Koninklijke Kpn Nv

And good afternoon, ladies and gentlemen. Thanks for joining us. Welcome to KPS' third quarter 2021 results webcast. With me today are Joost Farber, our CEO, and Chris Vige, our CFO. As usual, before turning to our presentation, I would like to remind you of the safe harbor on page two of the slides, which also applies to any statements made during this presentation. In particular, today's presentation may include forward-looking statements, including KPN's expectations with respect to its outlook and ambitions, which were also included in the press release published this morning. All such statements are subject to the safe harbor. Let me now hand over to our CEO, Joost Vaarwerk.

Thank you, Reinhard, and good afternoon, everyone. Today's results show another important proof point of our strategic progress. Mass market service revenues grew again in the third quarter, supporting service revenue growth for the group as a whole. This time growth was visible in all our mass market segments, most notably in SME segments. We delivered service revenue growth in SME ahead of our commitment to stabilize the four-year end. This is an important milestone for us. as it provides confidence to deliver the turnaround for the entire business segment during our current strategic period. We've seen strong momentum of mobile inflow in recent quarters, and this accelerated thirds of 67,000 net ads across consumer and business this quarter. Consumer mobile service revenues continue to grow, supported by strong performance of our unlimited propositions. And with a solid adjusted EBITDA growth in the third quarter and a strong year-to-date free cash flow, we remain on track and confident that we will deliver on our full year 2021 outlook. At the second quarter result, we announced a 200 million share buyback, reflecting our confidence in the successful execution of our strategy. We've nearly completed this lack of a share buyback program, which we see as the first step to structurally return additional capital to our shareholders in the coming years. We continue to make good progress against the strategic and financial ambitions of our strategy, Accelerate to Grow, and we remain confident that this strategy will create long-term, sustainable value for all our stakeholders. We rolled out Fiverr to 93,000 households in the third quarter, a figure slightly lower than other quarters as a result of the August holiday period. This year we've rolled out to 313,000 homes and over the last 12 months we've added 424,000 homes. We continue to successfully add new fiber customers and upgrade existing customer customers in fiber areas. This will be a key driver for sustainable revenue growth. The joint venture, Glassport, is now fully up and running and has recently started its wholesale broadband access services for wholesale providers. Together with Glassport, we're going to jointly reach 80% of Dutch households by the end of 2026. And after reaching that point, CapEx will come down to a lower, more sustainable level. After returning to growth in the second quarter, we've been able to show continued growth in mobile service revenues this quarter. This was mainly driven by an acceleration of the commercial performance of the last quarter and a higher RQ level. Fixed mobile revenues increased 3.5% and total consumer service revenues grew slightly by 2 million euros. Customer satisfaction remains one of our top priorities and the progress in the last two quarters has been encouraging following a few tougher quarters. It's been pleasing to see how efforts in this area are paying off. Humor MPS recovered strongly to plus 15. This is a reflection of the success of our attractive KPN and Simio lineup, the quality of our products and services, and the customer journey improvements in several areas, such as customers moving into new homes, complimentary fiber upgrades for Coppola, customers in fiber areas, and a new KPN Wi-Fi manager we introduced for our customers. Now let's take a deeper look into our consumer KPIs. Broadband NetApps were again relatively stable this quarter. Within the mix, we see a positive inflow on our KPM brand. This was supported by solid fiber inflow, which level was seasonally lower at 36,000 fiber households, but fully in line with our expectations. Our fiber APA remained significantly higher compared to copper due to the take-up of higher speeds, more value-added services, and more SIMs per household. And importantly, for the first time, our fiber service revenue growth was higher than the copper decline. We've delivered 27,000 postpaid net ads in the third quarter in consumer market, and together with 1.7% higher postpaid ARQ, this led to mobile service revenue growth of 2.4%. Let's now move to the B2B segments. This year, we started to run the business segment by focusing on three distinct customer segments, SME, LCE, and tailored solutions. At our strategy update last November, we committed to stabilization of SME service revenues by the end of this year. We've delivered on that commitment well ahead of plan, driven by solid commercial momentum in both broadband and mobile. This was the main driver for the improvement in our business service revenue trend to a decline of 2.7% year-on-year, compared to a level of around minus 5% in previous quarters. The performance in LCE and tailored solution was aligned with our expectations, and as we highlighted earlier, it will take us some more time than in SME to deliver the turnaround there. Business MPS remained at a positive level of plus three as customers continued to value KPM for the stability, the reliability, and quality of our networks and services. Let's dive a little bit deeper into the drivers of the SME turnarounds. Our strong focus on acquiring new and retaining existing customers by migrating to KPI1 is paying off with solid base trends. This in turn provides a strong platform to increase density of product take-up by our customers as we leverage up and cross-sell opportunities. Looking at the revenue development of the three product groups within SME, we can conclude the following. We see healthy broadband-based developments, also supported by fiber and self-employed inflow, and this resulted in a strong growth of broadband and network service revenues. The mobile market remains competitive, resulting in continued price pressure. However, Strong inflow of new mobile customers, among others driven by Unlimited, is now offsetting that effect. This led to stabilization in mobile service revenues in SME in the third quarter, an improving trend compared to minus 11% in Q1 and minus 4% in Q2. And finally, In fixed voice, the pace of the decline here moderated from around minus 20 to approximately minus 10%. And this is partly due to the analyzation of the phase-out of ISDN 2 last year, which reduced the year-on-year headwinds. All in all, good performance in SME, which gives me confidence that we will also deliver a similar turnaround in LC and tailored solutions, the other parts of B2B. In wholesale, revenues increased by more than 7% in the third quarter, supported by our successful open access policy. In mobile, we added 33,000 customers, and that's making a total growth rate growth for the group, including consumer and B2B, of 100,000 this quarter. Also, providers continue to strongly outperform the two incumbents in terms of broadband-based growth. In this third quarter, 18,000 broadband lines were added, reflecting the attractive access terms we offer to service providers. Recently, we entered into several long-term agreements with some of the larger broadband service providers in the Dutch market. ACM is currently conducting its fixed access review, and we strongly believe that we are operating a highly competitive market. With our open wholesale access goal, we guarantee sufficient room for wholesale providers to grow and to compete. And customers in the Dutch market get high-quality services, can easily switch and choose from a wide range of service providers that offer value for money. Now over to Chris for our financial performance. Chris.

Thank you, Joost. Financial performance of KPN. Well, overall, I'm pleased with the development of our key financial metrics this quarter. Let me start by summarizing some of these. Our adjusted revenues increased 1% year-on-year, supported by growth in mass market service revenues. Our adjusted EBDA after leases increased 1.4% at a margin of 46.3% for the quarter, despite a tough comparison base in terms of OPEX. Free cash flow was more or less flat for the last year in Q3. Year-to-date, however, our free cash flow increased 7.1% despite higher CAPEX and taxes paid. Our indirect cost savings run rate this quarter was impacted by several factors. First, the comparable base for the third quarter last year was a tough benchmark to beat this quarter, so this quarter year-on-year is not a good proxy for a normalized run rate. Second, we continue to see some less tailwind from COVID-related cravings. And finally, some other elements affected our staff cost performance this quarter, certainly when compared to last year. These include our recent CLA increase, dotations to employee-related provisions, lower CAPEX charging, and importantly, large restructurings in B2B and TDO. These were effectuated in the first of October, with the full impact visible in Q4, not in Q3. If we look through these specific effects, we see a continued and structural decline in our cost base. This is evidenced by the continued decline of FTEs employed at KPN. For example, our own employee numbers are now significantly and structurally lower, even below 9,800, where we started with 10,100 in the beginning of the year. Our total staff, own staff and third-party staff, external staff, is now 30% lower than Q1 2020, for example. as testimony to our continuous restructuring and structural cost improvements. We expect to pick up the pace of our reported cost savings run rate by Q4 this year, which together with our mass market service revenue performance will drive EBITDA growth well into 2022. Finally, please note that our capex spend is well under control. Fiber spend is up, as we planned to do, and non-fiber capex is down since last year, as testimony to our enhanced capex vigilance. If we dive into revenue growth, we see we delivered mass market service revenue growth again this quarter, which also led to growth in the group's overall service revenues. This is an important proof point for the success of our strategy and the first step towards sustainable top-line growth for KPM. All three mass market segments contributed to the 2.2% growth in the third quarter. also grew by 9.4%, mainly driven by broadband and mobile business, and some support from seasonality and several smaller incidentals. SME service revenues inflected a 2.9% growth, driven by the success of our KPCAPI and AIM portfolio. In consumer, mobile service revenues continued to grow. As Joe said, fiber broadband service revenues were higher this quarter than the declining copper, but again there was some offsetting effect by declining legacy services. Albeit small, it's important to note that our mass market segment is now no longer depending on wholesale to show stable to small growth from here on. Also excluding wholesale, there's some growth. Our growth phase is widening. In terms of revenue growth going forward, we expect some technical headwinds in the year-on-year comparison Q4. We'll still grow our mass market service revenues, but do technical comparisons at a slightly slower pace than Q3. Notably, B2B will face a tougher revenue comp due to the spike in Q4 last year, which is mainly related to pass-through revenues in LCE and TEL solutions. And in B2C, more than half of the €8 million revenue correction we booked in the first quarter was actually related to the fourth quarter of last year, providing a more difficult comp for fixed service revenues next quarter. We expect both effects to be technical in nature and temporary and fade again in Q1 next year, after which our top-line growth will resume around the current pace. So in summary, our revenue will continue to grow. The base comparisons will prove difficult to read in Q4 and Q1, but underlying, there's solid growth rate in the mass market sphere of revenues. In terms of cash, we've seen strong cash generation this year, despite higher CAPEX and taxes. A higher capex related to the accelerated cyber rollout caused our operational free cash flow to decline, but this was counted by several other line items. More favorable developments in working capital, as our continued effort to reduce working capital intensity is paying off. 38 million euros lower cash interest paid as a result of bond redemptions last year, and lower cash restructuring impact. Our free cash flow margin improved to 13.7% of revenues, and is on a clear path to improve further, in line with our guidance. Our balance sheet continues to be resilient. Committed liquidity, consisting of over €700 million cash and short-term investments and a €1 billion undrawn sustainability link to RCF, covers debt maturities well through to 2023. In the quarter, we extended our RCF but added a sustainability-linked feature to it. This underlines our commitment to sustainable operations and sustainability-oriented financing strategies. Versus Q2, net debt increased by 92 million euros, mainly driven by the 4.5 cents per share interim dividend in August for a total of 189 million euros, and 90 million euros worth of share repurchase in August and September as part of the 200 million share buyback program for 2021. nearly completed. And again, these were partly offset by free cash flow generated during the quarter. Our levels ratio of 2.3 times is one notch higher compared to last quarter, but still comfortably below our ceiling of 2.5 times. And reassured by our current financial performance and good strategic progress, we confidently reiterate our 2021 outlook and our ambitions for 2023. So to summarize, as we noted in our statement this morning, the successful execution of our strategic plan enables us to return additional capital to our shareholders, who had a €200 million share buyback this year, which has nearly been completed at this point in time. Execution of our strategy is on track, and we remain focused on delivering long-term value to all our stakeholders. And today's results show another important proof point of the success and impact of our strategy. After returning to mass market service revenue growth in Q2, we've delivered growth in SME service revenues this quarter. The number of business segments that have inflected increases gradually. Our margins, both in EBITDA and free cash flow terms, developed favorably, and we feel confident about the cash-generating rate of the group. And we remain fully on track to deliver our full year 2021 guidance and commitments. Thank you for listening. Now let's turn to your questions.

Thank you. Ladies and gentlemen, we will start the question and answer session now. If you would like to ask a question, you may do so by pressing star 1 on your telephone. The first question is from Mr. Ketel Kiroya, Deutsche Bank. Go ahead, please.

Thank you. I've got two questions, please. The first one being the revenue growth trend is obviously very impressive, but Chris, as you highlighted, the Q3 operates reduction was a bit weaker. Can you help quantify the level of improvement we should expect for Q4? On my numbers, I was expecting 25 to 30 million of operates reduction in Q4 based on the fully EBITDA guidance. Does that seem reasonable to you? Yes. And secondly, how should we think about OPEX reduction for 2022? On the one hand, you have had slower progress in 2021, but on the other, that could also help the 2022 trend as well. So both those questions on OPEX, please. Thank you.

Okay, well, two questions on costs. First, let me outline again on costs. I think we're seeing structural improvement in costs. As I said, the FTE levels are continuously declining. Our own staff, we're less than 300 since the beginning of the year. External staff also less than 300, and those are structural. Attrition is also good to work about, you know, 40 to 50 attrition FTEs leaving the company. We're hiring a bit back, but net-net, we're declining our staff level structurally. And, again, there's some technical comparisons to Q3 last year, COVID, CLA, employment provisions, OPEX, CAPEX charging, some investments in commercial success. Those make for a slightly more difficult comparison to last year. So the number we present for Q3 is a bit unflattering in this sort of comparison. And, finally, the restructurings that we plan for this year are more back-end loaded. Long story short, you asked what's the guidance and outlook for Q4. You said you've got 25 to 30 million in your models. That's a reasonable model. If I were such a model, I'd keep that model up and running. That seems like a reasonable estimate to me. And as far as next year is concerned, well, our program is running. We've got our target and commitments. We see FTE levels declining, restructuring kicking in. So we'll give you the full year guidance for 2021 when that moment is due. That's going to be done at the full year results. But at this point in time, we stick to our overall commitments and we keep the cost program running. Perfect. Next question.

The next question is from Mr. Joshua Mills, Exxon. Go ahead, please.

Hi, guys. Thanks very much. A couple of questions from me. The first is on regulations. You mentioned the ACM review, but it would be great just to get a bit more of an overview in detail. as to how you see the potential timing, the areas that could be impacted, and what way those might be impacted. And then, finally, you kind of talk about extending some wholesale deals with larger customers. My question was, have you changed terms with T-Mobile before or after the recent announcement of the business sale? And then the second question was just around inflation. And we've talked about how the FTE reductions we're making can deliver longer-term cost savings. Are there any areas within your cost space which are subject to rising inflation and how the payroll contract sets up to reflect that as well?

Thank you. Well, Joshua, let me first cover the ACM question you raised. Yeah, so ACM is a regulator investigating the fixed market. It's a review they do every three years, so that's not a surprise. Latest was in 2018, which was annulled by the highest court in the Netherlands last year, so we currently were not regulated. In the whole discussion around market analysis on fixed broadband, we believe we have a strong position and a solid case. The market with our consumer broadband share of 38% against zero with 42% did not really change compared to last year. We follow an open wholesale policy. We did not change after we were deregulated. And that dynamic reflecting competitive dynamics in the market, you could say. So we see also providers actually gaining substantial market share, which proves the model is working. Now our regulator indicated it expects to publish a draft consultation document as it's called coming month, end of November we expect it. And after that, the process will take at least a couple of months until mid of next year. They also have to ask the market for consultation, make the final documents, pass it through the EU. It will take some time. There is a belief at ACM's side that there may be a risk that KPM's access conditions will get less attractive for the market and complicate. the possibility for competitors to grow. We do not recognize that and we look forward to share our ideas with ACM like we did with the providers in the market. And like I said, we were able to close longer-term contracts with those providers. Of course, there's a claim of T-Mobile in the markets, but let's hope that the new owners of T-Mobile are more reasonable and that we can sit together and work it out like we do with the other providers. But I'm looking forward to to have a good discussion with ACM and to understand the real worries. But like I said, we believe we have a strong position.

Yeah, on cost, Joshua, inflation, if you think about the different cost factors, I mean, staff is one thing. I think we've got an annual CLA increase. Our CLA runs into next year, then we have to renegotiate a new one. For the moment, I think... It's not just about wage increases, et cetera. Let's see how these negotiations work out. From now, I think continuation of our current wage policy is probably fair to assume. And with that, it's not just a P. We're structurally declining the amount of labor capacity at KPN. Let me quickly touch other components. Energy is a question that's being raised to us sometimes. The impact of that is still limited because we actually forward bought most of our energy. So I think the energy headwind next year is probably up to 5 million euros, not more than that, simply because we've actually pre- or bought forward much of our energy. At some point, the higher price will kick in, but not for next year. We see some inflation in technology prices, but that's still limited and to some extent complicated by the fact we've also forward procured quite some of our materials. And on the rest, it means that we have to be smarter in procurement. That means consolidation of procurement. For example, in the long tail of our spend to consolidate suppliers, we focus more on catalog buying, more standard buying to counter all these effects. So, In summary, is there some inflation? Yes, there is. So far, it feels manageable, and we can count it by, you know, volume assignments and other measures. So, I mean, its cost will no longer be, or inflation will no longer be a tailwind, but nothing that would keep us awake at night where we are today. That's very clear. Thank you.

The next question is from Mr. Ulrich Rater. Jeffrey, go ahead, please.

Thank you. I have two questions, please. My first one is on the inflection of mass market service revenue. There's the reporting of a further expansion of the growth rate, which is good to see. Would you go as far as committing to that remaining in growth, really on a quarterly basis over the foreseeable future period? Obviously, there is a bit of sort of pandemic help in there, I suppose, at the moment. And so the question is, you know, is this something that you can commit to on a quarterly basis that will remain in growth? Second question is the broadband RGU picture. Is this still sort of slight leakage of broadband customers, net-net, I suppose, as you lock customers into your own fiber network, but then the copper... customers who are in competitive fiber areas, they get sucked up by the competitors. So I was wondering, is there a point at which you think the broadband customer-based shrinkage can be stopped? I understand a bit about the higher output and the revenue growth that comes with the dynamics, but simply on the volume side, that it can be stopped. Thank you. Yeah, Uli, to start with your second question,

Of course, our strategy is not only focused on fiber, but also on broadband in general. The more fiber we roll out, the better it gets, because we strengthen our weakest areas first. because on one hand we have low quality on copper, on the other hand we have high quality on copper in certain areas, especially in the larger cities we can do 200 to 500 megabits per household via a double copper line. So what we now saw is that for the first time we were able to more than compensate the loss on copper by fibre and by pushing this further and by focusing even more on our copper steering as well, We think in the quarters to come we will have to grow in broadband both in business and in customers by this strategy. There is a turn on copper on one hand and there's a growth on fiber on the other hand and it's our focus area to run that balance and optimize that balance better along the road. So that's what our whole strategy is about. So last quarter, or a couple of quarters ago, we were still in the decline. The copper loss was much higher than the fiber came. Now it's more or less break-even, and on the revenue side, we do better. So, yeah, step by step, we improved this run rate, I would say. On mass market growth rate, I would say before I hand over to Chris, that it's also a step-by-step runway we run here. We identified mass market as the most important focus point for this year, because that's where 90% of our EBITDA comes from. Consumer, wholesale, and SME. And looking at the run rate, we saw the growth coming in SME, but I'm, of course, happy that it's really visible now. And I would say that, yeah, it's our job there to run the run rate in a better way in the quarters to come as well. Chris?

Yeah, to your point on the pandemic impact, the pandemic impact on revenues has actually been limited on the mass market. I mean, We lost, we gained something on interconnect revenues, you know, on interconnect mobile calls, people calling like, oh, 800 corporate numbers. And at the same time, due to the pandemic, we lost roaming revenues. So, without argue, and that's, of course, a much more higher margin distance. So, without argue, revenue-wise, it's been flat to slightly negative. EBITDA margin probably slightly negative. perhaps a bit of cost benefit to COVID, but the revenue has not been that much affected by the pandemic. If you look at the coming quarters, if I look at where we are today, I mean, and the upcoming comparisons, I think we're well set to grow well into next year, so we'll show year-on-year growth numbers well into next year. Simply looking at the current run rate of service revenues, the underlying growth rate, and then the upcoming comparables. As I said, Q4 will be a bit funny because, for example, this revenue correction that we booked, it was an unfortunate event in Q4 last year and a correction in Q1 this year. And that, for example, in Q4, expect mass market service revenue growth to be about 0.3% to 0.4%, simply because of that comparison, and going back to 2% or a bit higher in Q1, simply because of those technicalities. But the underlying growth is probably around 1.5% to 2% in the coming two quarters, and I can see it growing well into the next year.

Very helpful. Thank you very much.

The next question is from Mr. Conrad Zomer, ABN AMRO. Go ahead, please.

Hi, good afternoon. First question is on the healthy e-migration to KPM1. I think we did a great job on migrating FME. I can imagine that to migrate large customers is going to take more time or is simply more complex. What gives you confidence that that's running about one year behind the migration of SME? And in particular, what should we expect in terms of revenue loss initially? Because we did see that with SME. We've turned it around very quickly. But I can imagine it can be a little bit bigger in LCE. And my other question is on your statement about shareholder remuneration. You've nearly completed the $200 million. I know from talking to several investors that they were looking for another announcement this quarter. It looks like maybe at the start of 2022 you might announce another buyback. You've used the word structural a few times. It can maybe be a bit more specific combined with your leverage ratio, your cash flow profile, but in particular, what that could impact for the share buybacks going forward.

Thank you. Yeah, so I'll do the first question. Yeah, so we migrated all our customers to KTN1 in the SME segment. That was not done quickly, but it took too long, as far as I'm concerned, by the way, but we're there now. And by doing that, migrating them to the future-proof portfolio, enabling ourselves to sell up again to that customer base, now makes it possible and doable to grow in the SME segment. So the dynamics in LCE are completely different, although the idea is the same. In LCE, we will migrate the larger customers to a new environment And once they're there, we're much in a better shape to upsell and make our business grow. It's not that we have to start on that. We already migrated 80% of our LCE base to that new environment. And the difference between how we will follow the last 20% compared to SME is that we found out that the last 20% is the most difficult part. and the first 20% is the most easy part to migrate when it comes to customers. So on LCE, we are following a more delicate migration scheme to avoid that we really move customers against their wishes to a new kind of platform. So the dynamics are different. We're the largest workspace provider in the Netherlands, so there's a lot of workspace for large customers in that base. And it's not only migrating customers, but also really moving them up to a better, protected, higher quality, safer, faster service. And so maybe it will take some more time, but we're super focused on not... losing too much business there when we have to migrate the last 20%, but already 80% has been done on LC.

Yeah, Conrad, on the shareback, as you pointed out correctly, the 2020-21 program is nearly finished. I guess it will happen probably in the coming weeks. That standard 2021 program, as in this year, we affected return on the free cash that we generate this year, we return to our shareholders. We said this is a structural part of our shareholder remuneration policy. That means we're going to continue this. It doesn't mean we're going to announce another one every quarter, but we have to announce the 2021 version. The 2022 one we'll announce is the continuous and a constant part of our of our reward program in which we take free cash flow into account, balance sheet into account, which objective to make is a structural repetitive part of our, you know, shell reward, and we'll design it like that. The exact number, I have to keep, you know, the spirits up, tension high. We'll let you know when we get there. It'll probably be communicated as a future result when we get the outlook for next year.

Okay. Thank you very much.

The next question is from Mr. Polo Tong. Yes, go ahead, please.

Yeah, hi. Thanks for taking the question. I just have one. It's really just about EBITDA. So your EBITDA growth year-to-date is plus 0.3%. And to achieve your guidance for the full year, you need close to 4% EBITDA growth in Q4. So can you really just talk about what makes you so confident that you can achieve this step up in growth? Can you maybe talk through some of the key moving parts? And what does this mean for the trajectory of EBITDA growth into 2022? Thanks.

Yeah, Paulo, it's Chris here. I think for Q4, it's easy to talk about the earnings that you need rather than the growth. And we've given a guidance for the year. If you go back, you can almost like backwards solve the EBITDA you need to get there, which then is a growth. over last year. And again, last year, if you remember Q4, we had relatively low EBITDA, so the growth will look good. To me, it's about the absolute level of EBITDA, and look what we need, what we guide for for Q4, and compare it to Q3. For example, the Q3 EBITDA level was affected in September, but Q3 is always high, just the classical release of the holiday provision and some other elements. If you strip those out, we need to continue to run the current underlying earnings rate, do a bit better, and then we'll hit the number that we're required to meet our four-year guidance and the growth function of that. So to me, it's more about confidence on the euros we'll make in the quarter. And that actually is a continuation of the current structural earnings rate of the group with some slight improvements that we think is actually feasible. And then the growth number comes out of that. But it's the euro number that we should drive the guidance, and we've got all comfort in that. Okay, thanks.

The next question is from Mr. Andrew Lee, Goldman Sachs. Go ahead, please.

Yeah, good afternoon, everyone. I had two questions. The first was another question just around the pandemic impact on your top line growth. So obviously, you've had a successful period upselling, which is driving your strong growth in the quarter. Just how confident are you that this isn't just a temporary phenomenon caused by a pull forward of demand for higher speeds, given the work from home, et cetera, set up across Europe and the Netherlands for you guys? We're just seeing like an acceleration of people's willingness to pay more for more right now that doesn't necessarily continue. So that's question number one. Second question was just on B2B. Given your success in inflecting the revenue growth of SME, where does that put you or does that pull forward your inflection on B2B altogether and timeline on that? Thank you.

Well, when it comes to COVID's effect on our top line, we... We are not benefiting that much from COVID. We think there's a lot more to upgrade to do in the Netherlands than we currently see. This is the Netherlands. So when we started on fiber, people started to buy 50 megabits. Currently, 100 is more the average. So we don't think that during the pandemic, people ask for an upgrade, and later in time, they will ask for a downgrade again. Once you're up on 100 or 200, And you found out the difference. People will not move back. By the way, we also pried their speech on Fiverr more attractively last quarter because we really tried to motivate our customers to do an upgrade. But we didn't see a real relation between pandemic, COVID kicking in, and upgrades being asked. It's a more delicate line that we see there. So we think now we roll out fiber and we move to XGS POM, which is enabling us to upgrade to 10 gigabits per household. We think there's far more potential in upgrading our customers in the years to come. And on B2B, well, we announced that we're going to stabilize our SME business second half of this year. So we're a bit ahead of the track with a slight growth in that segment, so that's good. And of course, now the jury's out. First of all, keep the growth in SME. And secondly, how to reflect the other parts of that B2B business. And when we aim for that, and I think it's We're ready for an update on that when we release our annual figures next year. And for us, that, of course, is a super important milestone because then we have a full top line growing again. But we're convinced we're going to do it. We don't want to overpromise now. It's the first quarter we see the SME market growing. So first keep that under control, and then soon we will come back to you on how to inflect the other part of B2B.

Thank you. That's very helpful.

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

Yes, good afternoon. Thanks for taking my two questions. So the first one is on CAPEX, and I was wondering how do you see the CAPEX profile evolving in the medium term? I think, Jos, you mentioned signals, CapEx normalization starting from 2022, but then when the 5G network densification kicks off, what sort of impact will it have? Do you think that the capital intensity eventually will start growing again if you think about the next five years? And perhaps related to that, but moving to the shareholders' remuneration, so as you make the share-by-back a structural component, and obviously you create a very strong signaling system, and I was wondering whether CapEx at some point becomes subordinate to the shareholder remuneration, so in other words, whether the capex number becomes even more discretionary for the sake of keeping a gradually increasing shareholder remuneration. Thank you.

Yes, Luigi. Last year, when we announced our strategic plan, we were fully aware of the fact that we were increasing our capex to a level of between 1.1 and 1.2 related to the rollout of more fiber in the Netherlands. With that capex envelope, we think we stretched the level of investments in the Netherlands. It's a huge amount of capex for a country like the Netherlands. And what we expect is that after 2026, when we're done, because then we rolled out 80% and we expect other initiatives to cover the other 20% in the Netherlands. So the whole Netherlands is connected to FibreDEM. It makes sense to put in the program that we will step down significantly on CapEx. Now, in our industry, there's always a promise of a short-term step up in CapEx and a longer-term step down. And we are aware of that as well. So it is for us super important that we stick to that program and we keep our promise. 5G. is something we really are very prudent on. There's an auction coming up next year. We already rolled out the network. The network is 5G ready on 5,000 sites, which covers the Netherlands. But we're not trigger-happy to start rolling out to a more dense network, thousands of sites in the Netherlands, because we really are working there business case-based. So we have some field trials out there, and we're scanning all over the world what's happening on 5G. It's super fantastic what one can do on 5G on certain locations, but it really should pay back before we do the investments. We've seen in other countries, So many investments in such doubtful business cases that we really are prudent there. And so I don't think we will start to work on a network that's covering 5G, 3.5 gigahertz spectrum kind of speeds through the Netherlands. It really is going to be business case by business case.

Yeah, on the CapEx, Luigi, to add to that, I mean, if you think about the CapEx ratios, I mean, our fiber, we're spending between 8% and 10% of our revenues on fiber. It depends a bit on what quarter you look at. Non-fiber is between 12% to 14%. It fluctuates a bit per quarter, but you get like 22%, 23% of revenues on CapEx. That is, we are fully aware that's a significant spend. And as Joost said, as soon as the fiber program is done, you know, that big chunk of the fiber program will obviously fade away, and you get to an underlying fiber, you know, CapEx profile, which is probably more in line with where the European telcos are, much more in line with, you know, our non-fiber spend. And that's where we look at it. Is it subordinate to shareholder returns? The way we think about it is this. You look at your KPACs that you can structure into different buckets. There's the bucket that has to do with maintenance, lifecycle management, dealing with increased traffic, security. That is your license to operate that you will always have to invest to make sure we keep our business running. There's KPEX that relates to customer KPEX. And in general, that good KPEX provides, of course, yourself profitable products. But assuming that your business is profitable, consumer KPEX tends to be good KPEX. And then there is Capex, which is more growth-oriented, which I would qualify as fiber at some point, growth-oriented Capex. And it's really clear that that needs to make an attractive return. What we tend to do, of course, is look at the ROI, the IRR of the Capex you invest there. And, of course, you always keep in mind, how does the IRR of that Capex stack up to, for example, buying back your own shares? Not that you maybe could swing CapEx 100 millions every year and buy back shares and back and forth, but it's a good disciplining factor to make sure that the return that you make on the CapEx stacks up to the alternative of buying back your own shares. That, to me, is a very good disciplining factor in determining how much you can spend in growth and innovation and new products, new initiatives. When it comes to our shareholder remuneration policy, I ultimately think you and we want our shareholder returns to be founded in continuously growing free cash flows. We designed a program that our cash flows can grow in the coming years. You'll see it according to our guidance. And you can top up that with whatever room you've got on your balance sheet. But in the long term, it's important that your cash flow will grow. CAPEX is an important element to it. And as Joost alluded, at some point, the fiber part will become less, and then your CAPEX will come down, and free cash flow will step up. And that will obviously have, you know, repercussions for, positive repercussions for shareholder returns.

That's great. Thank you.

The next question is, It's from Mr. Usman Ghazi, Bierenberg. Go ahead, please.

Well, thank you. I've got a few questions, please. The first one was just on the extension of wholesale agreements that you've announced this quarter. I mean, could you perhaps illustrate whether these were tough negotiations or And, you know, what were kind of some of the puts and takes that you had to, you know, concede to or, you know, to get these agreements done? And over what period are these agreements? Are they similar to the previous agreements you used to do? Are they shorter? And I think that would be helpful. And then just on the topic of FIDA as well, I don't know if it would be

We're going to take a couple of questions.

I'm afraid we're losing you a bit when it comes to the quality of the line. Can't be KPS, so probably something on your side. Okay, okay. Is it better now? Yeah, better. Sorry.

Would you please repeat your second question? Yeah, so the second question was just on the copper shutdown that you did in six areas in the Netherlands this quarter. I believe it was 40,000 kind of connections. I mean, during that process, it would be great to know what your experience was, whether there was a situation where there had to be any forced migrations of remaining customers or whether it was just the demand for fiber just led to a natural kind of migration in that process.

Thanks. Yeah. Guzman, thanks for your question. Good to hear you speak a bit Dutch as well nowadays. When it comes to wholesale agreements, I mean, we have these long-term relationships with several service providers out there in the Dutch market. Not only T-Mobile, but a lot more. And The reason why we have a good relationship is that we try to optimize the business model on both sides. We make it doable for the smaller service providers to plug in on one or two locations in the Netherlands, and via that we can serve them on broadband through the whole country, which makes it far more efficient on their side. and for us a bit better as well because it's on the active layer of the network and therefore we're generating a bit more margin. So it's a win-win kind of situation and I think that's why it's not only a storyline we tell to convince our regulator that everything is working in the Dutch market but that open network model, that open access network model is really working quite well for both our customers and ourselves. The copper switch-off and the migration to fiber in those areas is, of course, very important for us. We've been talking on that topic for years now. Also there, we use ACM's guidance to announce switch-off from certain areas three years in advance, if I'm not mistaken. But also, these areas are not new. They're older areas, so already five to eight years old in some cases. It's known that we, of course, had to, at the end, switch off the legacy network. It used to be tougher, but we changed our Fiber model a bit. So when we rolled out Fiber, we're more focusing on migrating our customer base to Fiber in the early stage, sell off and migrate complimentary Fiber upgrades early in the process than we did in the past. to make that migration possible, and also the other providers, the wholesale providers, most of them are following that because it's also, of course, important to sell fiber in five areas. So we did a switch off of, I think you're right, 40,000 lines, something like that. That was more a pilot in a couple of areas. We're very satisfied that we really switched off the whole MDF and the number exchange in those areas. And in 2023, the real program kicks off. Then we are really going to disconnect several areas with a large base of copper. And that is important because of the cost related to the copper network. The service tickets on copper are much higher than on fiber. It's more expensive to maintain a copper network in general in the Netherlands than fiber. So when it comes to efficiency, it's important to do the copper switch up and we really will start a real program in 2023.

And to your point on what are forced migrations, I mean, not really. We learned that this copper pilot is very important to start early on, communicate early and frequently to customers. If you communicate early on that this is going to happen, are very clear and repeat that, that customer eventually will move from copper to fiber. And as you know, we've got an offer where for the same speed from copper to fiber, you don't pay extra for the same speed. So for a client, for a customer, it's actually, you know, if he or she wants to stay at that current speed level, that's actually, you know, no additional cost. Just to make sure that there is always customers who do not respond and you have to chase and make sure you connect with them. And it's not the unwillingness of the customer. It's the fact that sometimes customers don't, pick up the phone, don't read their emails, don't read their letters. So it's more that pointing them to it and then having the last bunch of customers that you actually have to personally connect go door to door rather than the forced migration. It's about making sure you connect with customers on time And it's all about preparation. And we see the way you prepare well and early on, those transitions actually go pretty smooth. And that's where you are late or later, you've got much more work to do to migrate those customers.

Thank you. Just one follow-up. Just on the length of the wholesale agreements that you've recently signed, I mean, are these kind of – Seven-year kind of length deals, similar to what you used to have, or are these shorter in length?

No, they're multi-year contracts. They vary by customer, but they tend to be multi-year contracts.

Right. Thank you.

The next question is from Mr. Jacob Bluestone, Credit Suisse. Go ahead, please.

Hi. Thanks for taking the questions fairly quick. Firstly, just on the business segment, you mentioned the challenge of migrating the last 20%. They were the hardest ones. Just to be clear, I mean, do you think you could actually see some of the non-SME revenue segments worsen as you try to migrate those? I mean, if I look, for example, at your tailored solution revenues, it went from sort of minus 4 to minus 5, and the LCE sort of looks like it's fairly unchanged at minus 6% year on year. So just interested whether you think it could actually get worse before it gets better, just so we sort of understand the glide path. And then just secondly, I see there's some press coverage that Vodafone Netherlands has had three service disruptions in October. It's a little bit difficult for us to gauge from outside the Netherlands how significant that is. So just interested in hearing, is that significant from your point of view? Is that something you should materially benefit from? Thank you.

Yeah, so on B2B, what I mentioned when I said the last 20% is difficult, that there's always customers that just don't want us to touch anything. And sometimes they're right, by the way. So that's always the toughest part of the whole migration program. Doesn't mean that we're going to push our business additionally down. So I don't see the trend worsening related to the migration in B2B. We're not super happy with the current developments. It's our aim to inflect to a positive growth. So the whole migration is around improving the run rate at the end and keeping where it is in the short term. So I don't see the trend worsening. On Vodafone and the outages in the Dutch market, there is an old habit of not making jokes About competition or failures, because before you know it, it bites you in your neck. But the only thing I can say is that it's super important to invest in quality of your network and that's what we are doing. So we're focused on our network. We decided to upgrade our core mobile network to migrate it to Ericsson. We're investing in our core and access networks intensively. And we're focused on that. But we never think that we can benefit from bad news on competition. That is a negative business model and not good for the business in general, I would say. Very clear. Thank you.

Okay. Thank you very much. Thank you, Chris. That concludes the Q3 call. If there's any further questions, please contact the Investor Relations team. Operator, over to you.

Thank you. Ladies and gentlemen, this concludes today's presentation. Thank you for participating. You may now disconnect your line.