holland, I think you just mentioned the number for EUR 100 million in terms of the shift into the OpEx line. But I think in prior calls, the number you were talking about was more like EUR 200 million to EUR 250 million, so could you just give us some sense on whether there are still elements of capitalization in here just so we understand the moving parts in terms of your CapEx guidance change? Secondly, on Reggefiber, could you just help us understand what the net debt position would be at the end of '14 based on your revised rollout targets? It sounds like it's probably going to be a little bit less, if we have some sort of sense as to where the debt is in Reggefiber by the end of next year? And with that, could you maybe also just help us understand why the consolidation is end of next year, not early next year? Because if I remember correctly, I think the put option that Regge board has is exercised early next year, so just keen to understand that. And then very finally, just in terms of the revenue trends and, I guess, the message you're providing on stabilizing performance into '14, if we look at the last 3-odd quarters, the underlying growth that you provide in your presentation slide is about minus 6% to 7% for the Dutch Telco business. So could you help us understand, do you expect to see a meaningful improvement in that revenue profile over the coming quarter and into next year? Or should we assume that the proportion of the earnings stabilization next year is driven by the cost-cutting and the benefits of that also comes to, in turn, the churn as well?

Eelco Blok

Let's start with the handset lease question. We stopped the handset lease model in the KPN and Hi brand in September -- in September for Hi and in July for KPN, and resulting in a approximately EUR 100 million difference on CapEx, '14 compared to '13. So that's the EUR 100 million. And then we will continue to offer the handset lease model on Telfort, so there will be some CapEx on handset lease in the CapEx number I mentioned in the call. So that's on the handset lease shift. On the Reggefiber timing, yes, we will pass the threshold very shortly, but we have to ask regulatory approval to be able to consolidate Reggefiber and we believe that will take us through the second half of 2014, well, to have the outcome of the regulatory approval process available. Looking at the debt of Reggefiber at the time we consolidated, will be somewhere between EUR 1 billion and EUR 1.2 billion. And the stabilization of the financial performance towards 2014, maybe as I explained answering an earlier question, it will be the combination of the continued, well, pressure in our consumer mobile business also continue to impact top line. And also, the absolute result in this part of our business because we foresee no real change in the competitive dynamics in this part of our market, and we also have to go through some regulatory decisions both on the MTR and roaming, continued positive trend in consumer residential. Looking at the Business segment and NetCo, continued pressure on top line, but positive impact of the cost measures we have taken, that also have a positive impact on the other parts of the business. And combined, we really believe that we see the trend change on the financial results consolidated in The Netherlands during 2014.

Akhil Dattani - JP Morgan Chase & Co, Research Division

That's very useful. And I guess, I mean, it's too early for you to give too much detail on this, but I mean, should we assume ongoing meaningful restructuring charges given the likely further program? Or do you think any subsequent restructuring charges will be very modest?

Eelco Blok

We will give you some more details in the fourth quarter. But answering earlier questions, as part of simplification, results will be driven by continued FTE reductions, but as I said, on a lower level than the current program. So restructuring charges will also be on a lower level than you have seen in the past few years.

Operator

The next question comes from Mr. Guy Peddy, Macquarie.

Guy R. Peddy - Macquarie Research

I just wanted to understand your sort of domestic convergent bundled strategy in a little bit more detail. So far, it's been soft touch. So firstly, what have you been doing this year to enable you to accelerate that process into next year? And in your slides, you actually talk about convergence rather than sort of bundled. Is there a product that you envisage are going to be different in 2014, or is that just swapping terminology?

Eelco Blok

No, we will not have -- well, we will not have foreseen any change in the product portfolio, so it's just using different words for the same products and services we are offering. We have made the decision at the beginning of this year to position KPN Compleet not by offering prices discounts, but offering our customers value-added services such as additional TV channels, 45 free TV channels are added to the KPN Compleet product; free calls within the family and doubling the data, voice and SMS credits on the mobile subscription. We started with the KPN-branded triple play and KPN-branded mobile subscriptions. And we have worked very hard on the IP systems and the commercial processes to be able to add brands to our KPN Compleet product. First, we will add Hi to the KPN Compleet product, that gives us also the opportunity to increase the number of mobile subscription of KPN Compleet and offer families that are using KPN Compleet additional discounts, the family discount that is already a discount scheme that's in the market for mobile subscription. So every additional mobile that is added to KPN Compleet, we'll give an additional EUR 10 discount on a monthly base on that specific mobile subscription, next to doubling the credits on voice, SMS and data. So as I said, we have worked on changing the IP, the commercial processes, so we are able to add additional brands, and we will be much more aggressive on marketing and sales of the KPN Compleet product.

Operator

The next question comes from Mr. Luis Prota, Morgan Stanley.

Luis Prota - Morgan Stanley, Research Division

My question is on the recent talks between Liberty and Ziggo, and I wonder whether you could give last your view on how the landscape might change if this theoretical deal or merger eventually happened, whether you see that the mobile risk will be a bigger one due to larger reach and/or potential changes that you could anticipate to pricing strategies in broadband and TV? Whether you think that at the end of the day, this potential combination could be positive or negative for KPN?

Eelco Blok

We believe that the competitive landscape will not really change given the fact that both Liberty Global, UPC and Ziggo have a cable monopoly in their regions already today. So combining those 2 will not give them any advantage in the regions where they are operating today. Of course, they will -- due to the scale, will have cost benefits. And then it's up to the shareholder to decide if they would like to spend those savings or -- spend of those savings to become more aggressive in the market or use of those savings to increase shareholder remuneration. So that's from an outside in-view from a KPN perspective. And maybe it could even give us some short-term gain because you always know when 2 companies merge, especially when that will have an impact on the indirect functions, there will be a lot of internal focus trying to protect the individual jobs, et cetera. So on the short term, it could even give us some advantages. And don't forget, the regulatory approval process, that will take some time and will impact a lot of people at that quarter to focus on the regulatory approval process. And we know that the regulator will have a close look at this transaction when this transaction is there.

Luis Prota - Morgan Stanley, Research Division

If I can follow-up, don't you think that in a theoretical combination, we could see -- or I -- let me rephrase. In a theoretical combination, would you expect that the combined entity would reinforce its mobile position or rather because UPC has never been such a good fan of mobile, maybe this could become a lower risk for KPN? And on top of this one, when you were saying that it wouldn't change much the competitive landscape, yes, I see the point of not having overlap, but don't you think that a nationwide cable operator would definitely get some synergies from commercial campaigns and things like that, that could become a threat for KPN?

Eelco Blok

Yes, of course, there will be synergies, especially on headquarter marketing and operational cost. And, yes, I really don't want to start speculating on what they will do with the additional savings. And on mobile, the same, I don't want to speculate. Ziggo has recently introduced their Ziggo mobile offerings. UPC is not really offering mobile subscriptions and will they become more aggressive also on this one, I don't want to speculate on this. I believe that we have very strong position. We have invested heavily in spectrum, in our 4G network, but also in improving our 2G and 3G network. And I really believe that we are strong positioned in this very, very competitive market where we already see Tele2 and Ziggo operating.

Hans Söhngen

Okay, with this last question, I would like to close the Q&A session. Please let the Investor Relations team know if you've any further questions. Thank you for joining us today.

Operator

Ladies and gentlemen, this will conclude the conference call of KPN. You may now disconnect your line. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Koninklijke KPN N.V. Management Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts