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Executives

Hans Söhngen – Senior IR Officer

Eelco Blok – Chairman and CEO

Carla Smits-Nusteling – CFO

Analysts

Jonathan Dann – Barclays Capital

Nick Lyall – UBS

Hugh McCaffrey – Goldman Sachs

Luis Prota – Morgan Stanley

Matthew Bloxham – Deutsche Bank

Akhil Dattani – JP Morgan

Paul Sidney – Credit Suisse

Stuart Gordon – Joh Berenberg

Robin Bienenstock – Sanford Bernstein

Giles Thorne – RBS

Dimitri Kallianiotis – Citigroup

Peter Nielsen – Skælskør Bank

Will Milner – Arete Research Services

Royal KPN NV (OTCPK:KKPNY) Q3 2011 Earnings Call October 25, 2011 4:00 PM ET

Operator

Ladies and gentlemen, thank you for holding, and welcome to the KPN Conference Call. At this moment, all participants are on listen-only mode. And later we will conduct a question-and-answer session. I would like to hand over the conference to Mr. Hans Söhngen, Investor Relations. Go ahead, please, sir.

Hans Söhngen

Good morning, everyone. Today, Eelco Blok, CEO of KPN, and Carla Smits-Nusteling, CFO of KPN, will take you through our third quarter results and will address your questions during Q&A.

Let me briefly point out that the Safe Harbor statement applies to this presentation, and that any forward-looking statements made in this presentation does not differ from those already made in the press release published this morning.

I would now like to hand over to Eelco Blok.

Eelco Blok

Thank you, Hans. Good morning, and welcome to the conference call in which we will present our Third Quarter 2011 Results. The results will be presented by myself and our CFO, Carla Smits-Nusteling. I will start with the highlights, then Carla will take you through the group financial review. After that, I will provide you with an operating review for The Netherlands and Mobile International. Before handing it over to you for Q&A, I will make a couple of concluding remarks.

Let me start with the highlights. We have seen Q3 with group financial results that were broadly in line with our expectations. Within that, it’s clear that Consume Wireless is in a transitional period. In The Netherlands, we made further progress to strengthen the business. We launched multi-screen IPTV and see an increasing TV market share. In Consumer Wireless, we implemented the new mobile tariffs.

Furthermore, we have made good progress with the restructuring program in our Getronics segment where we are aligning costs with the lower revenue level. Getronics is renamed Corporate Market in our reporting structure and rebranded to KPN in the Netherlands to create full synergies. We are pleased to have seen another quarter with very good performances of our German and Belgium businesses. With all of this, we remain on track to realize our outlook for the year.

Let me move on to the financial highlights for the third quarter. Revenues and other income were down 3.4% to €3.3 billion. This included a regulation impact of 3.4%. EBITDA, excluding restructuring costs, was down 5.5% to €1.3 billion. This included a regulation impact of 3.5%.

Furthermore, we have taken €85 million restructuring costs in Q3. Free cash flow was €555 million for the quarter with €1,538 million year-to-date. We have displayed industry-leading shareholder returns in Q3. We have finalized our €1 billion share repurchase program for 2011 in September following an acceleration in May. We pay our interim dividend of €0.28 per share, up 3.7% year-on-year. This reflects our full-year dividend target of at least €0.85 per share. Total cash returned to shareholders year-to-date was €2.2 billion, up 22% year-on-year.

I will now take you through the outlook for 2011. We confirm the outlook for the full-year. We are confident to reach the full-year 2011 EBITDA outlook of more than €5.3 billion and a free cash flow outlook of growth compared to 2010. We expect a solid EBITDA in Q4. Carla will take you through the details as part of the group financial review.

KPN remains committed to food and financing and sustainable shareholder remuneration, including a growing dividend per share. The outlook for dividend per share is at least $0.85 for the full year 2011, $0.90 in 2012, and $0.95 in 2013.

Let me now hand over to Carla, who will take you through the group financial review.

Carla Smits-Nusteling

Thank you, Eelco. Good morning, everyone. We start with the group results. Our group results are in line with expectations to achieve our outlook of more than €5.3 billion of EBITDA, excluding restructuring costs.

Revenues in the third quarter are down 3.4% year-on-year, and which is an increased downward trend compared to the first two quarters of this year. And this results from a decline in revenues in consumer wireless and in Getronics. We were pleased to see that Mobile International continued its strong performance. And furthermore, we have seen a severe regulatory impact on the group, but, however, this is in line with the first two quarters of 2011.

If we look at the operating expenses, they include, first of all, the restructuring provision for Getronics to accelerate the process of aligning its cost base with the decreasing revenues we’ve seen. And secondly, investment in growth at Mobile International and Dutch Telco.

Our financial costs and taxes due to tax facilities have again been lower in this quarter. And if we look at profit after tax in the third quarter, it’s lower, but excluding the restructuring provision of €85 million, profit after tax would have increased year-on-year. As Eelco indicated, we expect to achieve the EBITDA excluding restructuring cost outlook of more than €5.3 billion for the full year.

The main reasons for a solid EBITDA in the fourth quarter are profitable growth in Germany and Belgium; a lower MTR impact in Germany and Belgium, where in Germany, we have one month less, and Belgium, the whole quarter less impact; seasonality at Getronics, leading to a higher EBITDA; and a sale of mobile towers in the Dutch Telco.

Before I continue with the free cash flow overview, a word on our pension funds. Our pension funds are impacted by lower interest rates combined with negative developments, as we all see, in equity markets.

And the average coverage ratio at the end of September of 96% is below the threshold of 105%. And this means that with the delay of one quarter, we are obliged to increase our funding to the main pension fund with €21 million, and this has to be paid for the first time in the first quarter of next year. We have no such obligation in this quarter and the fourth quarter of this year. And additional recovery payments will have to be made until the coverage ratio of this main fund is again above the 105%.

So, let me now continue with the cash flow, and first, start with the third quarter. Third quarter is lower year-on-year, and the main reasons are a lower EBITDA excluding restructuring costs of €77 million, which, by the way, is in line with our outlook.

Next to that, we see higher CapEx due to accelerated investments in network capacity and customer equipment. And we see this quarter less proceeds from the sale of real estate. Last year, we sold mobile towers in the third quarter.

Our free cash flow year-to-date, so for the first three quarters, is somewhat lower than last year. And the lower free cash flow from our businesses is the result of lower EBITDA and higher CapEx, partly offset by positive contribution from innovation tax facilities. CapEx is for the first nine months higher because of the accelerated network rollout in Germany. We are six months ahead of schedule with the high speed data and network rollout. And next to that, we invested to strengthen the Dutch businesses, both in network as well as in customer equipment.

For the full year, we expected CapEx to be below the €2 billion as already guided. For the next quarter, we expect a positive phasing of free cash flow like we see each year. And the main reasons are EBITDA improvement, CapEx phasing leading to a lower CapEx in the fourth quarter, year-on-year working capital improvement, and lower finance costs. And with this, we are on our way to reach our target of more than €2.4 billion free cash flow for the year.

Year-to-date, the cash flow returned to our shareholders is substantially higher year-on-year, following the acceleration and finalization of the €1 billion share buyback program. The acceleration of the share buyback and the payment of the interim dividend are visible in the net debt EBITDA ratio of 2.46, around 2.5. The year-on-year Q3 increase is due to a lower EBITDA, higher CapEx, and acceleration of the share buyback program.

Although this is within our financial framework range, we target a lower leverage going forward. The net debt EBITDA ratio is expected to decline in the fourth quarter, as there are no share buybacks and dividend payments in the last quarter, as well as effective free cash flow will be higher in Q4.

Let’s continue with the operational review of the Netherlands by Eelco.

Eelco Blok

Thank you, Carla. Let me now go into the Q3 2011 performance of Dutch Telco. Within Dutch Telco, we see a continuation of the trends in consumer that we outlined earlier in the year, while we see the performance of the business segment improving compared to the first half of the year. This is reflected in our financial results.

Revenues were down 5.5%, including a negative impact from regulation of €39 million, 2.2%. Revenues at consumer were impacted by the decline in service revenues, due to the continued change of customer behavior and competition in the value for money segment.

EBITDA decreased in the third quarter by 5% year-on-year. The margin was relatively stable at 53.3%. Lower revenues and increased variable costs to strengthen the Dutch businesses were offset by a continued decline of fixed costs and lower traffic costs.

I will skip a slide and move on to the operating review of Consumer Wireless. Consumer Wireless is clearly in a transition period. We see lower service revenues and have, in the beginning of September, introduced our new portfolio to counter the negative trends. Service revenues were down 11% year-on-year, and this was the result of regulation 3.8%, €17 million, the impact on service revenues of approximately 4% from changing customer behavior, the trend which we highlighted in the beginning of the year.

The declining prepaid base has an impact on service revenues in the third quarter of around 3%. Furthermore, the competition in the value-for-money segment leads to price pressure, and we are experiencing high churn in this segment. The negative impact on service revenues is partly offset by the continuing growth in data usage.

The total Dutch mobile service revenue market share decreased in Q3 to 45%. This is due to the following: As market leader, we have taken the first step to lower SAC/SRC levels. The distribution landscape in the Netherlands is changing with the number of independent retailers disappearing from the market. This is why we are increasing the number of owned shops. And furthermore, our focus on high-value customers in the prepaid segment leads to a lower market share in that market.

Let me now provide you with an update on the IP substitution trend we see in Consumer Wireless. Smartphone penetration is increasing steadily as well as the number of customers opting for a data package. Advanced smartphones and communication apps are driving the substitution of particularly SMS, but also voice by data, therefore, impacting service revenues.

At the Hi brand, we are seeing outgoing SMS per customer declining year-on-year with 24% in the third quarter. The decline in SMS per customer is now also evident in the KPN brand. Typically, the out of bundle revenues are exposed to the changing customer behavior. This is why we are actively addressing customers that have high out of bundle usage to convert this into contract revenue.

These short-term measures remain successful. To structurally counter the negative trend, we have introduced our completely new lineup with integrated data, voice and SMS tariffs at KPN and Hi brands. It will, however, take time before all of our customers are converted to the new tariffs as they are typically on two-year contracts.

Moving on to Consumer Wireline. At Consumer Wireline, we see the first positive signals, although our broadband market share continued to show a slight decline. Typically, customer losses in the single and dual play segment, whereas we are successfully adding customers in the triple play segment. This is driven by our strong IPTV product and sales approach, with a clear focus on bundled products. The revenue-generating units per customer are steadily increasing as PSTN loss is offset by TV additions.

Line loss in Q3 improved to 35,000 from 45,000 in the second quarter, driven by increased Fiber-to-the-Home activations and PSTN retention. Our wireline innovation road map is fully on track.

In Q3, we have launched multi-room IPTV and TV online. Customers can now watch TV on their iPads and laptop, and this has transformed our IPTV products to the leading product in the Dutch market. Our TV market share continues to grow at a steady pace and now stands at 17%. The sales run rate has increased from 5,000 per week in the second quarter to 6,500 additions per week at the end of the third quarter.

We are also successful on Fiber-to-the-Home via the Reggefiber joint venture. In the third quarter, the number of homes passed reached 844,000. By 2013, we will have covered more than 20% of the Dutch population with Fiber-to-the-Home.

The sales run rate of our Fiber-to-the-Home product is increasing. At the end of the third quarter, we activated 2,000 customers per week. We see positive development of our broadband and TV market shares in the Fiber-to-the-Home areas. An increased up-sell leads to significant ARPU uptake.

I will now look at the business segment and business wireless in specific. In Q3, we have seen service revenues growing by 5.3% despite a regulation impact of 5.7%. Although we still see price pressure in the business market, data is driving service revenue growth. Also, the sale of more bundle products is helping growth in the business segment. We don’t see a similar impact of changing customer behavior in the business market as we see it in the consumer market. However, we will proactively introduce new integrated data, voice and SMS propositions in Q4.

I will now move on to slide 21, the corporate markets. As said, Getronics is re-branded to KPN in the Netherlands. This allows us to focus on the sale of integrated telecom and ICT services.

We are still facing a difficult ICT market in the Netherlands, with clients postponing investments, most notably in the governmental sector. We see lower demand for business communication and connectivity solutions.

Our corporate market segment is able to show a good win rate of transactions, but these transactions are of smaller sizes and less profitable. A consequence of this difficult market is that revenues at corporate market declined 6.1% year-on-year.

We are focusing on cost initiatives to bring the cost structure in line with the lower revenue level. We have accelerated the restructuring plan that have announced. And in Q3, we have booked a provision of €78 million, bringing the total restructuring provision year-to-date to €99.0 million. This relates to a total of 1,350 FTEs, with 900 FTEs for efficiency and 450 FTEs through off-shoring. This is a big part of the announced 2,000 to 2,500 FTE reduction and will help our margins going forward.

Now, I will move on to slide 26, with the operating review of Germany. We are pleased to have seen another very good quarter for Germany. E-Plus continues to show high net adds every quarter, with 92,000 postpaid net adds in Q3. All regional organizations are in place with an increasing number of owned shops and good performance via our own channels. The Mein BASE propositions are performing strongly in voice and data with continued good take-up of data bundles.

The good performance has led to underlying service revenue growth of 8.1% and a strong EBITDA margin of 42.2%. This is fully in line with our expectations. The high-speed data network rollout is still running at an accelerated speed and is now six months ahead of schedule. This completely supports our growing data market share.

On the next slide, you will find the operating review of Belgium. Our customer base keeps on growing, supported by clear and transparent propositions. In Q3, BASE has put a number of new propositions in the market with good initial sales rates. BASE in Belgium had a strong quarter, with 11% underlying service revenue growth. Due to the decreasing, but still significant, MTA impact, reported service revenue growth was 3.5%. The EBITDA margin in Belgium is increasing, due to an increasing cost and awareness, to 36.9% in Q3, although this has included a positive incidental of €5 million. Also in Belgium, the high-speed data rollout is going well.

Now, let me give you my concluding remarks. We have seen a Q3 with group financial results that were broadly in line with our expectations. Within that, it’s clear that consumer wireless is in a transition period. In the Netherlands, we made further progress to strengthen the business. We launched multi-screen IPTV and see an increasing TV market share. In consumer wireless, we implemented the new mobile pairs.

Furthermore, we have made good progress with the restructuring program in our corporate market segment, where we are aligning costs with the lower revenue level. We are pleased to have seen another quarter with very good performances in our German and Belgium businesses. With all of this, we remain on track to realize our outlook for the year. We are convinced that all the actions that have taken to date will serve our business going forward.

Thank you. Now, I would like to hand over to you for Q&A.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen we will start the question-and-answer session now. (Operator Instructions) Today’s first question is from Jonathan Dann, Barclays. Go ahead, please.

Jonathan Dann – Barclays Capital

Hi, there. Two questions, could you just update us on the phasing of risk of expected restructuring charges? And then secondly, with the progress of fiber versus copper retention, could you just give us an update of the fiber customers? Are they your own customers you’re upgrading, or do you think you’re winning any customers from cable or we want, to just say, double or triple play from cable?

Carla Smits-Nusteling

Okay. Let’s start with the restructuring question. The full program comprises 4,000 to 5,000 FTE, and it’s for the full period of 2011 to 2015. And the cash and restructuring was planned accordingly, more or less evenly spread over the years. If it is up to economy, the sooner the better, because the sooner we take the charges, we also have the cash out, and we have the cost benefits going forward. So, we are very pleased that the corporate market makes so much progress this quarter. They themselves have already the half of their full restructuring program in the numbers, and it’s accelerated to align the cost base to the lower revenues. So, it’s still evenly spread, but the sooner the better.

Jonathan Dann – Barclays Capital

Thank you.

Eelco Blok

On fiber, it’s not only that we are upgrading KPN customers in fiber areas. When you look at the blended broadband market share in the Netherlands, we are on around 40%. And in fiber areas at the end of the second quarter, we were at 44%. On TV, blended, we are currently on 17%. And in fiber areas, we are on 27%. And the ARPU in fiber areas is several euros higher than our blended ARPU in the fixed business. So, concluding, we are winning customers from other service providers in fiber areas.

Jonathan Dann – Barclays Capital

Thank you.

Operator

The next question is from Nick Lyall, UBS. Go ahead, please.

Nick Lyall – UBS

Yeah, morning. It’s Nick, UBS. Could I ask, firstly, on Mobile, could you give us a sort of rough idea of what percentage of your subscribers are in the new tariffs so far, please? And do you plan to accelerate your push on the new tariffs, informing customers to try and get them on to new tariffs faster?

And then secondly, a bit like Jonathan’s question, just on the broadband side. Your ISP share seems quite weak. It seemed like cable have gained some reasonable subscriber numbers this quarter. You’re running at roughly the same small decline. So, is it, firstly, fair to say that cable has gained momentum this quarter? And secondly, if the Fiber-to-the-Home areas are not good, is it tempting to maybe accelerate the FTTH rollout phase? Thank you.

Eelco Blok

Let me start with answering the question on Mobile. We introduced our new mobile pricing plans at the beginning of September. And, of course, we are doing everything to push our customers to take the new mobile price plans, but when they are still in their old price plans, they keep on using their old price plans, and it will take us two years to fully migrate the customer base. As I said, we will guide them into the new price plans, but at the end, it’s decision of the end-users to continue using the old price plans or take one of the new price plans.

It’s too early to conclude anything out of the first few weeks of data we have available. And we need some more data to make any conclusions out of the change in customer behavior given the new tariff plans we have put in the market.

On broadband, yes, looking at share, we still see the same decline as we have seen in the previous quarters. But looking at underlying metrics, we see the first successes of our new strategy. IPTV sale is going up. Fiber-to-the-Home sale is going up. And we have introduced our new features on IPTV. And also today, we announced some new features on our broadband service – Spotify will be available for our premium broadband customers. And we are convinced that all these underlying metrics improving will support stopping first the decline, and then start growing again, somewhere next year.

Nick Lyall – UBS

Okay, that’s great. Thank you.

Operator

The next question is from Hugh McCaffrey, Goldman Sachs. Go ahead, please.

Hugh McCaffrey – Goldman Sachs

Thanks, guys. I have two questions, please. Firstly, to hit the EBITDA guidance for this year, you need to generate, I think, it’s €1.37 billion of underlying EBITDA in Q4. That implies 3% sequential growth from this quarter, and I think that’s roughly €40 million. How much of that is coming from the tariff sales? I think you mentioned that as being your contributor in Q4.

And secondly, just on E-Plus. At what percentage of the network has been upgraded, and how long will it take to reach 100%? Also, it would be interesting if you could just give us some color on which tariffs are most popular, and what percentage of net adds are taking a data plan? Thanks.

Carla Smits-Nusteling

Okay, let’s start with the EBITDA question. We have the same numbers. So, we also expect the order of magnitude of 30, 70. It comes from – especially, the EBITDA improvement in Mobile International. Also, the rest of world is a part of it, but lower MTA in Germany and Belgium, and we’ll show that the top-line growth will also be reflected in EBITDA. If you look at last year’s quarter, Germany margins were below 40, and we expect this fourth quarter higher margins.

And next to that, in Corporate Market Getronics, the fourth quarter traditionally is much higher than the quarters before that. And so, mobile towers is also – is also needed to mitigate more or less the decline in Dutch Telco that we’ve seen this year. We do not give the specific number because that will not help us in negotiating the deal.

Eelco Blok

On the E-Plus network, we will be on par with competition at the end of 2012. And currently, approximately 40% of the new customers are taking a data plan in the base rent.

Hugh McCaffrey – Goldman Sachs

Okay, that’s helpful. Thank you.

Operator

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

Luis Prota – Morgan Stanley

Yes, two questions, please. First is whether you could give us your thoughts on whether you would be interested in acquiring Tele2 Netherlands, if this asset was for sale and whether you see any regulatory hurdle. And if not, if you could elaborate a bit on the risk of new mobile player, either Tele2 or cable companies.

And the second question, I think you mentioned, as another factor to meet guidance in the fourth quarter, some tower sales in the Dutch Telco business, I wonder whether you could give us some kind of order of magnitude of for those book gains that you’re expecting to record for this recently. Thank you.

Carla Smits-Nusteling

Yeah, let me start with the tower sales, the answer is the same as just the last question. We do not disclose the magnitude because it will not help us in negotiating new deal. And if you want to have a little bit of a feel, you can look at last few years where we sold towers to have a bit of a feel for those.

Eelco Blok

On Tele2, looking at our market shares, especially in the business market and the wholesale market, there will be, at our assessment, high regulatory hurdles when we would try to buy Tele2 in the Netherlands, and OPTA has a position that they believe that you need at least three infrastructures in the Netherlands. So, also on the infrastructure side, there will be regulatory hurdles and on the Tele2 acquisition. Of course, in-country consolidation could add, when the price is right, value to the company. But as I said, there will be high regulatory hurdles in this potential acquisition.

Then to the fourth entrant, we, in our business plan, take into account that there will be a fourth entrant. The auction, as recently has been announced by the government, will be postponed probably around the summer 2012, and the spectrum will be available in 2013. So, there will be no fourth entrant in 2012. The earliest a fourth entrant will start in 2013, because then the spectrum will become available.

And who could be the potential candidates? We don’t know. As I said in our business plan, we take a fourth entrant into account as of 2013, because then the spectrum will be available.

Luis Prota – Morgan Stanley

Okay. Thank you.

Operator

The next question is from Matthew Bloxham, Deutsche Bank. Go ahead please, sir.

Matthew Bloxham – Deutsche Bank

Yeah, hi. Just a couple of questions. Just on the towers, if you can help us with the number, I mean, it sounds that you must be fairly well progressed in terms of the sale prices. Is that the right assumption?

And then secondly, just on some of the trends in mobile. I mean, we’ve seen in other operators that slower iPhone sales in Q3 because of the delayed launch of the 4S has helped profitability. Is that something you’ve seen at all for your numbers?

And then just finally also on Mobile. You mentioned that you had strong growth on business data. Just wondering if that’s coming from the kind of more smartphone side or whether it’s kind of more laptops and dongles. Thanks.

Carla Smits-Nusteling

The towers? Of course, we have made progress, because it’s closer to the end of the year so that’s evident, I think. Eelco?

Eelco Blok

Yeah, on the iPhone sales, well, we have, of course, also seen some slowdown in the sale of iPhones but a very interesting, good start of the sale of the iPhone 4S, but in general, no positive or negative impact on our profitability in the third quarter. In the business market, we have seen a very strong wireless revenue development, mainly driven by the growth in mobile data.

Matthew Bloxham – Deutsche Bank

And is that data coming more from, kind of tell us, smartphones and associated data or add-ons, or is it more laptop cards and dongles? Or is that mixed?

Eelco Blok

It’s mainly smartphones.

Matthew Bloxham – Deutsche Bank

Okay. Thanks.

Operator

Next question is from Akhil Dattani, JP Morgan. Go ahead, please.

Akhil Dattani – JP Morgan

Yeah. Hi, good afternoon. Just two questions, please. Firstly, Eelco, just picked up from the – your press conference comments and I just – that you’ve stated that you’re seeing some changing consumer behavior in Germany and Belgium. But just wondered if you could maybe elaborate on what you mean by that and what you feel is going on.

And then the second question is on Mobile International. Now, on your last quarter conference call, you stated that full-year EBITDA would be broadly flat year-on-year, which would seem to imply about €450 million of EBITDA into Q4, and so would seem to imply pretty impressive development. I just wonder if maybe you can help us better understand if that’s more revenue or margin driven, and what you feel is underpinning that. Thanks.

Carla Smits-Nusteling

So, let me start with your last question. That’s still the same assumption we have set international – for the full year, we’ll have more or less the same EBITDA as last year. It’s driven both from margin as well as from the top line. Top line – the underlying growth will be reflected in top-line growth in Belgium, since there is no MTR in the fourth quarter. And in Germany, one month is missing. So, in the margin part, we also expect margin in Germany above the 40s and in Belgium also to improve.

Eelco Blok

On the change of customer behavior in Germany and Belgium, no change of trend. Of course, we see some changes in Germany and Belgium, but not with the speed we have seen the changing customer behavior in the Netherlands.

And we have also a much lower penetration of smartphones, and the impact on the revenue is limited because we have much better price plans already in place in Germany and Belgium. So, no change compared to the previous quarters. Of course, we see some things happening, but with an impact on a much lower level and not comparable to what we have seen in the Netherlands.

Akhil Dattani – JP Morgan

All right. Thanks a lot.

Operator

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

Paul Sidney – Credit Suisse

Thank you. I also have two questions, please. Firstly, in terms of the Dutch mobile market, you made comments earlier today that you expected a positive effects from the new tariffs in the second half 2012. I was just wondering, possibly, if you could give us a bit more detail in terms of how you expect the positive impact to play out in the next few quarters. And just secondly, on Belgium, you see lot of positive momentum from some of these new propositions. Is there any particular tariff that is sort of doing the damage and allowing you to take market share? And could you give us an idea of who you’re taking market share off in the Belgium market, please?

Eelco Blok

Let me start with the question on the Belgium market. There is not a specific silver bullet that is driving the current growth right now. It’s just – as part of our propositions, some new propositions that are added to the portfolio that are supporting the continued high growth in Belgium, and we are gaining share from all the other MNOs in Belgium. On the margin, we are doing, compared to previous quarters, reasonably well, because the new management that is now in charge in Belgium has the same clear growth focus as the management in Germany. And the first results of this growth focus is already being seen in the P&L of the third quarter.

On the recovery of the Mobile business in the Netherlands, as I said, we have introduced our new price plans the beginning of September. And it is really too early to conclude anything out of the data we have currently available. We need at least another eight to 12 weeks to conclude anything, and then we can make the assessment about the turnaround. Our current estimation is second half of next year, the beginning of the first half of 2013. So, that’s where we are today. Operational organization is focused on relentless execution of all the measures we have put in place. And we have to see some more data to conclude anything.

Paul Sidney – Credit Suisse

Thank you.

Operator

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

Stuart Gordon – Joh Berenberg

Yeah, good morning. Two questions, please. Firstly, could you give us an update on the technology improvements that you’re looking to do in wireline and any update on a timeline for that? Also, on working capital, I was just curious as to what we could expect for the full year in terms of your working capital movements. Thank you.

Eelco Blok

Okay, I will start with the more high-level technology update on the upgrade of our copper network. We have accelerated, as part of the new strategy, the rollout of Fiber-to-the-Curb and VDSL, to be able to offer at least 40 megabits to the end users in 40% of our footprint before the end of this year, and at least 70% before the end of next year. And the rollout plans are on schedule.

Then, we will start using pair-bonding commercially in the first quarter of next year. And we are currently in the middle of implementing all the processes and systems, and we are testing everything in our live network. But commercially, pair-bonding will be available as of the first quarter of next year. And we will start using pair-bonding region by region.

Then, we are preparing second half of next year factoring and other DSL technology that will help us to increase the bandwidth of our copper network. We are closely working together with our incumbent DSL provider, and we have made decision to start using ZTE as a challenger in the DSL environment really supporting us to accelerate the upgrade of the copper network and to improve the quality of our copper network. So, that’s where we are.

Carla Smits-Nusteling

Working capital, free cash flow in the fourth quarter is supported by a higher EBITDA. So, the EBITDA improvement and CapEx phasing over the year, lower finance costs and absolutely also, as we’ve seen it over the last few years, working capital improvement. Working capital is, in itself, have – you’ll never know the 31st of December and the 2nd of January, if someone pays you at the 31st in year one or pays you at the 2nd of January. So, there’s always some room that from a value creation point of view, it doesn’t matter whether you have the money three days earlier or later. Your own payments, of course, you control. But there’s always some uncertainty at the year-end border.

Stuart Gordon – Joh Berenberg

Just sort of follow up on the working capital. I mean, it’s over the last two or three years been north of €200 million in the final quarter fairly consistently. I mean, is there any reason to believe it won’t be that level again?

Carla Smits-Nusteling

No. There is no reason to believe that.

Stuart Gordon – Joh Berenberg

Okay. Thanks.

Operator

The next question is from Robin Bienenstock, Bernstein. Go ahead, please.

Robin Bienenstock – Sanford Bernstein

Yeah. Thanks very much. So, you’ve said that the – you’re not worrying about a fourth entrant until 2013 in the Dutch market. But other markets show that the price impact has come ahead of their entry. So I’m worrying if that doesn’t present a risk to the upside that you could see from your re-pricing. And I guess related to that, in terms of the regulatory environment, OPTA seems intent on only giving two licenses for the remaining three players. In Germany, you’ve lived without some of that spectrum. Could you imagine living without that spectrum also in the Netherlands?

And then lastly, in Germany, you seem to be pushing more and more into pre-payments, that’s a larger and larger share of your net adds. Is that a stop-gap solution as the network is rolled out? Or is that actually a sign that you and Vodafone on the other side can live symbiotically in what is essentially a two-tier market? Thanks very much.

Eelco Blok

On the fourth entrant, in some markets, you see before the fourth entrant is entering the market, a strong price element entering the competition. In the low-value segment, we have seen also price pressure the last few quarters, and we are convinced that this will, especially in this part of the market, continue to be there. But we believe that for next year, in the other parts of the market, of course, there is – there will be attention for price, but we will not see an acceleration of the price pressure in that part of the market. For the – Robin, can you repeat the question on the spectrum in the Netherlands?

Robin Bienenstock – Sanford Bernstein

Yeah, if there are only going to be two licenses available for the remaining three – for the three players, for you, Vodafone and Deutsche Telekom, would you be willing to live without getting one of those licenses in the same way you did in Germany?

Eelco Blok

Well, I’m not going to tell you anything about the auction because there are unbelievable strict rules related to the auction on the one hand. And on the other hand, I don’t want to make anyone outside this call, well, better informed than they are right now. So, sorry for not answering this question.

And on the prepaid business model in Germany, we are continuing to be successful with prepaid and we will continue to offer the prepaid services as we are already doing for a number of years.

Robin Bienenstock – Sanford Bernstein

Okay. Thanks very much.

Operator

The next question is from Giles Thorne, RBS. Go ahead, please.

Giles Thorne – RBS

Thanks very much. Just on domestic mobile, looking at the contract rates, you’ve signaled that you were going to have a lower SAC environment back when you launched new tariffs, and this has come through in the results today. Have the competition followed? And if they have, is the deterioration in your contract net-adds in the quarter actually more of a reflection of the new tariff structure you launched?

And second question, just staying on domestic mobile, what are your plans to address the prepaid subscriber losses? Are you intending to be more competitive versus part of the market where you don’t see profitability being necessarily attractive enough?

And lastly, on the business division, a welcome inflection in the – both the top line and the margin trends, but as we go into a macro environment that has risks still skewed to the downside, how confident you – are you on maintaining that momentum? Thanks.

Eelco Blok

Okay. On the subscriber acquisition cost and subscriber retention cost levels, as I said, as a market leader, we have taken the first step to lower the SAC/SRC levels as we have done in previous years. And the verdict is still out if the other MNOs will follow us. I mean, looking back at the last few years, sometimes they have followed us, sometimes not.

And if they are not following us, then, of course, we will come back with a change in subscriber acquisition and subscriber retention costs. But looking at the trend of the subscriber acquisition costs in the Netherlands, it is trending down. And as I’ve said, we are the market leader and we will lead the market also in a continued trending down of the subscriber acquisition and subscriber retention cost levels.

On the prepaid, we have clearly made the choice to focus on the high value customers in the prepaid segment, and that has led to a lower market share in the market. And up ‘til now, we have – well, we have no – we are not thinking of making changes to this strategy, because we believe that this will add more value to KPN than changing this strategy.

And then on the business market, yeah, you’re totally right, a macroeconomic environment is not really helpful for the business segment, not for the Telco part of our business. And for the IP part, we are – well, we are getting everything under control. In the business market, you will see in the results in the third quarter, that there will be pressure on this part of the market, both price pressure and also investment decisions will be postponed by our customers. And we have to see what the impact will be, but compared to the first half of this year, so far, so good.

Giles Thorne – RBS

Thanks.

Operator

The next question is from Dimitri Kallianiotis, Citi. Go ahead please.

Dimitri Kallianiotis – Citigroup

Hello, just, if I may ask two questions please. The first one is on the International Mobile. Just want to make sure I get this one right, so that you are expecting to get low 40s margin in Germany – and that’s in Germany and Belgium combined. Just wanted to know, does that mean that will – you’re prepared not to go as aggressively in market share, especially as we’ve got the launch of the iPhone 4? So it just seems to be a very, very strong improvement from last year.

And I just want to get – if you could give us an update on the impact of mobile termination cuts, I think you – at the end of the year it’s about €40 million negative impact on EBITDA. And so far this year we’ve done, I think, €153 million, so about €47 million for Q4, which is not very dissimilar to what you did – you’ve done in Q3. So, I was just wondering if you can give us, sort of, impact of – negative impact of termination cuts in Q4? Thank you.

Eelco Blok

Yeah. On the International Mobile performance, we are convinced that with the strategy in place, we will continue to see strong underlying growth in both Germany and Belgium in the fourth quarter.

In Germany, that will be partly translated into some positive impact on the top line because as of December 1, there will be no year-on-year MTR cut anymore. And in Belgium, the full fourth quarter underlying growth will be top-line growth. In Germany, we expect a margin in the low 40s, as we have seen in the second and third quarter. And in Belgium, we are implementing a more cost focus, and we will see a margin between 35% and 40% in Belgium.

Carla will take the question on the MTR.

Carla Smits-Nusteling

For the MTR in Belgium, the fourth quarter – MTRs have annualized. In Germany, as you might recall, last year, it started the 1st of December, so that also annualizes. If we look at the full year, what we – our best estimates of where we are today is that in total, the revenues of the whole group will be impacted by around €460 million on the top line. That also includes, by the way, the Netherlands, and EBITDA around €190 million.

Dimitri Kallianiotis – Citigroup

Thank you.

Operator

The next question is from Peter Nielsen, Skælskør. Go ahead, please.

Peter Nielsen – Skælskør Bank

Thank you. Just one question, please. It seems as if it appears that the impact of so-called changing consumer behavior in the Netherlands have slightly accelerated in Q3. At the Q1 results, when you mentioned this for the first time, you did give a – you did provide a full year estimate of the impact. Does that estimate still stand, or have you changed that internally? Thank you.

Eelco Blok

You’re right. The impact of the change in customer behavior accelerated compared to the second quarter. And it’s not a – well, major change compared to what I’ve said during the first and second quarter result. But it is, in general, as expected, somewhat increased compared to what we have thought in the second quarter.

Peter Nielsen – Skælskør Bank

Okay, thank you.

Operator

The next question is from Will Milner, Arete. Go ahead, please.

Will Milner – Arete Research Services

Thanks a lot. Just a couple of follow-up questions, really. Just on the prepaid strategy in Holland, you said you’d – clearly you’re focusing on the high end. But I guess that approach has had a bigger negative impact on revenues in the third quarter. So, I’m just trying to get some clarity on how big is this, sort of, low value prepaid segment that you’re prepared to, I guess, cede to competition on the basis that you’re not creating value there? Just trying to understand when that sort of revenue – deteriorating revenue trend may improve?

And then the second question is just on the pair-bonding and the VDSL upgrades. I just wonder how you intend to market that next year given the regional rollout. Are you intending on out-sizing a doubling of broadband speeds on a national basis? Or is it more a direct marketing approach in specific regions? Thanks.

Eelco Blok

Okay, on the prepaid question, sorry to say, but I’m not going to give you a breakdown of our prepaid business. We have made a clear strategic choice to focus on our high-value customers with the impact we have seen in the previous quarters, and we will not make any changes on the short term to this strategy.

On the pair-bonding and factoring, it will be a – pair-bonding will be a regional approach. So, we will select regions where we will start using pair-bonding and a selection of the regions will be made based on the quality of our network, our competitive position, and, of course, we will use in those areas speed, not as a differentiator, but as a quality differentiator to be able in those areas to offer IPTV services.

And for IPTV services, multi-room IPTV, you need at least 40 Mb, and we will start using pair-bonding to be able to offer to most of the households in those areas at least 40 Mb by using pair-bonding.

And factoring, they’ll be implemented in the second half of next year, and we are still working on the implementation strategy of factoring.

Will Milner – Arete Research Services

Okay. Thank you.

Hans Söhngen

Okay, everybody. Thank you, Will, for that last question. I would like to conclude this third quarter results conference call. Thank you all for dialing in. If you have any further questions, please contact the Investor Relations team. Thank you and have a good day.

Operator

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

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