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Executives

Vivienne van Asten – de Leeuw - Head of IR

A.J. Scheepbouwer - Chairman & CEO

C.M.S. Smits-Nusteling - CFO

Analysts

Steve Malcolm - Evolution

John Davies - ING

Jonathan Dann - Barclays Capital

Luis Prota - Morgan Stanley

Paul Sidney - Credit Suisse

Hugh Mccaffrey - Goldman Sachs

Matthew Bloxham - Deutsche Bank

Nick Lyall - UBS

Brian Rusling - Arête Research

Frederic van Daele - Kempen

Karen Egan - RBS

Frédéric Doussard - Oddo Securities

Peter Nielsen - Skælskør

Luigi Minerva - HSBC

Royal KPN NV (KPN) Q3 2010 Earnings Call October 26, 2010 4:00 PM ET

Operator

Good morning, and welcome to the KPN Conference Call. At this moment all participants are in listen-only mode and later we will conduct a question-and-answer session. We’d like to hand over the conference to Mrs. Vivienne van Asten, Head of Investor Relations. Go ahead please ma’am.

Vivienne van Asten – de Leeuw

Good morning, everyone. Seated beside me are Ad Scheepbouwer, our CEO and Carla Smits-Nusteling, CFO who will take you through the third quarter results presentation we published this morning. The presentation as usual will be followed by Q&A. Let me briefly point out that the Safe-Harbor applies to this presentation and any forward-looking statements made in this presentation do not differ from those already made in the press release.

Now I’d like to hand over to Ad Scheepbouwer.

A.J. Scheepbouwer

Good morning. I’ll start with the highlights, and then Carla will take you through the financials, and after that I’ll be back with the operating review for the Netherlands and International.

If I start with the highlights, during the third quarter we’ve seen year-on-year revenue growth for the first time since the first quarter of 2009. And that’s of course, not a precedent for coming quarters, because we will get some regulatory effects and some of those are not known yet, but nevertheless, we are pleased with this first growth in this quarter.

Our focus on cost, customer value and market share in the Dutch Telco has led to a continued increase in profitability. Germany has done very well with higher service revenue growth and very strong margin. And we are rolling out our high-speed mobile data network at an increased speed in Germany, and we will be launching commercial services in the first cities next week. We are also confirming our outlook for this year and next year.

Then some of the financials. Revenues up 1.4%, EBITDA nearly 6%, CapEx 431 million and up on last year, free cash flow 681, 1.6 million year-to-date. That’s 100 million up on the first nine months last year. And earnings per share were €0.27.

Our financial profile, Carla will get to you later on that. And we’ve continued, of course, our industry leading shareholder returns and nearly 70% of our repurchase program is completed. So, that means we’ve got another 30% to go in the next couple of months. We paid our interim dividend per share of €0.27 in the third quarter, a total amount of 419 million.

Then the outlook, by means of share of revenue and EBITDA growth in the third quarter, we are on track and remain on track to deliver our objectives for this year. We expect higher revenues for the second half of 2010, compared to the last six months in 2009, leading to in line revenues for this year.

EBITDA is up 230 million in the first nine months providing us with confidence that we will reach the target of 5.5 for the full year. And we continue to be mindful of balancing profitability with market shares. And that’s very important for us that we keep our eye on that. Market shares are very important to us.

No glide pass for MTRs for the Netherlands, and Belgium, have been announced. Germany is still unknown and that’s probably only known by the end of November. Despite the impact of regulation in the Netherlands and Belgium, we remain confident that we can deliver on the objectives that we set for 2010 and 2011, and the outlook is therefore, confirmed.

Well, I probably shared that we are committed to industry leading shareholder returns and confirm the €0.80 dividend per share objective for 2010. 2011, we expect growing EBITDA, free cash flow and dividend. And over the full-year 2011 our target is a dividend per share of €0.85.

I will now hand over to Carla for a financial review.

C.M.S. Smits-Nusteling

Thank you, Ad. Good morning, everyone. Let’s start with the Group results. As Ad just said in the third quarter growth has returned into our topline. Revenues grew by 1.4%. And if we exclude the effect from disposed businesses, revenue increase was even a bit higher at 2%.

If we look underlying, we see revenue increases at Mobile International and iBasis, and these are partly offset by lower revenues at Dutch Telco and Getronics. EBITDA continued to grow in the third quarter by about 80 million and with all segments contributing.

Mobile International performed strongly, with especially Germany showing a very high margin. For the full year, we have guided for 5.5 billion EBITDA, a step-up of about 300 million. And with 75% of the year’s targeted step-up achieved so far, we are on track.

This quarter we see higher financial expenses in the third quarter, close to 130 million, and this results from the bond tender in September and higher average borrowings. And therefore, we experienced a decline in the profit before tax, and however, profit after-tax is up because of a lower effective tax rate.

Our next overview is the Group cash flow for the third quarter, and I think most notable here is in the comparison that the free cash flow was close to 150 lower, compared to last year’s quarter, and last year we had a working capital benefit of close to 150, following an adjustment in VAT payment from monthly to quarterly.

Looking at cash returned to shareholders, the bottom of our slide, we see that the payout so far this year is 41 million lower in this quarter. And although the interim dividend payments were higher due an increase in dividend per share, fewer shares were repurchased in this quarter, compared to last year due to timing differences in the buyback program that we will make up for that in the fourth quarter.

Then we continue with the year-to-date Group cash flow overview, and year-to-date we have an increase of 106 million, and with that we are on track to meet our full year guidance of at least 2.4. If you compare the both years, ‘10 and ‘09, actually what you see is that the forecasted 300 million full-year EBITDA step-up is mainly offset by approximately 120 million higher interest payments and higher tax payment, which we expect in the fourth quarter, and amongst others due to the last year’s tax refund we got.

We have returned 1.8 billion to our shareholder so far this year and this is expected to increase to more than 2.1 billion for the full year, as a result of our ongoing buyback program.

And let me conclude this slide with a short note on the status of our pension funds. The coverage ratio in the third quarter slightly improved to 103% as a result of increasing interest rates. However, we expect a negative impact of 3% points due to the implementation of updated mortality tables in the fourth quarter, all other variables being equal.

The last slide of this part touches upon the Group financial profile. In the third quarter we optimized our maturity profile through a tender and a bond issue and we repurchased 1.3 billion of near-term maturing bonds and issued a €1 billion bond with a very low coupon of 3.75%. And these two transactions resulted in 97 million additional finance expenses in the third quarter, but will of course, lead to lower future interest costs.

We have extended the average maturity of our bond portfolio to 7.2 years. Our net debt-to-EBITDA remained stable throughout the quarter at 2.3 and is expected to be lower in the fourth quarter since then there is an absence of dividend payments. And just in closing, we have received an update from Moody’s reconfirming our Baa2 rating, and of course, we are pleased with that.

That concludes our financial review and now Ad will continue with our operational review.

A.J. Scheepbouwer

Thank you, Carla. What you see here are the six pillars that are the basis of our strategy. In the Netherlands with the Dutch Telco, we maximize value and that reflects in EBITDA growth. We carefully managed our market shares. Quality to our customers is very important. We’ve improved productivity for the operations and we are investing in the future.

And I will elaborate on examples of our strategy while discussing the operating performance of the consumer division.

If we look at Dutch Telco, revenues were down 1.3%, due to pressure on traditional businesses. 1.5% of that was negative impact from regulation and a positive impact from incidentals, which I’ll explain later on. But, all in all, the real downturn is about 1.3% because the 1.5% regulation, and the incidentals sort of cancel each other out.

EBITDA growth is 3.5%, and that’s based on continued maximization of market value and customer value and our best-in-class benchmarking to support cost reductions and some incidental benefits. All in all, a pretty solid margin of 53%, which is up more than 2% year-on-year.

Then if we go to the financial review, we see that all segments have contributed to the healthy profitability at the Dutch Telco. We see in Consumer that revenues are down 2.7%. That’s following an improved performance of the wireless services division, despite impact of regulation. Furthermore, EBITDA margin of 28% has been achieved combined with increased commercial efforts.

In Business, we see ongoing revenue pressure as a result of economic circumstances, competition and regulation, while the services there had a stable performance, and the wireline division experienced a continued negative trend.

All-in-all, a very solid EBITDA margin of 32.8%. If we look at Wholesale & Operations, we see a stable quarterly performance influenced by continued focus on cost reduction, but also a continued decline in traditional businesses and regulation.

In the third quarter, we’ve seen a number of incidentals in the wholesale operations. First of all, the sale of a number of mobile towers. These are mobile towers that we do not consider as strategic, and this sale is part of a larger agreement in which the sale of a second tranche of mobile towers will be completed sometime in the first quarter next year.

This quarter we had a gain of 37 million under book gain, and the first quarter of the second tranche will be 32 million. In the third quarter of 2009, we also sold some towers for around 17 million, but that one-off effect was largely offset by a 16 million wholesale price cut incidental.

So, all-in-all, a lot of incidentals, but on the whole the EBITDA margin at Wholesale & Operations has been 61%, if you correct it for the tower sale in the third quarter.

Then we go to Consumer Wireless. There we’ve continued our successful strategy of maximizing market value and customer value as well. We see that we strengthened our market position while remaining focused on market value. We’ve increased our commercial efforts and that we’ve seen some favorable results. We’ve picked up 67,000 high value postpaid net adds and combined with a stable ARPU, and the SAC and SRC remaining under control.

So, another positive development in the third quarter, which is the increased demand for mobile data. As part of this topic I want to put emphasis on the fact that we’re going to launch the iPhone 4 and that we’ve reached a smartphone penetration in our existing postpaid customer base of over 40%.

During the third quarter, we’ve continued our efforts to optimize KPN’s profitability by maximizing customer value. A clear example is the continued investments in our national distribution footprint of 213 shops for our three main brands.

Then continuing with Consumer Wireless, we see an improving service revenue trend. In the third quarter it was down 3.7%, impacted by MTA and roaming by approximately 3.3. The trend of continued data growth is of course, supportive to the improving services revenue’s performance.

The customer base, as I said, increased to 67,000 postpaids and we’ve seen lower value prepaid customer numbers go down, amongst others due to one-off 130,000 clean-up. ARPU was stable and we saw an increase in non-voice ARPU to 36%.

Now regarding Consumer Wireline, there are some positive developments there. On the left side of the slide you see that in TV we’ve picked up 52,000 IPTV customers, with an average of 3,000 to 5,000 a week, and approximately 50% of those new subs are new broadband customers.

On Fiber, we see the first signals of improved sales following the adjusted approach, activations are growing much faster now.

In our joint venture, homes passed increased to 616,000, which is a total of 172,000 homes activated, of which 32,000 are KPN homes.

And on the right side of the slide you see a graph where the broadband customer base is stabilizing, almost always due to the IPTV growth, and the VDSL upgrade, net line loss we made at 35,000.

As a follow-up to the previous slide, I’d like to point out a few supporting numbers on this slide. You see the PSTN/ ISDN line loss development is pretty stable, if you look back over the last seven quarters. And that’s mainly due to successful retention offers, but also to outflow of traditional customers to cable.

As stated earlier, KPN has managed to stabilize its broadband customer base supported by the VDSL upgrades and in an environment where we expect the overall broadband market has probably grown lesser than 36,000.

If we now move to Business Wireless, service revenues are down 2.6%. Regulation impact negatively was about three, so underlying, pretty stable. We’ve experienced continued growth in mobile data, within a competitive environment of course, and furthermore, we will launch the iPhone 4 for our business customers in the coming months.

The customer base in business has declined mainly to a migration of around 40,000 customers to Mobile Wholesale. The number of data customers continued to grow, leading to 52% of our customers in business using data services. Then ARPU declined relating to regulatory effects and a higher proportion of data customers.

If we look at Business Wireline, we see a decline of 7.2% year-on-year. There is an 11 million negative incidental in there, relating to deferred connection fees and revenue recognition corrections. The underlying revenue trend is in line with previous quarters. This revenue trend stems from competition, the economy and a continued decline in traditional businesses.

Voice and Internet connections continue to decline and traffic volumes saw a decrease as well. These developments are caused by ongoing customer rationalization, the migration to new services, and competition. On the other hand, we see business DSL continuing on its growth path.

In managed data services, we continue to see migration from leased lines to VPN. However, due to customers rationalizing the number of locations and technically inactive lines, we’ve not seen growth in VPN in Q3.

Then Getronics, revenues and other income from existing operations in Q3 were down 1.9% year-on-year, with the decline in the Netherlands of 4.4%, including a positive incidental of 3 million.

Revenues at international were up 9.2%, 7% of that was a currency effect. Market conditions remain challenging, particularly in the Netherlands with price pressure and clients postponing investments. All-in-all, Getronics expects a stable market share.

EBITDA increased from 31 to 34, but that includes 3 million incidental from the sale of a small part of the business. EBITDA margin increased year-on-year to 7.1%. The EBITDA margin year-to-date is 7.2, and that’s in line with expectations, and will keep us on track to get to the 8% for the whole year.

Now let’s move to Mobile International. If we look at the combined Mobile International, there the revenues are up 5.1%. That’s a pretty good performance, mainly the results of an improving growth trend in Germany and a strong growth at the Rest of the World, with Belgium this quarter contributing less, because of a severe negative impact from MTA.

EBITDA is up 11%, reaching a record margin of 41.6% of our total Mobile International business, and all operating companies contributed to the profitability increase, and has an 8 million incidental in there, and last year in the same quarter, there was an 11 million incidental.

CapEx, you see has increased to reach about 60 million year-on-year. And that’s a result of the phasing in the year relating to the accelerated rollout of our high-speed data network in Belgium and Germany. CapEx is expected to be in the region of 600 million, and that’s relatively in line with last year.

If we now look at Mobile International by segment, in Belgium, we see that the revenues were impacted by the divestment of business-to-business activities in the first quarter, and we have now impact of two months of severe MTA regulation.

Wireless service revenues nevertheless grew 1.8% in Q3, which of course, was considerably lower, compared to previous quarters. However, we think we’ve outperformed competition in this quarter. And also, the margin was pretty good at 35.4%.

In Germany, we see service revenue going up 4% year-on-year, including a positive impact from the Multiconnect business. EBITDA in Germany very strong, due to improved performance of captive sales channels and focus on execution. EBITDA, as I said, included an 8 million one-off versus 11 million from last year. Growth in the Rest of World driven by our NPLs in Spain and France, as well as Ortel. Benefits from improved scale and conditions are reinvested for further stimulating growth.

Now, Belgium specifically, now we see in BASE that the service revenues underlying grew 8.4%, but was reduced to 1.8, because of the mentioned MTA. Growth was driven by BASE postpaid, mainly flat fees and SME/SoHo, as well as wholesale partners.

Net adds in the quarter were 38,000, of which 14,000 postpaid, bringing the total customer base to 3.7 million. We continued our regional focus on distribution and further expanded our points of sale in the Walloon region.

And furthermore, we have already launched our commercial data services in several urban areas, following the accelerated rollout of the network and based on customer demand.

If we then move to Germany, in the third quarter we picked up 309,000 net adds, with a further improvement in postpaid to 77,000. The total customer base now stands at 19.9 million. We’re pleased with the good uptake we see in postpaid gross adds at Mein BASE, specifically through our captive channels. Focus is partly shifting to upselling additional options within the Mein BASE proposition.

Service revenues up 4%, improving trends, compared to Q2, and we expect the underlying positive growth trend to continue in the next quarters, amongst others, supported by the expected uptake in mobile data services.

Now, we if we have a look at the launch of high speed data services, we’ve of course, mentioned before that we were getting ready to do this, and people have worked very hard to bring the opportunity forward.

The basis of our strategy is a strategic partnership with ZTE, which we closed in the last quarter last year. We’ve re-launched the BASE brand in the first quarter. We’ve acquired a valuable spectrum in the auction and we continue to further implement our regionalization strategy.

Furthermore, the accelerated rollout of our high speed data network is ahead of schedule and we will therefore, soon launch new commercial data services in the first nine urban areas in Germany. The accelerated rollout of the network continues across our footprint with more areas to launch in the next quarters.

The commercial launch follows customer demand and is therefore, focused on those regions where we have a strong market position. Similar to the efforts in Germany, we started offering high speed data service in Belgium in six areas, with the next 20 urban areas and key hotspots to follow before year-end in Belgium.

If we look at the commercial side of the launch of mobile data under the BASE brand, E-Plus, we’ll launch new, simple and affordable data offerings. The offers combine a range of smartphones plus a flat fee data package for a single monthly fee to, which a choice of voice plans can be added.

The range of smartphones will be extended by private label devices, of which the first one will be available from December. KPN offerings are intended to lower entry barriers to mobile data, thereby making data service accessible and attractive to the great mass of the German market, similar to the voice offerings that were launched in 2005.

Due to our challenger business model, we have the lowest cost to serve in the market, enabling price leadership. Combined with multi-brands and commercial distribution partners we are well placed to cater mass-market data adoption.

Now, a few quick words about the Rest of the World in mobile. All operations contributed to the growth. In the third quarter profitability improved and we continue our focus on further stimulating growth in the markets where we operate.

In Spain, we see continued subscriber growth with a healthy ARPU, mainly from Simyo, and we benefit from improved network conditions. We’ve also launched a new brand in Spain with media partner, Cuarenta, to target the youth segment.

In France, we also continue to see revenue growth from Simyo, and particularly, we also see a very successful launch of Ortel in France, and the current focus is on further expanding distribution channels.

Ortel’s focus on quality and targeted promotion has resulted in profitable growth in the existing markets, mainly Germany and Belgium. The Ortel brand with its distinctive focus on the cultural segment is on track for footprint expansion into Spain next month.

Last, but not least, iBasis. In the third quarter, iBasis continued to focus balancing revenue growth and profitability. Revenues were up 38% to 240 million, of which 10% was a positive currency effect. EBITDA margin was 3.2%, plus EBITDA year-to-date amounting to 25 million versus 15 million last year.

We can clearly see the impact of the current continued momentum of the iBasis turnaround following the full takeover by KPN in the fourth quarter of 2009, resulting in structurally higher revenues since Q1, 2010.

iBasis continued to outperform the market in the minute growth, especially in the higher-value mobile termination part, and this quarter iBasis delivered another strong quarter in terms of number of minutes while sustaining average revenue per minute expansion. To conclude, iBasis reinforced its position within the top five in the international voice traffic market.

Now, to conclude, the revenue growth in the third quarter, Dutch Telco operation showing another increase in profitability. Germany having both higher service revenue growth and a very strong margin. We are launching high speed data in Germany. We’re confident of our objectives in 2010 and 2011, and with that we are on track to move forward in 2011, and of course, we are very pleased that the Supervisory board has announced its intention to appoint (inaudible) as Chairman of the Board of Management.

Now I think we are ready for Q&A.

Vivienne van Asten – de Leeuw

It seems that there is a short technical problem in getting the Q&A over the open line to everyone. We will come out in just a few seconds, please. Again, apologies for the delay, a few more seconds, please.

Question-and-Answer Session

Operator

So the first question is coming up from Mr. Steve Malcolm, Evolution. Go ahead, sir.

Steve Malcolm - Evolution

I will go for two, please. The first is just on Germany where really recovering service revenue trends were good. It looks like it was driven more by voice than data given your disclosure, and in particular, voice yields, which went up about 6, 7% on my calculations in the third quarter. Can you just give us a little more color on what’s driving that increase in price sequentially? This is not something we’ve seen for quite a long time. And secondly, can you just update us on this quest to get external financing for Reggefiber, and what you’ve got on that? Thank you.

A.J. Scheepbouwer

Well, I think we are launching, particular mobile data in the next few months, so I would expect that at this stage our voice is still bigger than data, so I’m not particularly surprised about that. But I don’t know whether you’re talking about any specific number or so, because I don’t recognize that.

Steve Malcolm - Evolution

If you back out the percentage of data revenues and look at the implied voice growth, it looks like the minutes growth actually slowed, but the price per minute went up 6%, 7% sequentially, which is obviously a very good trend, but it just -

A.J. Scheepbouwer

We’ll get into the detail and maybe at the end of this call we can come back on that. The second one on the financing of Reggefiber?

C.M.S. Smits-Nusteling

Yeah, we are absolutely pleased that the European Investment Bank gave its commitment. It’s subject to final documentation and, well, we expect Reggefiber to release a press release in coming days on this good news.

Operator

Next question is from Mr. John Davies, ING. Go ahead please.

John Davies - ING

I’m wondering if you could update us on your views on the economies, particularly in Netherlands and Germany, and the impact on spend with you. And secondly, on the iPhone in Germany going to a wider audience, I suspect you will think that’s not a particularly important device for your particular market segment? But if you can give a bit of color on that?

A.J. Scheepbouwer

And I would say, if we look at the economy in The Netherlands, John, it’s a pretty dreary picture, it’s very boring, it’s sort of all hovering around to the 0% line. And to be quite honest, we expect that we will be tottering along that line for quite a while. And this, of course, in our business market and Getronics, that’s not very good news. But it is what it is. And for us in The Netherlands, of course, the economy is important, because we are a, let’s say, relatively large company in this country.

That’s different in Germany. The German economy is doing very well. I mean, I think we’re doing very well too, but I always say that our success in markets where we are not market leader is more depending on our own ability to sell than whether the economy grows. So, in Germany, we see that we now have a team which has a very focused effort on growing the business and growing the business in the right places.

So, you see postpaid net adds going up from negative in Q4, 2009 to negative in Q1 to positive in Q2, to more positive now, and you see that the revenue trend follows that. And then on top of that, we will have the mobile data launch. So, we’re looking at a future that seems to be a lot brighter than it was six or eight months ago.

iPhone, I think, many iPhones on our network in Germany, but it is, let’s say, we are looking in Germany to distinguish ourselves from the crowd, so we will offer many different smartphones, and amongst them, specific phones that are, let’s say, tailor-made for the audience that we have.

Operator

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

Jonathan Dann - Barclays Capital

And the first, in the text, you allude to some postponed decisions around outsourcing. If you could just walk us through, I guess, the magnitude of sort of, I guess, how many full-time equivalents?

And then secondly, could you just add some color to the consumer side of Reggefiber? But I can see that you’re effectively adding about 12,000 subscribers. But can you walk us through what’s happening on the wholesale side? What I guess you’re thoughts on the take-up?

C.M.S. Smits-Nusteling

Let me start with the outsourcing question. What we’re doing at the moment in our strategic discussions in the board of management is look at the overall picture for the Group. What sort of activities we want to do in our own house, and what sort of activities we can share of the three countries, and what we can outsource, either in our own markets or further offshore, and we will come back to magnitudes, if we come with the Q4 results.

A.J. Scheepbouwer

She is leaving fiber to me. So, I’ll try and answer your question. Yeah, the Reggefiber is a joint venture, and of course, we’re together very active to see how we can roll out as fast as we can, and on the other hand also, keep the investments, let’s say, at a sound level so that we do not roll out in areas where the uptake is not high enough. So, at this stage, what we do is, before we go into areas, we go into demand bundling. So, we ask people to commit themselves to a subscription, if and when we roll out fiber and we incentivize them, let’s say, to do that and meanwhile, wait for it and we give them attractive offer in the meantime.

Now, what you see is that at this stage, we’ve rolled out, I think, by heart 616,000 homes passed, and we have homes activated of 172,000, and 32,000 of those are directly attributable to KPN. But of course, for us, let’s say, the 172,000 is more meaningful, because that is the total fiber that is activated, and 616 is the potential.

Now looking at the future, we are going to pick up areas where we find that the demand from our customers is high enough to cover the cost of the rollout. And in total, I guess, what we will see is a patchwork of networks where we have copper or VDSL or both, and in other areas, fiber. And we try and serve the customer, the demand of the customers in those specific areas. And we think that as we said before, that we end up with somewhere between 30 and 60% of Dutch households in fiber.

And the good news is that, after all the initial troubles that we had that we now seem to have control of our operational problems, on the IT side and on the sales side, and that the weekly numbers seem to be going up week-by-week. That’s sort of a general update, and there’s not a lot more I can tell you.

Operator

Next question is from Mr. Luis Prota, Morgan Stanley.

Luis Prota - Morgan Stanley

Yes. Hello. I have two questions, please. The first is whether you could give us your view on these fiber plans from pension funds in Netherlands. What could be the implications for KPN? Whether you see this as a positive or a negative, or what you think about this?

And secondly, in Belgium, and following the termination rate cut, the 50% cut that you had in termination rates, are you planning any change to your commercial approach, maybe lower in retail tariff, at least for off-net calls? Not that gross margin available has widened with the termination rate cut. And maybe try to take share in the market or not, any thoughts on that could be very useful. Thank you.

A.J. Scheepbouwer

Yeah, first of all, the Belgium MTA rate cuts, of course, we’re carefully looking at that situation, but commercially, it wouldn’t be too smart to start to discuss now what if we have plans to what we’re going to do about them. But it’s a very clear path in Belgium that leads to, from memory, 1.8 cent MTA in the end. So, we clearly know what’s hitting us.

And we have an opportunity to look at possibilities to extend our market share, and certainly, in the business area there is, let’s say, more of an opportunity now or in the future than we had in the past, because we were just squeezed out of the business market by Datacom.

On the fiber plans for the pension plans in the Netherlands, well on the whole, I think that’s good news. The more people that invest in fiber, the better. So, we now have KPN investing with Reggefiber. We have some municipalities. We have some provinces and sometimes we participate if we think it’s promising, and sometimes we don’t.

But in itself there are more people interested in infrastructure, in this case fiber, makes it, let’s say, the offering and also, the choices that we have, I think, more interesting, because we can decide that in some areas it’s better that somebody else rolls out, and we are a service provider. And in some other areas that we want to be an infrastructure and a service provider.

Operator

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

Paul Sidney - Credit Suisse

Just two questions, please. Firstly, in terms of domestic wireline, could you give us your expectations on how you think line loss trends will develop over the next two quarters, and I guess more importantly, into the medium term, sort of 2011-’12?

And just secondly, very strong margin at E-Plus in Q3, combined with some strong subscriber growth, a larger mix shift towards postpaid. Should we now be thinking about E-Plus margin as well above 40% going forward? Thank you.

A.J. Scheepbouwer

Let me start with the domestic wireline, there you see that the line loss is pretty steady over the last six or seven quarters, going a little bit up or down, 30 or to 40. In the end what has to kill the line loss is the bigger the larger number of sales of IPTV, and particularly of course, the fiber uptake.

And at some point in the next couple of years, line loss has to get to a point to net zero. I don’t think we’ve pointed to a specific time at this stage. But with the IPTV uptake, and the bigger fiber uptake, the line loss should start to come down in the next couple of years.

And the strong margin of E-Plus in Germany at 45%, I think our guidance has been 35% to 40%, and we’ve had several very good quarters of over 40. But, you know, what I particularly don’t like is that we start to get all sorts of goals for all sorts of different parts of the company. But if I had to make a guess, our margin will probably be closer to 40 than to 35% in the next couple of quarters.

Operator

Next question from Mr. Hugh Mccaffrey, Goldman Sachs. Go ahead, please.

Hugh Mccaffrey - Goldman Sachs

Just a couple of questions, please. Firstly, just digging a little bit deeper into the broadband and TV market in the Netherlands, and can you give us a bit more insight on how you think about end-value market share versus line loss over time, do you see the domestic consumer business increasing in value as you increase IPTV penetration? And secondly, and again, just on the consumer business in the Netherlands, what are your thoughts on converged fixed and mobile offers in the consumer market? Thank you.

A.J. Scheepbouwer

What was the last question?

C.M.S. Smits-Nusteling

Fixed and mobile convergence in the consumer market?

A.J. Scheepbouwer

Fixed and mobile. Okay, well, if we look at the broadband, obviously our aim is to grow our broadband market share, because in the long run, of course, we think that is very important if you look (inaudible) cable that our broader market share is as high as we can. And the IPTV launch well is part of, let’s say, that strategy, and we also see that 50% of the IPTV customers take a broadband connection with us. So, that should help mitigate our line loss in the future.

And the other thing is, of course, as our fiber uptake, which will be significantly higher in the next couple of years that should certainly help our line loss. So, these two factors, together with possible other initiatives, to grow faster organically. And if there were possibility of non-organic, we would look at that as well. It should give us a better position in the next few years in the broadband market, and with a following result in the end, on the line loss.

On your question on fixed/mobile convergence, I don’t know whether, let’s say, there is of course, trend at the moment that people like to buy multi-play propositions. So, we have a multi-play proposition in fiber. We have a multi-play proposition on the copper or VDSL, and people seem to be interested in that. But on the other hand, we still have more customers who just have a single service, be it Internet or telephony.

Of course, nobody at the moment is bundling yet with mobile included as well, and that’s always a possibility, which you can think of. That certainly is something that distinguishes us from the cable guys. But on the whole, we think that for the next couple of years, bundles of different services will play a role. But is there no future for a single mobile operator? Well, I don’t believe that, because there would be lots of people that just go for one service.

Operator

Next question is from Mr. Matthew Bloxham, Deutsche Bank. Go ahead please, sir.

Matthew Bloxham - Deutsche Bank

Firstly, just on the German termination rates coming up. Have you heard anything recently to suggest that it might be a bit worse than expected or are you still comfortable that the German regulation could be relatively benign, compared to what we’re seeing elsewhere?

Then the second question was on pension. You mentioned the change in mortality rate. I think you also mentioned in the press release about an 11 million cash impact in Q4. Just wondering, does that 11 million include the mortality adjustment, or would that impact future cash-out in 2011?

C.M.S. Smits-Nusteling

Let me start with the NPRs. I think it’s not helpful if we start to guess what it could be. What could be helpful for you is an estimation of the impact per €0.01 decline. And from what we see now, €0.01 decline on average could impact revenues with 60 million in EBITDA with approximately the half, 30 million, and then we will see end of November what the final numbers will be there.

On the pension fund, you asked for an update, if mortality table updates immediately impact the amount we pay to the pension fund? That’s not a direct effect in itself. The 11 million, which we disclosed refer to the end of last quarter, where the coverage ratio was below 105, and for instance, this quarter, now we are on 103, the negative impact will be 3%. So, from where we stand today, we are at a coverage ratio of 100. But that could increase towards the end of this quarter, and then there is no impact at all. So, the way it works is that, at every end of the quarter, we make up the balance. If it’s below 105, we pay a contribution to the pension fund, and this contribution, by the way, is limited to around 360 million over a five-year time period. And if the coverage ratio is above 105, payments cease.

Operator

Next question is from Mr. Nick Lyall, UBS. Go ahead please, sir.

Nick Lyall - UBS

Could I ask on the Reggefiber rollout, do you see any signs of any pressure or increasing consumer interest on higher speed fiber to the home connections? Obviously, I can see your subs numbers for Q3, but do you have any sense that maybe UPC is trying to push higher-end cable, faster broadband products, that may put more pressure maybe on your rollout?

And then secondly, I think you cut operating cost by about 7% for the Dutch Telco business year-on-year. Could you just tell us if you can keep that sort of rate of cut going when you have increased SECs, from something like the iPhone, or should we expect a substantial slowing in savings over the next few quarters? Thanks.

A.J. Scheepbouwer

Well, let me start with the Reggefiber and cable, and then Carla is making sums in the meantime. What we can do on the cost side? Yeah, of course, let’s say, the cable companies in the Netherlands are focusing on putting forward that they have a higher speed, because they’re not, let’s say, particularly competing on price. So, that’s good news and bad news. And we are, let’s say, focusing on the fact that we are of course, increasing our speeds as well, but we’re also focusing that we have different propositions for people with different wallet of spending. And we are focusing on quality and on, let’s say, where we want that on a combination of services that we offer.

So all-in-all, you will see that this battle is fully in progress, where we think that fiber in the coming years will play an important role, because, let’s say, fiber is the, I think, recognized superior network for superior services. And meanwhile, we are fighting on a daily basis with, say, UPC and Ziggo on different issues. But, as you see, we pick up 60,000 TV customers in a quarter or 51,000, whatever it was, IPTV, so it’s a lively battle.

C.M.S. Smits-Nusteling

On the operating cost in the Dutch Telco, the way we look at it is the following. We expect to not only expect business uncertainty and regulatory cuts in years ‘11 and ‘12. And given that situation we go for a lower cost base, and what we do is that we continuously search for opportunities to improve our services, to reduce cost in that area. We touched upon outsourcing already earlier in the call. We see there a benefit going forward, as well. We look at opportunities for the group in doing operations together. So, not only for the Netherlands, but also for Germany and Belgium in one organization. And that’s all targeted to reduce the cost base in the coming years further.

Of course, we are also hoping that one day regulatory cuts were true. But at the moment that’s not in the foreseeable future. But once it’s at €0.01, there is not so much more to lower it and I think that’s the foreseeable future where we see still enough cost opportunities.

Operator

The next question is coming from Mr. Brian Rusling, Arête Research. Go ahead please, sir.

Brian Rusling - Arête Research

First of all, on fiber, and then on E-Plus. Just on fiber, Ad, you talked about the first signs of improved growth. Certainly we can’t see that in the numbers we’re looking at. You said that in the last couple of weeks things have picked up. Can you give us the magnitude, given you seem to be connecting a 1,000 customers a week?

And then on the other side of fiber, is given you changed your definition of homes activated by other ISPs, we can’t really see what the growth rate is now. Can you tell us what maybe Q2 was for the other ISPs given the change you’ve announced today, so that we can see what the take-up is across the Reggefiber footprint?

And then moving into E-Plus, you’ve obviously got some own branded smartphone handsets coming. Can you give us some idea what the price points of those are going to be? And are these the ZTE handsets that you guys have talked about in the past? And then also in data in Germany, how are you thinking about expanding the data product offering to some of your wholesale partners?

A.J. Scheepbouwer

Yes, indeed, one of the smartphones that will be going up is from ZTE. I don’t think we will discuss the price points at this stage, because why would we. We will do that when we launch. The wholesale side is of course, very interesting, because from previous tests we found out that there is an interesting market for that and by the way I think it’s Mexico where you see that already the wholesale data market has taken a big growth. So, we are really hopeful for that, and in the course of next year we will be launching in the wholesale market as well.

Now, going back to fiber, I think you asked on other ISPs what the growth was, and the information I get here say there’s about 5 to 10,000 per quarter. And the other question you asked is what’s my current optimism on growth rate? Well that we seem to be software or IT problems are operational problems, sales is going better. So, we see an increasing rate week after week where we do better. But is this a reason to start to give specific numbers per week? No, we’re not going to do that, but we are hopeful that in the next few quarters you will see an improving trend on the fiber uptake.

Operator

The next question is from Mr. Frederic van Daele, Kempen. Go ahead please, sir.

Frederic van Daele - Kempen

Two questions from my side. The first one is the improved trends in consumer wireless in Holland, in postpaid especially. Could you indicate what the driver has been during the quarter, and is it fair to say that maybe the competitive environment has improved somewhat? That’s the first one.

Secondly, some small questions on Reggefiber. The quarterly contribution in the KPN P&L seems to be quite negative. Does this relate to Reggefiber financing, and will that continue in coming quarters or is that a reflection of the operational side of the business? And how much debt or CapEx did you provide to Reggefiber year-to-date given that the financing has been delayed somewhat? I thought it was 50 million in the first half.

A.J. Scheepbouwer

Well, I’ll start with the consumer wireless, and then Carla can help you on the Reggefiber questions. Yes, consumer wireless did well this quarter for a number of reasons. They had a campaign, which was very successful, whereby they positioned an offer in the market where the uptake was high. I think we mentioned 67,000 postpaid customers, and what mobile in the Netherlands does very well is focusing on specific segments and picking up high value customers. And this has been successful this quarter together with some more investment in the market, and I think the story in the Netherlands is always that we have a big market share and we try to constantly balance market share with value. So, we try and avoid price wars. So, sometimes we lose a little bit of market share and in some other quarter we gain and on the whole we try and stay at the level that we want to be. Now, on the Reggefiber.

C.M.S. Smits-Nusteling

On Reggefiber, if I start with the shareholder loans KPN gave to the joint ventures. For this year it’s around 90 million, and last year, the fourth quarter we contributed 21 million. So, since the start we’ve contributed 111 million on shareholder loans. That is our 41% share. So, that means that (inaudible), the other partner contributed more and that’s around 160 million.

If you look at your other question, the quarterly impact of the result, that’s not an indication of the underlying trend, because there are two specials in it this quarter. The impact is minus 17 in this quarter. Operational, that’s a loss of 2 million. And next to that Reggefiber has another way of hedge accounting and tax accounting and we changed that for purposes how do you say, consistency in our reporting and that meant a loss this quarter of a total of about 15 million. So, the operational loss is 2, tax, and the fair value adjustment of the swap position is another 15.

Operator

The next question is coming from Mrs. Karen Egan, RBS. Go ahead ma’am.

Karen Egan - RBS

And I’ve just got one question regarding Group EBITDA. On slide six, it’s clear that your 5.5 billion EBITDA guidance for 2010 was on the basis of just immaterial real estate proceeds. But the real estate book gains in EBITDA for you stays now 43 million, ahead of the level that we’ve seen at this stage last year. Can you give us an indication of whether you expect any other gains in Q4, and can you confirm whether your reiterated 5.5 billion EBITDA for the full year includes these book gains on real estate or whether you expect to achieve 5.5 billion without any real estate gains?

C.M.S. Smits-Nusteling

We don’t expect in the fourth quarter any other real estate gains and we confirm the 5.5, including all the results we had year-to-date in this presentation.

Karen Egan - RBS

So that’s, including the real estate?

C.M.S. Smits-Nusteling

Yeah, that’s including.

Operator

Next question from Mr. Frédéric Doussard, Oddo Securities. Go ahead, please.

Frédéric Doussard - Oddo Securities

Two questions, if I may. First you said that you expect the underlying growth of E-Plus in Germany to improve in next quarter. So, after already the strong improvement in Q3, plus 4%, which is quite spectacular. And what makes you confident to further improve the underlying growth in Germany? That’s the first question? And second question, are you confident to make the EBITDA growing next year, in 2011, even if there is a strong decline in MTR in Germany?

A.J. Scheepbouwer

Well, to the last question, I can’t say much else than we wouldn’t be confirming 2011 if we weren’t confident that we could do that. And, of course, we’ve taken into account everything we know so far. Underlying growth, the next quarter in Germany, well that’s driven by the confidence that we’ve seen the uptake of our postpaid new offering in Mein BASE. We see that the gross adds are continuing to grow, and the driver behind the topline growth is the increased postpaid offering.

And, of course, in the fourth quarter mobile data business doesn’t really play a role yet. What we do get of course, in the fourth quarter and let’s say, underlying, of course, nothing too, but we have of course, in the month of December an MTR cut of unknown proportions at this stage that could be very little or it could be more.

Frédéric Doussard - Oddo Securities

And in Q3, do you think that all the German market improved significantly or do you think that you have won market share?

A.J. Scheepbouwer

I wish I knew.

Frédéric Doussard - Oddo Securities

So you don’t see any strong retaliation from…

C.M.S. Smits-Nusteling

We expect to have formed in line with the market.

Operator

Next question comes from Mr. Peter Nielsen, Skælskør. Go ahead please, sir.

Peter Nielsen - Skælskør

At the Q2 presentation you said that around 20% of new handsets sold in Germany are smartphones. Is that still the case or has that number changed materially? And would you tell us what this year smartphones is of the total base in the Netherlands? Thank you.

A.J. Scheepbouwer

The last, I think, is easy. I think the total base of smartphones is 30% at the moment. Yeah. And we are selling, let’s say, of the new complex, about 60% of people take a smartphone. That’s the Netherlands. The question on Germany, I don’t know.

C.M.S. Smits-Nusteling

Yeah, in Germany, I have the numbers in front of me, and we expect about the same percentage as we did last quarter. It’s a bit smaller than 20%. And to finalize also with Belgium there we have on average 15%.

Operator

Next question is from Mr. Luigi Minerva, HSBC. Go ahead please.

Luigi Minerva - HSBC

Yes, good morning. On the subject of your move to tiered data plans. In Q2, you said you were moving to tiered data plans in the Netherlands. Couple of weeks ago, you announced your new tariff for E-Plus, although they are called all you can eat, they’re quite reasonably capped in terms of speed after 200 megabytes of usage. So, my question is what are your expectations from the shift out of flat rate plans towards tiered data plans in terms of ARPU? And secondly, whether you expect your competitors to follow along the same lines? Thank you.

A.J. Scheepbouwer

I guess you’re talking Germany now, specifically, or Netherlands.

Luigi Minerva - HSBC

Well, both. I mean, in Q2 you said in the Netherlands you were moving towards tiered data plans by the end of the year. And in Germany, your announcement two weeks ago, about all you can eat, which is actually capped at 200 megabytes of usage in terms of speed.

A.J. Scheepbouwer

In the Netherlands, of course, we’ve announced what we have and Vodafone have announced that they will move to a similar plan. Let’s say, look at the people the large users, then these percentages always seem to come back to that about 20% of the people use 80% of the capacity that we provided. So, what do we expect from that? I guess we expect that some people will start to pay more some will move the heavy users to a provider that maybe doesn’t have a tiered price plan. And on the whole, we think that it should be beneficial to ARPU.

And, of course, in Germany, our position is, let’s say, different from the Netherlands. There we are a number three challenger and we are not, let’s say, setting the tone in the German market on what price plans people offer, we have our own price plan and we compete on our own terms, which are our own low cost, high speed network.

C.M.S. Smits-Nusteling

Before we conclude this conference call, I would like to come back to very first question, which was both on the voice price per minute in Germany, indeed, if you quarter-on-quarter that number has increased. That is partly due to traffic mix effect, where we have more roaming in the third quarter. But if you look year-over-year, the pricing has come down.

So thank you very much for questions. If you have any follow-up questions, please call the IR team.

Operator

This concludes the conference call of KPN. Thank you very much.

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