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Executives

Hans Söhngen – Head, IR

Eelco Blok – CEO

Steven Van Schilfgaarde – Interim CFO

Analysts

Polo Tang – UBS

Paul Sidney – Credit Suisse

Frederic Boulan – Nomura

Jonathan Dann – Barclays

Luis Prota – Morgan Stanley

Emmanuel Carlier – ING

Ulrich Rathe – Jefferies

Sander van Oort – Kempen & Co

Royal KPN N.V. (OTCPK:KKPNY) Q1 2014 Earnings Conference Call April 25, 2014 4:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Analyst Quarterly Figures Conference Call. At this time, all participants are in listen-only mode. After the presentation, we will facilitate a Q&A session. I would now like to turn the conference over to Mr. Hans Söhngen, Head of Investor Relations. Go ahead Mr. Hans Söhngen.

Hans Söhngen

Good morning, everyone. Welcome to KPN’s first quarter 2014 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 statements applies to this presentation, 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, and good morning. Thanks for joining us on the call to discuss our first quarter results. With me on the line is Steven Van Schilfgaarde, our Interim CFO who will present Q1 financials.

Let me start with the highlights of quarter. In the first quarter of 2014, we’ve made good progress with the execution of our strategy by further strengthening our networks and simplifying our operating model. Commercially, success of our strategy is visible with promising postpaid net adds in consumer mobile, and continued good IPTV net adds in consumer residential.

The focus on our market leading products such as 4G and IPTV leads to growing numbers of triple and quad-play customers in consumer markets and a growing number of multi-play seats in the business market.

In Germany, underlying service revenue growth was strong at 3.8%. And we increased our market share to around 16%. At the same time, postpaid net adds were again at a high level close to 200,000.

In Belgium, our clear market position, which combines a high network quality with price leadership translated into another quarter with high postpaid net adds of 28,000 and market outperformance.

Financially, our performance from continuing operations in the first quarter was impacted by the competitive environment in our mobile markets, leading to a decline of ARPUs and pressure on the business market size. We have completed to rollout the 4G in the Netherlands in a remarkably short timeframe of 15 months following the spectrum auction, and are substantially ahead of the competition.

This means that these investments can now be scaled back, leading to lower CapEx levels, also supported by phasing out of the handset lease and the implementation of our simplification program.

The free cash flow in Q1 reflects intra-year phasing and a difficult year-on-year comparison. Steven will elaborate further on this in the financial review.

The outlook I shared with you at the full year results has not changed. The good strategic and operational progress makes me confident that we will reach a stabilizing financial performance towards the end of 2014 and free cash flow growth in 2015. As I also indicated at our full year results back in February, we will recommence paying a dividend of EUR 0.07 to our shareholders in respect of 2014, and expect growing dividend in respect of 2015. The dividend remains subject to the sale of E-Plus.

Furthermore, we will potentially benefit from additional excess cash by receiving dividends by our 20.5% stake in Telefónica, post completion of the E-Plus sale.

Let’s look at where we are on the E-Plus sale. The E-Plus sale is subject to a Phase 2 review by the European Commission. We are confident to obtain regulatory approval in June and to complete the sales shortly after that. Closing of the sale of E-Plus allows us to pay a sustainable and growing dividend combined with a solid financial profile.

Post completion, we will own an effective 20.5% stake in Telefónica Deutschland. Through this shareholding, we’ll have exposure to the strong synergy potential of the combination.

Now over to Steven for the financial review. Steven?

Steven Van Schilfgaarde

Thank you, Eelco. Good morning everyone. I will start with the financial profile of the Group which includes our discontinued operation.

In the first quarter, our net debt level increased by about EUR 600 million compared to the end of Q4 2013. The increase is mainly related to the usual intra-year phasing of free cash flow within the Group. I will discuss this in more detail shortly.

As a result, free cash flow for continuing operations was EUR 292 million negative while free cash flow for our discontinued operations amounted to minus EUR 134 million negative, also due to the cash flow phasing. Other investing cash flow was about EUR 100 million higher, due to additional shareholder allowance to Reggefiber.

On a pro forma basis, including the expected net cash proceeds of the sale of E-Plus and including the expected consolidated impact of Reggefiber, net debt at the end of Q1 2014 was EUR 6.2 billion versus EUR 5.8 billion at the end of Q4.

At the end of the first quarter, pro forma net debt over EBITDA was around 2.1x. The increase compared to the fourth quarter is mainly due to a EUR 179 million lower 12-month rolling EBITDA and the EUR 350 million high net debt.

Our gross debt decreased by roughly EUR 1 billion in the quarter as a result of EUR 750 million bond reduction and the cancellation of the preference shares which resulted in the repayment of EUR 258 million, including EUR 2 million dividends to the foundation. The preference shares were recorded as current debt.

Let me now take you through our Q1 Group results. Let me first point out debt as you might have seen in our consensus filed for the first quarter, we will put most emphasis on our results, adjusted for incidentals and restructuring costs.

Adjusted revenues for the first quarter were down 7.7% year-on-year, which was somewhat better than the previous quarters. The revenue decline was driven by the competitive mobile markets and also pressure on the size of the business markets, as a result of continued customer rationalization and optimization.

The OpEx, excluding D&A and adjusted for the impact of phasing out of the handset lease model, decreased by 4.5% year-on-year driven by lower employee cost in the Netherlands.

Adjusted EBITDA decreased by 21% year-on-year as a result of lower revenues and phasing out of the handset lease. Excluding the impact from phasing out of the handset lease of EUR 43 million, the adjusted EBITDA decline was 15%.

Let’s move to the Group cash flow for Q1. In the first quarter, our free cash flow for continuing operations was EUR 402 million lower than Q1 2013. The main items that explain the delta are as follows: EUR 250 million less cash from change in working capital, mainly driven by EUR 167 million prepayments that were made in Q4 2012, and supported a positive Q1 2013 working capital developments; a EUR 176 million lower reported EBITDA; and EUR 50 million cash payment as a result of the final settlement agreement with the bank of the trustees of KPNQuest.

These negative effects were partly offset by a EUR 96 lower million CapEx which I will explain on the next slide.

These items led to a free cash flow from continuing operations almost EUR 292 negative. For our full year 2014 free cash flow, we expect to see a significant improvement versus the first quarter, driven by a positive working capital developments and less interest payments in the remainder of the year. Compared to last year, we will see lower CapEx levels and lower taxes paid.

Let’s take a look at our CapEx expectation for the coming years and the first results of our simplification program on the next slide.

As a result of our investment strategy in the last years, we have seen elevated investment levels at KPN compared to our European peers. We have now completed some of these major investment programs such as 4G in the Netherlands and therefore we expect less elevated investment levels going forward.

We have provided a CapEx outlook of less than EUR 1.4 billion for 2014. The more than EUR 200 million improvement versus 2013 is driven by three factors. In the first half year of the year, this is largely supported by phasing out of the handset lease at the KPN and Hi brands.

The nationwide 4G coverage has been reached at the end of Q1. Therefore we expect lower mobile network investments going forward. And the simplification program will start to support CapEx reduction as from the second half of 2014. Together this CapEx reductions, we also expect significant OpEx savings from the simplification program.

Combined, this will result in at least EUR 300 million gross sales by 2016. With respect to the simplification, we have already achieved the first results. In terms of simplifying our product portfolio, we have phased out 90% of our broadband propositions in the consumer market.

We also started to optimize our distribution model for mobile, by adding high products in the KPN shops and focus more and more on online distribution. As a result, we were able to close five Hi shops in the first quarter and we intend to close more shops in the rest of this year.

These actions are just a few examples from a long list to streamline our organization which will lead to a lower cost operating model.

I would now like to hand off to Eelco for the operating review of the Group. Eelco?

Eelco Blok

Thank you, Steven. In consumer residential, we’ve seen an increased level of promotional activities by cable competition, especially Ziggo. Their actions were mainly focused on growth via increased marketing and sales, free hardware and promotional triple-play pricing at a lower level compared to our sales brand [ph] efforts.

Coupled with the continued decline of traditional voice services, this has somewhat impacted our top line performance in the first quarter, with adjusted revenues 1% lower year-over-year. In Q1, we remained disciplined in the market with a strong focus on IPTV. Combined with the positive results from our strategy that we have executed over the last three years, this is leaving to increased profitability.

Adjusted EBITDA increased by 22% year-on-year. Despite the increased promotional activity of competition, most of our operational KPIs continued their positive momentum. The growth in RGUs and ARPU continued in the quarter, driven by the take up of triple-play, which in turn is supported by our market leading IPTV products.

We have continued our growth in Interactive TV by adding another 62,000 customers in the first quarter leaving to a 26% TV market share. Our broadband base was slightly lower, which has led to a broadband market share of 40%. Our triple-play base continued to grow as we added 48,000 triple-play customers in the quarter.

We’ve now reached a 46% triple-play penetration of our broadband base and intent to grow this further in the coming quarters. We continue to be successful with quad-play. In the first quarter, we added another 62,000 quad-play subscriptions leading to total of 235,000 quad-play customers.

Earlier this month we have also started Telfort CombiVoordeel, which basically is Telfort quad-play. Telfort customers having both IPTV and a mobile subscription are rewarded for their loyalty and can pick one of three benefits related to mobile credits and additional TV channels.

Let’s move to mobile. The mobile market in the Netherlands remained competitive especially in the no frills segment. Underlying service revenues at consumer mobile declined 12% in the first quarter. Mobile service revenues continued to be impacted by the shift to SIM-only, lower above bundle usage and continued pressure on pricing levels.

Our mobile market share in the Netherlands was at 43% at the end of the first quarter, which is lower than Q1 last year but stable compared to Q4. Adjusted EBITDA was EUR 82 million lower in the first quarter compared to Q1 2013 for a large part driven by phasing out of the handset lease.

Adjusted for the EUR 16 million additional SOC related to retention action in the fourth quarter, EBITDA in Q1 was slightly better Q-on-Q.

We are convinced that we have created a strong position which should lead to a better performance in consumer mobile in the periods to come. This is evidenced by a growing customer base. The postpaid retail net adds were promising at 26,000, our strongest performance since almost two years.

The improved performance was driven by a number of factors. We’ve adjusted some of the price points at our KPN and Hi brands to become more competitive in the market. This has led to an improved performance of these brands. Churn is lower, driven by a strong focus on our own customers and our unique quad-play proposition, and the strong uptake of 4G by our customers which has accelerated.

We now have 610,000 4G subscribers in the consumer market. For Q2, all our customers have access to 4G, as Telfort customers now also have opportunity to add 4G to their subscription for a monthly fee of EUR 5.

Following our remarkable fast 4G rollout, we are now at least for one year in a unique position as the only mobile operator with nationwide 4G coverage in the Netherlands.

Finally, the postpaid retail ARPU of EUR 28 was relatively stable compared to last quarter, supported by a higher inflow ARPU from our full service brands, KPN and Hi.

In the last years, we have seen that the size of the business market has declined. In the first quarter, this trend continued driven by ongoing customer rationalization and optimization. This results from a still tough macro environment and competitive marketplace.

We are proactively migrating our customers and services from old to new solutions as part of our rationalization and simplification program to ensure we meet our customer demand. This leads to future proof solutions, but also lower ARPU levels mainly at mobile resulting in lower revenues in the short-term and better results in the longer term.

This led to an adjusted revenue decline of 11%, which is pretty much in line with previous quarters. The EBITDA margin was lower in Q1 at 20%. We continued to reduce fixed costs, driven by lower personnel expenses. With variable costs such as SOC for wireline and wireless remained at similar levels in order to support a market positions in a competitive market.

Briefly looking at some of our KPIs in Q1. We continued to see a decline in access lines as a result of rationalization and the migration towards voice-over-IP. The wireless-only base declined slightly in Q1, but I see this as a positive development as this was fully driven by a migration towards multi-play, one of our strategic pillars for the business segments.

We are executing on four clear priorities to improve the results of our business segments and are making good progress on all of them. These priorities are de-risking our revenues; growing revenues from multi-play; growing revenues from new services; and executing on our ambitious cost savings plan. A bit more detail on all of these.

First of all, de-risking our revenue profile. Initially, this will put some pressure on top line, but in the medium term, this will have a positive impact. For example, the committed mobile ARPU was 10% points higher year-on-year. 4G is also very important towards more committed revenues in the business segment, as this encourages customers to move to new propositions. At the end of Q1, we have 412,000 4G subscribers, which represents 27% of our wireless customer base.

Secondly, multi-play. At the moment, the contribution of multi-play to our results in the business segment is relatively small. However, we expect this to increase significantly in the coming quarters, driven by a strong increase in the number of seats.

Thirdly, new services. Introduction of new innovative services such as luggage tracking and processing in partnership with KLM and Fast Track Company and a machine-to-machine connectivity solutions for Tesla, will result in new revenue streams. We’ll continue to invest in new services such as cloud to support these new revenue streams.

And finally, we focus on the reduction of fixed costs by simplifying and reducing our product lineup, systems and applications. This leads to further FTE reductions and other significant cost savings.

Next to this, we will put even more focus on the relationship with our suppliers. Also here I see scope to improve pricing and efficiency, which is likely to result in less suppliers and lower costs.

I am convinced that we are implementing and executing on the right areas to improve the performance in the business sector going forward.

I’ll skip two slides and continue with the operating review of Germany. I am proud that although the sale process is ongoing, we have been able to continue our good performance having closing the first quarter of 2014.

In Q1, we’ve shown positive reported service revenues for the first time since Q3 2012. Underlying service revenues increased by 3.8% year-on-year, leaving to an increased market share of 16%. The continued improvement is mainly driven by a strong performance in postpaid and data.

The EBITDA margin was higher year-on-year at 28.6% as commercial investments were somewhat lower compared to the first quarter last year. We’ve again showed strong growth in postpaid net adds with 197,000 additions in the quarter, in line with our strategy, the majority of net adds originated from the under-penetrated regions.

Further strategic progress has been made by network quality improvements and new partnerships. LTE was launched in Q1, and E-Plus has now 22% outdoor population coverage in Germany. Also the available data speeds and throughput more than doubled compared to the same period last year.

With respect to new partnerships, WhatsApp launched their first MVNO on our network, and we also announced to partnership with United Internet.

Let’s move to Belgium. Also in Belgium, we’ve seen continued good operational developments in Q1, although the market remained competitive. Therefore the underlying service revenues continued to decline at 4.4% in Q1, although an improvement versus the previous two quarters.

The improvement was driven by the good performance of postpaid, as data usage and data revenues are growing while prepaid remained under pressure. As a result of the market outperformance, we estimate an increase of our market share to around 21% in Q1.

The adjusted EBITDA was EUR 5 million lower year-on-year, driven by somewhat higher traffic costs and the provision related to Walloon site taxes. In Q1, we saw continued strong postpaid net adds of 28,000. This was driven by improve in churn levels and a very clear market position where BASE Company is able to combine high network quality with price leadership.

Postpaid ARPU remains under pressure as customers continued to optimize their tariff plans. In Q1 2014, we launched 4G for all, providing 4G access to every BASE customer. The 4G network now covers 591 cities, towns and villages equaling approximately 46% outdoor coverage of the Belgium population.

Concluding, both Germany and Belgium made strong operational progress and improved their financial performance in Q1.

To sum up, we have seen another quarter with good strategic progress showing positive results in 4G, IPTV and multi-play in the Netherlands. Mobile service revenues remained under pressure in a competitive Dutch mobile market, but postpaid retail net adds are promising.

The financial performance in the business segment was impacted by declining market size, which was driven by continued customer rationalization and optimization. We have clear priorities in place to counter this by a strong focus on de-risking our revenues, growing revenues for multi-play and new services, and executing on our cost savings plan.

Driven by continued strong postpaid net adds in Germany and Belgium, we’ve shown service revenue growth and market outperformance in Germany and increased our market share in Belgium.

All in all, we are on track to show stabilizing financial performance at the end of this year driven by continued operational progress and the first results of our simplification program. We remain confident to obtain regulatory approval for the sale of E-Plus in June, and thereafter complete the sale in mid 2014. This will allow us to recommence dividend payments combined with solid financial profile.

Thank you for your attention and now we’ll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Mr. Polo Tang. Go ahead please.

Polo Tang – UBS

Yes. I just have a few different questions. The first one is on E-Plus. The service revenue growth of plus 3.8% was obviously a very impressive performance for the quarter. So can I just clarify if there were any one-offs in this number? Similarly, is the growth is because E-Plus is benefiting from overall market growth, or is it taking share from specific operators? The second question I have is on consumer mobile. If you look at your ARPU, it was stable quarter-on-quarter. That’s round about EUR 28 per month. Do you think you can keep it stable for the coming quarters? And if you look at the postpaid net adds development, obviously very encouraging, but do you think we can see an acceleration of the postpaid net adds, i.e., more than 26,000 going forward or is 26,000 postpaid net adds that sustainable run rate? And my final question is really on the simplification program. I think that you gave a rough indication of EUR 100 million of simplification savings for this year, but can you give us a rough idea of what was achieved this quarter? Thanks.

Eelco Blok

Okay, let’s start with the E-Plus questions. There are no one-offs in the service revenue numbers. And we believe that we have taken share from others, but it has nothing to do with market growth.

On the consumer mobile questions, we expect to further stabilize the ARPU compared to the trends of the last two quarters. And we don’t expect an acceleration of the postpaid net adds growth. We are fairly pleased to see the good trends in this quarter. And to give you some more details on this, it’s especially promising that KPN and Hi brands are showing an improvement in the base development, driven by investments in SOC, and the repositioning of the price level.

And of course the continued success of 4G and our quad-play offering are supporting KPN and Hi brands, which also leads to lower churn.

Looking at Telfort and Simyo brands. They show solid base growth in the first quarter of 2014. And we have introduced in the second quarter an add-on on 4G feature for Telfort and Simyo, where our customers can enjoy 4G for a EUR 5 monthly fee. And in addition to the KPN Compleet quad-play offering, we have introduced in the second quarter a quad-play proposition for Telfort named CombiVoordeel also revolving around traditional customer benefits like KPN Compleet, however with a clearly different market position.

So these underlying trends make me confident that we can continue the positive trends we have seen in the first quarter but no accelerations.

Then on the simplifying program. As you can imagine there was, yes, only a limited impact of the simplification program in the first quarter of this year, because we started to execute on the simplification program last year. There will be more in the second half of this year, mainly on CapEx. So that will be EUR 100 million of the first year. And as you know, as part of the simplification program, we have started a new reduction program of 1,500 to 2,000 where we have started this program this year and positive impact on the OpEx you’ll be seeing late this year but mainly next year.

Polo Tang – UBS

Thanks.

Operator

Next question is from Paul Sidney, Credit Suisse. Go ahead please.

Paul Sidney – Credit Suisse

Thank you very much. Just a couple of questions please. The first one is on your cost of debt. It doesn’t remain relatively high compared to some of your peers. And I just wondered is there an opportunity to bring the overall interest costs, cost of debt down post the E-Plus transaction when you get the EUR 5 billion, if you just maybe talk about the opportunity there? And secondly, I just wondered if there was any more thoughts you had on the perhaps sustainable net debt EBITDA ratio that you are comfortable with post the transaction. I know you gave some comments in the Investor Day. I just wondered if you had any more thoughts on what you would be comfortable with once the initial EUR 5 billion proceeds were received? Thank you.

Eelco Blok

Steven will deal with the first question. On the net debt EBITDA number, as I explained during the Investor Day, we not share a specific target number on net debt over EBITDA. We continue to be committed to our investment credit profile and that’s what we would like to share at this moment with the market. And that’s a firm commitment post the E-Plus transaction.

And Steven maybe you can deal with the first question about cost of debt after the EUR 5 billion proceeds will come in.

Steven Van Schilfgaarde

Yes, if you look at the cost of debt at the moment, of course the redemptions will lead to low interest rate and as you know we have had redemption of EUR 750 million in the quarter one and already EUR 650 million in quarter two. Of course, if you look at the future, we are considering all options to optimize our balance sheet, but as you can understand, I will not go into details today, [indiscernible] at present we continue to put operational progress in Netherlands and Belgium.

Important to note, as always in our company, if you are looking at the options, we are only implementing – we should create shareholder value. So that’s also an important decision making criteria. And apart for – yes, maybe these debt payments which we already said, growing dividend after this year. We aim to balance the operational financial flexibility and potential excess cash could be utilized for small in-country M&A or shareholders remuneration. That’s all.

Paul Sidney – Credit Suisse

That’s clear. Thank you. Just as a quick follow-up. How would you expect the rating agencies to treat the stake in Telefónica Deutschland post transaction? Would they be looking straight?

Steven Van Schilfgaarde

I think they would see this as you see it also. It’s a good opportunity but yes, we – on the dividend one on the other hand, and if you look at the future about the stake we have a local pay [ph] half year for the close, and after it, we will come back to you what we will do with the other possibilities.

Paul Sidney – Credit Suisse

Okay. Thank you very much.

Operator

Next question is from Frederic Boulan, Nomura. Go ahead please.

Frederic Boulan – Nomura

Hi good morning. Couple of questions. First of all on debt level. Where could we expect to see debt closing towards the end of the year on the pro forma basis? Are you comfortable with consensus currently sitting I think at EUR 5.3 billion? And also can you clarify where are shareholders loans now to Reggefiber versus the EUR 526 million at year end? And overall what will be the impact of the Reggefiber consolidation considering the higher intra-company loans you granted in the first quarter? A follow-up to the previous question on refinancing. I know it’s a bit early days, but where could we see interest costs on the run rate base post deal. Where do you expect the overall level to stabilize in the medium term, once the refinancing exercise will be done? And secondly, on the business performance. Quick question on the fixed line performance. I can see why Ziggo’s push would impact broadband momentum, but I’m struggling a little bit with the declining revenues from 2.5% in Q4 to minus 1% in the first quarter. So can you explain a bit more what is changing here? Is it just the weaker mix in your base towards Telfort? And could you give us any color on the mix of subs between the different brands and market segments? That would be very useful. Thank you very much.

Eelco Blok

Okay, Steven will deal with the first part of your questions, and I will take the consumer residential question. Steven?

Steven Van Schilfgaarde

Yes. If you look at the Reggefiber question, which you took. At the end of 2014 and taking to the effect, the effects of Q1 2014, KPN has to consolidate it around EUR 900 million net debt, consisting of around EUR 700 million bank debt. And of course the option payments, which will both EUR 150 million in our estimation. Together with an EBITDA of around EUR 100 million, the total leverage impact is around 0.2 pro forma to sale of E-Plus. So that’s one thing I want to tell.

If you look at the cost of debt, the last bond issue was 3.75%. So yes, you can of course debate about the cost. What I would like to say about the net debt EBITDA or the development of net debt, as Eelco already said, we are fully committed to investment grade profile. I think that’s more enough for this moment.

Eelco Blok

Okay. I will take the consumer residential question, the year-on-year revenue decline of 1%. There are no fundamental worries underlying the trend. Our strategy aims at increasing RGUs and ARPU and stabilizing our broadband share. And based on the short-term and what we have seen is an increased level of promotional activity in the fixed market especially driven by Ziggo in the first quarter. They were active with discounted offers and offering free hardware, while we remained very disciplined on pricing and marketing during the first quarter. And we’re focused on further growing our IPTV base.

Then some underlying important KPIs. We have seen again growing RGUs in the first quarter compared to the fourth quarter of last year. Growing blended ARPU, up almost 5% to EUR 44 versus the first quarter of last year. Our triple-play penetration went up 6% points year-on-year with a net add number of 48,000. And we continue to grow our IPTV customer base with 62,000 net adds leading to a TV market share of 26%. And looking at our quad-play customer base, we’ve seen an increase of 62,000 net-adds to KPN Compleet.

So all the important underlying KPIs are moving in the right direction, also in the first quarter, and therefore we are confident that we can continue the trend we have started last year with yes, small increase of top line in the first quarter, but looking at EBITDA, 22% growth year-on-year on EBITDA.

Frederic Boulan – Nomura

Okay. Thank you very much.

Operator

Next question is from Jonathan Dann, Barclays. Go ahead please.

Jonathan Dann – Barclays

Hi there. Two questions. Could you – have you estimated the Easter impact? I guess this year Easter was late. Secondly, while I appreciate you didn’t take any provisions for headcount. Can you just estimate how much cash you spent on headcount reduction in the quarter?

Eelco Blok

Of course we have taken the Easter impact into account. It will have a minor impact, but of course we have taken that into account. And on the provisions question, Steven will answer that one.

Steven Van Schilfgaarde

Yes, on the provision question. We have between EUR 20 million and EUR 30 million spent on restructuring on employee headcount reduction.

Jonathan Dann – Barclays

Can I ask a follow-on? Ziggo had talked about raising prices. Do you have plans to put through inflation rate price increases at some point this year?

Eelco Blok

Yes, as we have been doing in the previous years, we will do the same.

Jonathan Dann – Barclays

Great. Thank you very much.

Operator

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

Luis Prota – Morgan Stanley

Yes, thank you. I just have one question on free cash flow, and whether you could give us some kind of guidance on working capital for the full year once all this phase out is over, whether you’re expecting again positive working capital for what we benefiting from handset lease or what are the trends there? And also on cash interests, which I understand that those were affecting free cash flow in the first quarter. Whether you could give us the percentage of total cash payments for the year that were made in the first quarter, could you help us understand how this is going to phase out for the year? Thank you.

Eelco Blok

Okay, Steven will deal with this question. Steven?

Steven Van Schilfgaarde

Yes, if you go to the last question about the interest payments, we already paid EUR 332 million in Q1. If you compared this with the full year 2013, the whole interest at that moment was paid EUR 654 million. So you see that the – yes, the last part of the quarter is already paid in Q1 around 50% of the total year. So that’s the first question.

About the working capital, if you look at the free cash flow, Q1 2014. I already told you that we see the usual intra-year phasing in the continuing operations, but also in discontinuing operations. As always we expect to update in the second half of the year where we traditional generate a vast majority of the free cash flow. And yes, this should result in a free cash of roughly equal of 2013 as we have said before.

And this is mainly driven by improve in working capital compared to 2013. The less interest payments in the remainder of the year, we have over total of 50% is already paid in Q1. And we see also lower CapEx level, but also lower tax paid.

Luis Prota – Morgan Stanley

Okay. Thank you.

Operator

Next question is from Emmanuel Carlier, ING. Go ahead please.

Emmanuel Carlier – ING

Hi good morning. Two questions from my side. One on broadband. So if I am right, Ziggo has improved the speeds to their customers without adapting price increases. So I am just questioning how you believe you will manage to turnaround the trend of net adds – of net losses in broadband?

Eelco Blok

Can you repeat the question because it’s very difficult to hear your question.

Emmanuel Carlier – ING

Okay. Do you hear me better now?

Eelco Blok

Yes.

Emmanuel Carlier – ING

Okay. So the first question is on broadband. So in broadband you had net losses in the first quarter. Ziggo has improved the speeds quite recently. I am just wondering how you will tackle that. How will you believe that your net adds could grow again in broadband? And then secondly, if I look at the numbers of Tele2, they were pretty weak, which could maybe – yes, consider them to divest their stake. And here I am just wondering if you could provide your view on how you believe the Dutch telecom markets will evolve in the coming years? Do you believe that there is room for consolidation? Thank you.

Eelco Blok

Okay. On the broadband speed issue, with our hybrid access strategy, where we continued to upgrade our corporate network via pure BULRIC [ph] actually we have already today the opportunity to increase speeds in areas where we have rolled out BULRIC factoring to 200 megabits. So speed is not really a differentiator especially when you take into account that in fiber regions and we have already a 25% footprint of fiber in the Netherlands. We are offering already 500 megabit symmetrical services.

So as I said, speed is not a really a differentiator. And the small decline in our broadband base is really driven by the additional promotional activities of Ziggo, while we continue to be very disciplined on pricing and promotions in the first quarter, given the fact that the important underlying KPRs [ph] continue to move in the right direction. And well, based on that we are confident that we can continue the positive good trends of previous quarters also in the quarters to come.

On Tele2, well I realize that especially looking at well our large stake in the Telefónica Deutschland E-Plus combination, our financial strengths looks good, but I’d say we’re good at selling assets for really good price, but let me share that I am more cautious when buying assets especially part of Tele2, not even taking into account the regulatory hurdles that we need to overcome. So this is my position to Tele2.

We have strengthen our business over the last couple of years on residential, that has already resulted in turning around negative trend, not only operationally, but also financially, and we are now moving in the same direction with the consumer mobile business and that’s what we are doing. And of course we will look seriously at opportunities, but today, we are focused on continue to strengthen our business and turnaround trend on the financial performance.

Emmanuel Carlier – ING

Okay. And I am covering all of these, and if you speak with some of them, with company that are hidden is really convinced that in the each markets you will actually have just two or maybe maximum three dominant players left offering fixed and mobile services combined. If I look at the market in the Netherlands, you still have quite a lot of players. So do you have any views that you can share on what could happen in terms of consolidation, not in the near term, but maybe in the next five years?

Eelco Blok

Yes. Well, on fixed, we have KPN on the one side with 41% market share on broadband, and a combination of UPC and Ziggo. Ziggo on the other hand with, well, approximately 43% market share, and in between some bundlers with the declining market share, so I think – well, we’ll have a competitive markets, but not as we see in some other countries.

On mobile, well, we continue to see a very competitive dynamic in the Dutch market with four players. And as I said earlier, I believe that there is not only a need for consolidation, but that we will see consolidation going forward. And I am convinced that after the approval of the L2 [ph] E-Plus deal that that will be a trigger for further consolidation in Europe, of course in-country consolidation, but also cross-border consolidation.

Emmanuel Carlier – ING

Okay. Thank you.

Operator

Next question is from Ulrich Rathe, Jefferies. Go ahead please.

Ulrich Rathe – Jefferies

Yes, thanks very much. My first question is on NetCo actually. I was just wondering whether you have changed any of the internal pricing or business arrangements for the internal business between NetCo and consumer mobile and residential, because I do note a bit of margin pressure at NetCo, and I noticed pretty good margins in mobile and residential. I was wondering whether that you’ve shifted profits? The second question is on business. I was wondering whether the issues you are commenting on here in the first quarter mean the market overall and your business is tracking below budget, or whether this is exactly the way you thought it would unfold given that, of course you are consciously also getting up revenues. Are the trends essentially the way you felt that would pan out, or is this actually incremental? Those are the two questions. Thank you.

Eelco Blok

Okay. There are no internal trends for pricing changes. The NetCo performance just reflects the performance in consumer residential, consumer mobile and the business market segments. That’s it. So no internal trends for pricing changes in the financials. Then looking at business market, well, I can be open to you. Yes, disappointing performance of our business market segment. Disappointing not only year-on-year, but also compared to our plan mainly driven by the continued tough macroeconomic performance with, yes, GDP somewhat recovering but unemployment rates still growing up and the market remains to be very, very competitive resulting in a shrinking markets following the rationalization and optimization by our customers, and continued price pressure. And that’s also the reason why we have taken additional measures focusing on cost.

And as part of the cost, FTEs, no doubt, from an FTE perspective, the business segment is the largest segment in the Netherlands with almost 8,000 FTEs within this segment.

Ulrich Rathe – Jefferies

Thank you. Can I maybe just ask for one clarification on another matter? You repeated an indication from the Capital Markets presentation about flattish free cash flow for this year. I’m just wondering, why don’t you make this part of the guidance statements in the extra reported as because your conviction level on that is a bit lower, or you consider it less important or why is that? Thank you.

Eelco Blok

No. The free cash flow is really, really important but given the flexibility, I want to have looking at competitive market. And the events that will occur this year, we have taken decision to just as part of the outlook mentioned the growing free cash flow in 2015. And we believe given the changes in the company that’s more important metric than the short term free cash flow in 2014.

Ulrich Rathe – Jefferies

Great. Thank you very much.

Operator

The next question is from Sander van Oort, Kempen & Co. Go ahead please.

Sander van Oort – Kempen & Co

Yes, good morning. Thank you for taking my questions. First of all, a quick question on the business division. In the presentation, you mentioned it will be a bit of a short-term pressure on the top line. And I was wondering maybe you can quantify this. Will it be up in the next few quarters or is it something which will take maybe more than a year? And maybe you can also elaborate a bit on the phasing of this initiative. Have you seen most of the impact already in the first quarter or is it something that is pretty stable over the next few quarters? The second question, maybe you can elaborate on the part of SNOW in Belgium in terms of net additions? And then thirdly on the consumer residential. The EBITDA is up mostly due to the lower marketing cost, and maybe you can also say what’s happening for the content costs which used to increase in the previous few quarters and I was wondering whether these content costs are already stabilizing or still increasing? And finally, question on your marketing approach going forward. You’ve seen now growth in consumer mobile and in business that you’re approaching consumers proactively and to of course reduce churn in the future. Is this an initiative also like you have consumer residential, given now that of course also on the internal KPIs the business is slowing down a bit, and you want to secure medium term growth. So is this also an marketing initiative you’re planning to undertake in the coming quarters for consumer residential. These are my questions.

Eelco Blok

Thanks. Let’s start with the last question about churn. Churn reduction is a major effort in KPN in Netherlands, so not only on mobile and in the mid business market but also on residential. So we expect a close impact from the churn improvement program that is part of the simplification program. So also the residential is part of the marketing approach.

Content costs are related to the subscriber base of IPTV. And our TV base continues to grow, and therefore content costs will continue to grow. EBITDA for residential as you have seen, nevertheless went substantially up, and we believe that the current level is a level that is sustainable looking at the EBITDA at consumer residential.

SNOW is a very, very small part of the business in Belgium. It’s an add-on to mobile. It’s not a stand-alone product important for the performance of BASE Company in Belgium. It’s just a defensive move we have taken to be able to offer triple-play to customers that really want challenging triple-play products.

Then the question on business. To mitigate the question on revenues and EBITDA, we have four building blocks; the proactive migration of customers to flat fees at lower ARPUs; to increase committed ARPUs; to increase committed revenues; and de-risk the ARPU profile. And of course this will have a negative impact on top line, but we will continue to execute on these building block in the next quarters.

Mobile, committed revenue is now at 60%, 6% point higher than in the fourth quarter of last year. Second thing we are doing on this one is migrating proactively customers from 3G to 4G. At the end of first quarter, we had 412,000 customers on 4G. That’s approximately 27% of the customer base, so but still 73% to go. And also on this one given the clear advances we have compared competition we will continue to push migration from 3G to 4G, also having a negative impact on top line, and also on SOC impacting the P&L but we have taken initiatives [ph] to continue to execute on these drivers, because for the long-term we believe that this is the right strategy.

The second building block is the growth of multi-play by offering as we are doing in the consumer market, bundled services. And one example is to KPN One [ph] product that’s the most important driver. Also this one goes with SOC, but we believe that given all the investments we have been doing in the previous years, that is the only strategy that will make it possible to turnaround the trend in business markets.

Thirdly and that’s not a huge – that will not have a huge impact on top line and EBITDA but is really, really important for the somewhat longer term. That’s the push for new innovative services and machine-to-machine solutions, cloud services, data center services with interesting growth numbers, but not from a large base, but we believe that we need to do this to be able to turnaround the trend in business market.

And last but not least, and for the short-term the most important one that’s reducing the fixed cost, cost to create the lean operating model for the longer term and to offset the short-term margin pressure.

Sander van Oort – Kempen & Co

Thank you.

Eelco Blok

Okay. With this last question I would like to close this Q&A session. Please let the Investor Relations team know if you have any further questions. Thank you.

Operator

This will conclude today’s conference call. Thank you for joining us. Ladies and gentlemen, you may disconnect your lines.

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