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Executives

Hans Söhngen – Director, IR

Eelco Blok – Chairman and CEO

Eric Hageman – CFO

Analysts

Akhil Dattani – JP Morgan

Hugh McCaffrey – Goldman Sachs

Nick Lyall – UBS

Dimitri Kallianiotis – Citi

Frederic Boulan – Nomura

Matthew Bloxham – Deutsche Bank

Luis Prota – Morgan Stanley

KPN Group (OTCPK:KKPNY) Q3 2012 Earnings Call October 23, 2012 4:30 AM ET

Operator

Ladies and gentlemen, thank you for holding, 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. I would like to hand over the conference to Mr. Hans Söhngen, Director, Investor Relations. Go ahead, please, sir.

Hans Söhngen

Good morning. Welcome to KPN’s Q3 2012 results conference call. Today, our CEO, Eelco Blok, and CFO, Eric Hageman, will take you through our third quarter results and address your questions during Q&A.

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

I would now like to hand over to Eelco Blok.

Eelco Blok

Thank you, Hans, and good morning everyone. Over the past nine months we have made further progress to strengthen our domestic market positions in the Netherlands, where we have accelerated our investment strategy, and internationally we focus on balancing revenue growth and EBITDA margins.

Against an uncertain and challenging macro environment we have seen mixed performance across the group. Specifically, I would say we are on track in the Netherlands towards reaching our 2012 targets, while stabilizing our broadband market share in consumer residential and of maintaining our stable market share in the business segments, but we face conditions of increased competition in all our mobile markets.

We continue to upgrade our mobile and fixed networks in the Netherlands to provide the highest quality services for our customers, and we continue to increase customer driven capital expenditures to strengthen our domestic market positions. In Dutch mobile we are starting to upgrade the network to enable LTE, while in the fixed segment the hybrid approach of corporate network upgrades and a continued Fiber-to-the-Home roll-out is working well.

Our commitment to our customers through direct and accelerated investments is a key part of our strategy, whose success is illustrated by rising net promoter scores in the consumer market, driven by improved customer service, such as free 24x7 call centers and a strong focus on quality. We are also doing well on customer satisfaction in the corporate market, but still have to do better in the business markets. We are making good progress with our 4000 to 5000 employee reduction program, which is currently on track, and expect it to be finalized by the end of 2013.

In Germany competition has intensified in recent quarters, which is leading to a slowdown in our top line growth. Even in Europe’s strongest economy customers are increasingly looking for and receptive to opportunities to reduce their costs and improve their tariffs. As a result, all network operators have launched new initiatives with a strong focus on price.

As the challenger, E-Plus is adjusting in several ways. Innovative all-net flat postpaid propositions were launched leading to higher postpaid net adds. The growth from higher postpaid net adds is however being offset by the fact that existing customers are optimizing their tariffs. We are continuing to drive cost discipline, and we are on track with the accelerated high-speed data network roll-outs.

KPN Group Belgium performed strongly in 2012 year-to-date. They have launched a number of initiatives under its challenger strategy to protect and enhance its market positions. An integral part of our group strategy is to focus on corporate social responsibility, and I am proud to say that this has been recognized. KPN has again been included in the Dow Jones Sustainability World Index, and furthermore the Carbon Disclosure Project 2012 declared KPN as the number one telecom operator worldwide with respect to the emissions reduction performance.

We are all focused on strengthen, simplify and grow our businesses, and to deliver successful results from the accelerated investment strategy in the Netherlands. We confirmed the financial outlook for the full year 2012. At the same time, we acknowledge that also in the coming period market conditions are set to remain challenging. Nevertheless, we are confident that the accelerated investment strategy in the Netherlands and our challenger strategy in Germany and Belgium are succeeding in supporting a solid future for KPN.

We recognize that we are outside our self-imposed financial framework, and we expect that this situation could continue for the coming quarters. We will continue to strive for a balance between a prudent financial framework, investments in our business, and shareholder remuneration.

All in all, KPN is on track to realize its full year 2012 outlook for EBITDA, Capex, free cash flow and dividend per share. Therefore I confirm the outlook.

Now I would like to hand over to Eric Hageman.

Eric Hageman

Good morning. As Eelco just highlighted, we recognized that we are still outside our self-imposed financial framework. Net debt at the end of the third quarter was stable compared to the previous quarter at 12.4 billion. The stable net debt was mainly the result of free cash flow generation during the quarter, offset by the interim dividend payment in August and some small items like the tax recapture payment.

Combined with a lower EBITDA over the last twelve months, this resulted in an increase in the net debt to EBITDA ratio to 2.7 times. Also this year we will see phasing in free cash flow with a significant part still to come in the fourth quarter, which will positively influence the leverage ratio. However, in the short term, the evolution of this ratio maybe impacted by strategic investments.

In the third quarter, we strengthened our liquidity position by issuing a 750 million Eurobond at a low coupon of 3.25%, compared to our current average coupon of 5.1%. This illustrates that KPN continues to have very good access to the debt capital markets at attractive rates. This quarter we also extended our 2 billion revolving credit facility with all our 14 relationship banks to July 2017.

The chart in the bottom left corner indicates that there will be a bill in redemption coming up in November, the 13 to be precise. This can easily be financed by the 1.5 billion in cash we currently hold on our balance sheet.

Let me continue with the group results for the third quarter. Revenues were down 2.8% year-on-year, excluding the impact from the loss of revenues as a result of the sale of Getronics International earlier this year. The decline in revenues in the Netherlands was mainly due to the performance of consumer mobile and NetCo.

EBITDA decreased by another 53 million or 12% year-on-year, which was mainly caused due to NetCo Germany, and consumer residential.

Operating expenses this quarter were down 6.5% year-on-year due to lower Opex because of the sale of Getronics International and the 72 million lower restructuring cost compared to the same quarter last year. These Opex savings were in part offset by investments to strengthen our Dutch market positions, increased commercial investments in Germany, and higher pension costs.

Furthermore, depreciation was up 12% as a result of a one-off depreciation charge of 42 million in Germany related to assets under construction as a result of a reclassification to PP&E.

Let us now move on to the year-to-date group results. Revenues year-to-date were down 1.6%, excluding the impact of the sale of Getronics. In line with what we just saw for the third quarter, this decline is mainly due to the performances of consumer mobile and NetCo, and to a lesser extent is attributable to our residential and business segments.

EBITDA decreased by 440 million or 11% year-on-year, which was mainly the result of NetCo and consumer residential’s performance. Taxes year-to-date were up 59 million compared to the first nine months last year, when KPN benefited from a one-off innovation tax facility related to the 2007-2010 period.

Let us now skip one slide and move to the group cash flow year-to-date. Year-to-date 2012, we generated 917 million in free cash flow, 600 million less compared to last year. This delta can be explained as follows, 450 million lower EBITDA, 184 million higher tax payments, 80 million more negative change in working capital and 48 million higher Capex, mainly related to an increase in customer driven investments in the Netherlands, such as TV and Fiber-to-the-Home activations and handsets.

The decrease in cash flow is partly offset by 74 million higher change in provisions, mainly due to high additions to provisions caused by actuarial losses of 55 million at Getronics UK and US, and 66 million lower interest paid mainly due to bond redemptions in Q3 of 2011, and a shift of coupon payments to Q4.

In Q3, we have seen a positive impact on our pension funds, largely driven by the implementation of the Ultimate Forward Rate as of the 30 September, which led to a positive effect on the coverage ratio of 3 percentage points. The Ultimate Forward Rate is a part of the discount rate for pension liabilities used by the Dutch pension regulator. The coverage ratio of our largest pension fund increased to 104% in the third quarter, and the coverage ratio of our other smaller pension fund increased even higher to 109%. This led to an average coverage ratio of KPN pension funds of 104% at the end of Q3.

In Q3, a recovery payment of 19 million was made. Based on the coverage ratios at the end of Q2 and Q3 2012, KPN will have the obligation to make recovery payments of 23 million in the fourth quarter, and 19 million in the first quarter next year.

Let us now review in more detail the financial results of our segments, starting with our Dutch Telco division. Q3 2012 saw a continuation of trends within our Dutch Telco businesses. Revenues and other income were down 94 million or 5.7%, including a negative impact from regulation of 27 million. The lower revenues were mainly observed at consumer mobile and NetCo.

EBITDA, excluding restructuring cost, decreased by 101 million, or 11%, as a result of lower revenues, and a 60 million regulatory impact. The EBITDA margin decreased to 50.3% from 53.5% in the same quarter last year, but was higher than in the first two quarters of this year, which was around 49%. At the same time, improvements in our underlying cost structure are planned to support our margin at Dutch Telco going forward, which I will talk about in a moment.

Let us move on to the financial review of the segments within Dutch Telco. Revenues at consumer mobile were 51 million or 11% year-on-year as lower traffic was only partly offset by higher committed revenues. Service revenues were down by 10%, and impacted by regulation to the tune of 13 million. EBITDA at consumer mobile increased to 145 million in the third quarter from 135 million in the second quarter, driven by the introduction of the new commercial propositions, including a handset lease model. As a result, we have seen an increasing margin over the last quarters to 34.4 this quarter.

Revenues at consumer residential were relatively stable over the last quarters at 457 million as the positive trend in TV and Fiber-to-the-Home revenues were offsetting the lower revenues from a smaller fixed voice customer base. The EBITDA at consumer residential was also stable Q-on-Q at 100 million. This led to a stable EBITDA margin Q-on-Q, albeit at a lower level to last year as a result of the increased activation cost for IPTV and Fiber-to-the-Home as the number of customers continued to increase, higher content cost, and a continued decline of traditional services.

Revenues and other income at our business segment were down by 31 million or 5.2%, impacted by 10 million regulation, lower traffic, the continued decline in high margin traditional services, and price pressure in a competitive market environment. Wireless data revenues continue to show a good performance though, and the challenger brands, Telfort and Yes Telecom, also performed well.

There is a noticeable revenue step down Q-on-Q. This is due to lower hardware sales. In line with lower revenues, EBITDA for our business segment was also lower at 194 million in the third quarter compared to 200 million in the second quarter, and 210 million in the same quarter last year. This led to a relatively stable EBITDA margin of 34.1% in Q3.

Revenues at NetCo were down 6.5% year-on-year. The top line performance of this segment follows the revenue trend across our Dutch Telco operating segments. EBITDA at NetCo declined to 354 million this quarter due to increased fiber activations. This quarter we announced a partnership with Tech Mahindra, which should lead to a more efficient IT spend in the Netherlands and result in 200 million IT savings over a five-year period of which the majority will fall in the NetCo segment.

Revenues at Corporate Market The Netherlands were down 5.2% year-on-year at 291 million due to the adverse market environment, which continues to negatively impact the ICT sector in the Netherlands. Prospects in clients continue to postpone larger ICT investments. The underlying EBITDA margin was 7.2%, where we now start to benefit from lower personnel cost as a result of a successful FTE reduction program.

Revenues at iBasis were up 8 million or 3.1%, including a positive US dollar versus Euro currency effect of 4.6%. The EBITDA margin in iBasis was higher in Q3 at 3.4%, supported by a focus on cost control and some smaller one-offs.

On the next slide we set out that we continue to make good progress with a 4,000 to 5,000 FTE reduction program as we have recorded 208 million restructuring cost related to approximately 2,500 FTEs since the start of the program in the beginning of 2011. We have been able to reduce the number of FTE in the Netherlands by 1150 since the start of the program.

However, the number of FTEs that left KPN as part of the FTE reduction program is actually higher at around 1300. The offset in increase of 150 is due to the accelerated investment strategy implemented at the start of the year. Here you need to think about more customer facing staff, in for example our stores and at contact centers.

You may have seen the relatively higher amount of provisions per FTE. This is mainly because the provisions are related to a relatively higher number of efficiency reductions than originally planned.

Let us now move on to the financial results of our international division. Revenues and other income was stable in Germany in the third quarter at 839 million. Underlying service revenue growth of 0.9% was lower than we expected at the beginning of the year when we presented to you in London. The top line growth has slowed down following increased competition in Germany in the last quarters. Eelco will further elaborate on this when covering the operating performance of Germany.

The EBITDA margin in Q3 for Germany was in line with the previous quarters at 38.5%. Compared to last year it is a couple of percentage points lower as we are seeing higher costs related to commercial investments needed to support the introduction of our new mobile propositions. In Belgium, we have again seen very strong profitable growth. Underlying service revenue growth was 9%, adjusted for 5.1% regulation impact, driven by growth in mobile data of B2B and wholesale businesses, very much in line with what we saw in previous quarters this year.

The EBITDA margin in Q3 for Belgium was 36.8% fuelled by strong underlying EBITDA growth of 17% year-on-year, which in turn is driven by the solid top line growth and continued focus on cost containment. Revenues at rest of the world decreased by 36% year-on-year due to the sale of KPN France at the end of the fourth quarter last year, and the highly competitive environment in which automobile continues to operate.

The negative EBITDA of 2 million in Q3 is a slight improvement compared to the previous quarter. As you may have seen last week, following the approval of the Dutch competition authority we announced completion of the acquisition of 4 fiber service providers in the Netherlands. This is an example of an acquisition which is at the heart of our accelerated investment strategy to strengthen our domestic market positions.

In addition to that over the past years we have also continued to streamline our portfolio of businesses, making clear choices around core versus non-core businesses, always adhering to our principle of creating value. On top of the encouraging organic growth in consumer residential, the acquisition of the fiber service providers will add approximately 120,000 broadband customers. All in all, this will lead to a broadband market share of 41% and a fiber penetration level of 29%.

Our product offering for the business segment has been strengthened by two acquisitions bringing portfolio improvements much to the benefit of our customers. We have also successfully divested part of our non-core assets in order to focus on our core footprint and most profitable businesses. The divestments of the four Getronics subsidiaries like Getronics International, and selling part of our mobile towers in the Netherlands are a testament to that.

With this, I would like to hand back to Eelco.

Eelco Blok

Thank you, Eric. Let us now look at consumer mobile. Mobile service revenues were down 10% year-on-year as lower traffic and a 3% regulation impact were only partly offset by higher committed revenues. This quarter the retail postpaid net adds were at minus 14000. This is mainly due to aggressive promotions by competition following our Hi and Telfort portfolio launches in the second quarter.

Furthermore, our commercial spending was relatively low in Q3. To improve the net adds trend we have increased commercial activity again in the last weeks of September. The postpaid retail ARPU remained under pressure at 34 euros, partly driven by increasing SIM-only subscriptions within the mix and lower traffic. The committed ARPU percentage was up by seven percent points year-on-year to around 66% as new propositions are now being launched for old rents.

Our distribution footprint has again been strengthened in the third quarter by opening multibrand stores and XL shops. All in all, the total Dutch service revenue market share remained relatively stable over the last quarters around 44% to 45%.

We are seeing encouraging trends in consumer residential. Both TV as well as fiber continued to show positive developments leading to an uptake of 63,000 triple play customers in Q3. Total triple play packages are now at 816,000, an increase of 34% year-on-year. This led to average revenue generating units per customer of more than two.

IPTV growth with 88,000 net adds for the quarter led to a TV market share of 20%, 3 percent points higher compared to the same period last year. We took another step to improve our market leading IPTV proposition by introducing IPTV on the smartphone. Another encouraging development is an improving broadband customer base trend. We have shown organic growth in the customer base for the first time in several years. As a result, the broadband market share is stabilizing around 39%.

We were able to grow the broadband customer base, while at the same time slightly increase the average ARPU per customer. As mentioned by Eric, the acquisition of the four fiber ISPs brings our broadband market share to 41%. The performance in our fiber areas remain strong with the highest organic number of quarterly Fiber-to-the-Home activation to date. The increase of 34,000 activations this quarter led to almost 200,000 homes activated at the end of the third quarter. The growing Fiber-to-the-Home customer base is supporting the take-up of high-value propositions.

Our fiber penetration level increased to 18%, showing a 7 percent point improvement year-on-year. Including the 120,000 customers from the acquired service providers will bring the penetration further up to 29%. The rollout of Fiber-to-the-Home continued at a good rate reaching well over 1 million homes passed in KPN areas.

Let us now move onto the operating review of mobile international. In Germany, the increased price competition resulted in a slowdown of service revenue growth. Postpaid net adds remained at a high level driven by the continued successful rollout of all-net flat propositions introduced in Q2. However, the growth from higher postpaid net adds is being offset by customers optimizing their tariffs plans.

Prepaid net adds of 284,000 increased quarter-on-quarter, but are still below the 2011 level. The main reasons were increased competition in the ethnic segment, and a value focus on customer acquisition. E-Plus’ market share and service revenues remained relatively stable at 15.9%, supported by continued data service revenue growth of 40% year-on-year.

Customers in Germany are increasingly looking for opportunities to reduce their costs and improve their tariffs. As a result, in recent quarters all network operators have introduced new tariff plans with a strong price focus in both the postpaid as well as the prepaid market.

In the postpaid market, high-value customers are trading down in tariff plans offsetting the growth from new customers. In the prepaid market competition has mainly increased in the ethnic segment, while we have seen aggressively priced new entrants in the market. As a challenger, E-Plus has adjusted to this trend by the introduction of new base tariffs earlier in the year, and attractively priced all-net flat postpaid propositions in Q2, leading to a higher level of postpaid net adds.

Together with our partners, new prepaid propositions have been launched to capture data growth in the wholesale markets. At the same time, the roll-out of our high-speed data network is on track to support further growth in data revenues.

Belgium continued to show strong underlying service revenue growth of 9%. Like in previous quarters, the strong service revenue growth was driven by B2B, wholesale and data. We expect to have grown our service revenue market share to 20%. Postpaid net adds were 3000 negative this quarter due to higher churn caused by increased competition in the market for both business to consumer and business to business.

Prepaid net adds corrected for clean-up grew to 234,000. The prepaid clean-up contained the disconnection of 930,000 expired SIM cards leading to negative prepaid net adds of 696,000 in Q3. Several commercial initiatives were launched this quarter as a countermeasure to maintain price leadership in the market. For instance, Jim Mobile as well as the BASE portfolio were revamped. Besides introducing new commercial initiatives, we have made further investments in our network and are on track with the roll-out of high-speed data.

In my concluding remarks, I would like to again highlight the following. We have seen some mixed operational performances across the group in Q3. On the one hand, we are seeing encouraging trends in consumer residential such as a growing broadband customer base and strong IPTV and Fiber-to-the-Home net adds. Our TV market share increased to 20%, supporting a further take-up of triple play packages, while the fiber penetration level increased to 18%, and as a result the broadband market share is stabilizing around 39%.

On the other hand, we face conditions of increased competition in our mobile markets. The total Dutch mobile service revenue market share remained relatively stable around 44% to 45% in a competitive environment. In Germany, the increased competition on price has resulted in a slowdown of service revenue growth as the growth from higher postpaid net adds is offset by customers optimizing their subscriptions.

While Belgium continued to show strong underlying service revenue growth of 9%. All in all, we are on track to realize our 2012 outlook.

With this, I would like to open the floor for Q&A. Thank you.

Question-and-Answer Session

Operator

(Operator instructions) The first question is coming up from Mr. Akhil Dattani, JP Morgan. Go ahead please.

Akhil Dattani – JP Morgan

Yes, hi. Good morning. Akhil from JP Morgan. Just two questions please, firstly just be interested in a bit more color on your comments on the Dutch mobile market. You started by saying that competitions picked up a bit, so I guess I will be interested to understand who’s driving that, wherever you are seeing the pressure, and adding to that you said that commercial spend from yourself would pick up in Q4, so could you maybe just help us understand whether you think trends will improve or deteriorate into Q4, and just a bit more color around the outlook there.

And then secondly on Reggefiber, I guess just keen to understand a bit better how you think about the impact of that on your net debt once we get to 2014, which is when you will be consolidating that asset. I guess in terms of helping us with that, maybe you could walk us through the debt moving part, specifically where the debt was at the end of 2011, what you see happening to that debt profile in the next couple of years, and I guess also with that what are the final costs of buying out the Reggeborgh equity minorities out of that period as well, that will be very useful. Thank you.

Eelco Blok

Okay. I will start by answering the first question and then Eric will take the second set of questions. On Dutch mobile, both Vodaphone and T-Mobile, after we have introduced our new propositions in the second quarter have increased their marketing spend and have also increased their promotional actions. And we have only taken actions on this response of the other M&Os in the Netherlands in the second part of the last month of the third quarter to be able to accelerate the growth of net adds again, and we expect the results coming up in the fourth quarter.

We don’t expect trends to worsening, but as I said competitiveness has increased in the Dutch market and we have responded to that. Eric, maybe you can take the second question on debt.

Eric Hageman

Yes, sure. I think let me start by saying that we are very happy with the progress that we are making. On the one hand, I think we are very much on track with making sure that the right numbers of homes get passed, but more importantly that the activations are picking up, and in that light obviously also the inorganic approval that we got from the competition authority is – has extremely helpful – extremely helpful to us.

Just on the net debt implications, Akhil, most part of the options are exercisable in 2014 and 2017. We put out a clear document on that on the 11 of November, if I recall correctly last year. In essence, if you look at the combination of the Capex that we put in, the shareholder allowances are within the business, plus the payments for exercising the options, you are looking at an impact of around 0.15% to 0.2% on net debt to EBITDA, and that is by 2014. So exercising option one and exercising option two that is what we have been talking about, and this is what the impact would be.

Akhil Dattani – JP Morgan

Great. If I could just follow up on that last point from Eric, and would you happen to be able to give us some rough color in terms of the absolute net debt increase, because I appreciate there is some EBITDA contribution as well, but just so we can understand how you get to the 0.2, and then I guess adding to that just as a kind of broader point to that at the moment as you said slightly outside of your leverage range, you are saying that this would take that a little bit higher, so I guess just interested in how you are thinking about the whole balance sheet situation at the moment, is your confidence on the ‘13 dividend because you are quite positive on the outlook, or are there other items you also need to consider here?

Eric Hageman

So, two questions, let me then first answer the question on the debt, so you will understand that number a bit better. So the 0.15% to 0.2%, you have to assume a debt of around 900. So if we would now consolidate that is what would be added to the number. So it is around 900 million, of which about half of it are shareholder loans, and about the other half is the current external financing that this JV has assumed. So these are lines of loans that they have received through other funding, other means than the two shareholders. So that is where the 900 comes from.

If you then look at our confidence with the outlook, in an essence what we have said is two things. One, if you look at the current performance year-to-date and if we look at what Q4 will bring, then we are very happy to confirm that, but also we put in the extra comment that we do see that the market conditions remain challenging, and if you then link that to the financial framework it is the second quarter that we are outside the self-imposed range of 2 to 2.5, and that we continue – you know, we expect that that will continue for the following quarters.

However, the main variable that is affecting this on the positive side is we typically expect more cash in the fourth quarter. This is the phasing that we always talk about that obviously will help this ratio, but there is potential yield, so some strategic investments that we have to make in the fourth quarter, which is obviously as negatively affecting that. You know, we really think that, you know, that we have taken some very good actions early this year already.

If you look at the share buyback, in January if you look at the dividend that we did in July, you know, certainly the last one that saves you around 800 million in cash. So we’re quite happy that we could confirm that outlook, but also look clearly was a good commitment to our financial profile for the future.

Akhil Dattani – JP Morgan

All right. Thanks Eric.

Operator

The next question is from Mr. Hugh McCaffrey, Goldman Sachs.

Hugh McCaffrey – Goldman Sachs

Good afternoon, or good morning rather. Thanks for taking the questions, and I have two questions. Firstly, and just kind of following up around the balance sheet there are two levers really there in terms of capital allocation, just cutting the dividend potentially and lower capital intensity, so can you just talk about how you see capital intensity evolving in the business over the next year or two, and then secondly just in terms of migration to [new firms] in the Netherlands, and SMS volumes are still very negative, and how far along in the migration do you feel like you are, and when do you think that that kind of decline in SMS volumes is likely to stop?

Eelco Blok

On Capex intensity, as you know the customer driven investments in the Netherlands will continue to be high in line with our accelerated investment strategy, and Capex in 2012. As a result of our accelerated investment strategy, we’ll be in the upper end of the outlook range of 2 to 2.2, and in 2013, it is well not expected to have a lower Capex level than in 2012 as a result of the continued investment strategy that we have implemented.

So that is on Capex. Then on where we are on the mobile trends in the Netherlands, we see a continued migration to the new tariff plans at the end of the third quarter. We were at a 66% level of committed ARPU, and while we still have a part of our base in the old tariff plans, we need another year to fully migrate the customer base to the new tariff plans and we foresee a see an increase of committed ARPU over the next period.

Hugh McCaffrey – Goldman Sachs

That is clear. Thanks.

Operator

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

Nick Lyall – UBS

Hi, morning. It is Nick, UBS. Can I just ask you a couple please, on the – have you seen any rise in [Ziggo] marketing spend into the fourth quarter because it sounded like their spending levels were quite depressed in Q3. So is that maybe a bit of a risk to some of the fixed trends in the fourth quarter. And then secondly, back to the debt question, you have mentioned self-imposed targets, can you just discuss how the credit rating agencies look at you being with or above your ceiling of debt for the time being as well. Thanks.

Eelco Blok

Eric will take the second question on the credit rating. On [Ziggo], well, it is up for [Ziggo] to answer that question. We are convinced that our current strategy that we have started to execute on last year is resulting in positive trends in this part of our business. As I have said, a growing broadband customer base for the first time in several years, stabilizing our market share at 39%, and increased continued growth of IPTV and Fiber-to-the-Home net adds, and we will not make any changes to this seriously because we are convinced that this will bring the results we need.

So and well we have to see what competition will do in the fourth quarter, but we will do everything to continue the extent we have put in place, our broadband market share, including customers of the small acquisitions is now at 41% on IPTV. On TV, our market share has grown to 20%, it’s growing 1% per quarter, and in Fiber-to-the-Home the penetration increased to 18%, 7% points higher than one year ago, and including the customers, the fiber customers of the acquired ISPs, the penetration of Fiber-to-the-Home will increase to 29%.

Eric Hageman

On the discussions with the rating agencies, well let me I think first and foremost say that we cannot speak on behalf of them. It is obviously up to them to do their own analysis and assessment, but needless to say we are in very close contact with them. So we have regular updates also before the Q results. They know the exact details of our business plan, including the potential for the strategic investments. I think fiber and think for example spectrum, and what is clear from our conversations during the year is that some of the actions that we have taken like stopping the share buyback and taking the dividend down you know, have been very credit positive for them.

I think what they also understand and, you know, we’ve talked about it also in January is if there is a justified reason why you are outside the band then that is something which is – what is acceptable – and what is acceptable then is when you are investing in your business to improve your positions and that’s exactly what we are doing. We also shared with them that you know, the market conditions are challenging in the coming period, but we are very confident you know, that the accelerated investment strategy will yield results in the Netherlands but also in Germany and Belgium.

I think the main point that we reiterated in our last conversation is that we take you know, a lot of comfort from many of the positive operational KPIs that we’re seeing some that Eelco just mentioned. So if we look at broadband, if we look at TV, if we look at fiber you know, all of those are very positive developments. Ultimately that has to be translated into improved financial results, you know, that is what give us comfort in those discussions.

Nick Lyall – UBS

That’s great, and they do give you a certain time scale to get back within the bonds or any (inaudible) or ceiling?

Eric Hageman

If you – the discussions is much broader than just at the band, that is one that we talk about to I guess also make it you know, it’s a simple KPI to discuss with the outside world, but also internally with them. If you look at the Ba2 and also the BBB you know, they are giving us you know, time to really make sure that, you know, the results of the new strategy that pays off. They understand that we are in a transition period. They understand that you know, certainly in this telco climate that we are in it takes time for those investments and those decisions that we’ve taken to be translated into financials, but again you know, the operational KPIs give us a lot of encouragement.

Nick Lyall – UBS

Great, thank you.

Operator

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

Dimitri Kallianiotis - Citi

Good morning. I’ve got two questions please. The first one is regarding Germany, the revenue growth obviously slowing down quite significantly. I just want to get your expectation for the coming quarters, if you expect revenue growth in Germany to turn negative, even pre any regulatory impact. And then my second question was regarding the strategic investment, I understand the spectrum auction coming up soon, but apart from that do you see any gap in your portfolio in terms of assets you want to buy, as you mentioned the small fiber acquisition that you’ve done, that you got the approval, anything like this that you think you need to do to improve the business going forward? Thank you.

Eelco Blok

Let me start with the question on Germany. We are seeing in Germany a trend of customers optimizing their tariff plans, and increased price competition in the market. As you know, we have already started to introduce new propositions at the beginning of 2012, and we introduced our own net flat propositions in the second quarter resulting in a high number of net adds, postpaid net adds, but it is difficult to predict how long the effect of customers trading down to new tariff plans will be there, and how long we have to wait until we see the impact of the growth rates of the net adds in Germany. Also helpful is the continued rollout of our high-speed data network that is on track and that will support further growth on data in Germany.

Eric Hageman

Your question Dimitri on M&A, as always we continue to be focused on creating value whether we’re buying or selling assets. From a strategic point of view, you know, we obviously look at in country consolidation first. This is also why we put in additional slides in the deck today to show to you that we continue to invest in improving oppositions in the Netherlands.

We’ve highlighted two small acquisitions that we’ve done to strengthen the portfolio in our business segment. If we see opportunities where we can also expect to get approvals from the regulation, and then we also will look at opportunities on the ISP side, which has helped our broadband market share.

So we’re very happy with that but from a sort of financial impact that we’re looking at, these are not big numbers, and if they are, you know, bigger numbers you know, they can easily be offset by some of the divestments that we continue to do, I think for example about you know, the dollar sales that we’ve been doing in the Netherlands.

Dimitri Kallianiotis – Citi

Thank you.

Operator

The next question is coming from Mr. Frederic Boulan, Nomura. Go ahead sir.

Frederic Boulan – Nomura

Hi good morning gentlemen. Two questions if I may. Firstly back on the fixed trend in Holland, good progress on broadband driven by fiber. Can you comment on the costs associated to this growth, margin seems to be holding up pretty well there as well, and also if you could comment on where the churn in market share going in the VDSL areas, and in general is there a need to expand fiber much further in the long run to secure market share, if you continue to see churn in the cooper you have even with the VDSL upgrade to 80 megabits. And secondly, sorry to come back on that question, but I’m struggling a little bit to reconcile your comments around the financial framework, and the fact that you reiterate this morning the target of growing dividend next year. So if we put some cash for spectrum even with the (inaudible) be done next year, your leverage should remain above 2.5 times, so whether it makes sense to look at reducing dividend to strengthen this balance sheet? Thanks a lot.

Eelco Blok

Let me start with the first question on the fixed trends. We are investing in this part of our business by upgrading the copper network, continued investments in fiber, and continued improvement of our IPTV product resulting in the trends you have seen in the third quarter. We are now planning to increase our investments either in the network services and the marketing and customer acquisition.

So we expect to continue the growth with the cost level that we are seeing in the third quarter. On churn, in copper areas we have implemented the hybrid strategy, Fiber-to-the-Home roll-out and upgrading the copper network to be able to offer the high-end triple play packages also to our single and dual play customers.

Given the penetration on copper of the Fiber-to-the-Curb VDSL coverage, we now are able to offer in a larger part of the country our high-end triple play services resulting in a reduction of the churn, together with the continued high growth in Fiber-to-the-Home areas, we were able to stabilize our share, and believe in one of the next quarters we can start growing again and given the results we will take positions on the balance between continued roll out of Fiber-to-the-Home and the numbers of homes passed, and focus on VDSL Fiber-to-the-Curb areas.

Eric Hageman

On the financial framework front, you know, as I said and we said during the presentation as well, we recognized that this quarter, in the second quarter that we are outside the self imposed net debt to EBIDTA range, and also that we expect that we might be outside this frame for the coming quarters. And that also mainly has to do you know, in the short-term with the potential strategic investments that we have to make. Again we have taken some firm decisions already earlier this year. I repeat that the share buyback in January and then, you know, the saving of around $800 million by taking the dividend down from $0.90 to $0.35.

Maybe another important point to make is the following. You know, there is phasing in the cash flow as we see every year. I think it will be even more phasing in this year than we have seen in previous years. You know, then we will know where we will end up the year. I think if you look at some of the steps that we’ve taken, I mean that’s the main reason why we have $1.5 billion in cash on our balance sheet at the moment. So that’s from a liquidity perspective a very healthy position to be in.

What is more, we talked about the operational KPIs, which we are very happy with, you know, at some stage that has to translate into financial results. So with that you know, we are okay with what we are currently seeing around financial framework because we can explain it but also we look with confidence at the future.

Frederic Boulan – Nomura

Okay, thanks a lot.

Operator

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

Matthew Bloxham – Deutsche Bank

Yes, hi there. Two questions, first on Germany, just wondering if you can give us a little bit more, few more numbers around the tariff optimization process, how much longer you see that happening for, how much more there is to play for, and secondly on domestic mobile, obviously we heard from [Ziggo] earlier this week that they are extending their Wi-Fi trial.

We’ve seen Telenet get good traction with our own Wi-Fi in Belgium, and something that Kabel Deutschland has as well in Germany. Could you just give us your perspective on the magnitude you see from that kind of cable threat into mobile, and what assets you’ve got that you can use to either kind of match that kind of Wi-Fi offering, or otherwise you can compensate for it, thanks.

Eelco Blok

First on Germany, customers in Germany are increasingly looking for opportunities to reduce their cost and improve their tariffs, and as a result we see that the high-value customers in the postpaid markets are trading down in their traffic plans offsetting the growth from the new customers we acquire on a level somewhat higher than 200,000 per quarter. And it is very difficult to predict how long this in fact will impact the growth rate in Germany, but we are confident that with the growth we have seen the previous quarters that we will be able to get back on our growth in Germany again.

And then I’m talking about underlying growth because you have to understand that there will be an [MTR] cut on December 1 in Germany. And then on Wi-Fi, for us of course it is important what competition is doing but it is also important what we are doing. We have Wi-Fi as part of our mobile strategy already implemented by using the KPN hotspots in the Netherlands. We are preparing our network for LTE with our investments in the network in the Netherlands and we believe that we will be able to be very competitive using old technologies that as a fixed operator we have available. So 2G, 3G, 4G, Wi-Fi and leveraging our fixed assets and fixed customer base.

Matthew Bloxham – Deutsche Bank

Okay, thanks.

Operator

The next question is coming from Mr. Luis Prota, Morgan Stanley. Go ahead sir.

Luis Prota - Morgan Stanley

Yes, thank you. Two questions please. One is on Netherlands and the mobile business, which has deteriorated a bit sequentially, but not so much on the consumer part of the business. It has been more around business mobile. So if you could elaborate a bit on the trends you are seeing there, whether it is about pricing or customers asking for discounts, competition on what could we expect would be useful. And secondly in Germany your new no-frills contract tariffs, dual phone, et cetera, were supposed to be mostly advertised through social media, no nationwide campaigns. Is this going to change now, are you planning to turn slowly, more aggressive to boost growth and if so what could be the impact on margins going into the next few quarters. Thank you.

Eelco Blok

Let me start with answering your first question. We are seeing no deterioration in the business market mobile except for a continued pressure on prices, particularly in the corporate and large business segments we see an increase in price competition, and in September we introduced new propositions. And we expect that combination of all the messages we have taken in the business market but also the consumer market that we will maintain our stable market revenue share positions combined in the range of 44% to 45%, but increased price competition in the business market and increased migration from – driven by the change of the tariff plans and the changing customer behavior and then the other question.

Can you repeat the second question, Luis, sorry.

Luis Prota - Morgan Stanley

Yes, no problem. I was asking about the dual phone no-frills contract tariff in Germany, which I seem to remember you were always saying that you were not planning to make a nationwide commercial campaign, and that was going to be supposedly to be advertised only through social media. So the question is whether this is going to change, now that you need probably to boost growth and whether this would have any impact on margins.

Eelco Blok

So Opex in Germany driven by the new propositions have increased in the recent quarters due to the higher commercial investments we had to make after the introduction of new propositions, and of course we have higher traffic costs due to the growing customer base, and for the near future we will target the margin in Germany to be somewhere in the range of 35% to 40%, and as you have seen in the third quarter we ended up with a 38.5% margin and the objective is to have a margin in the range of 35% to 40%.

Luis Prota - Morgan Stanley

Okay, thank you.

Eelco Blok

Okay everyone, thank you for joining our Q3 results conference call, and please do contact the investor relations team for any further questions. Thank you.

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