Koninklijke Kpn Nv

Good day, ladies and gentlemen, and welcome to KPN Second Quarter Earnings Webcasting Conference Call. Please note that this event is being recorded. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's prepared remarks. If you would like to ask a question, you might do so by pressing star 1 on your telephone keypad. I will now turn the call over to your host for today, Mathis Van Negenhorst. Head of Investor Relations. You may begin, sir.

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us today. Welcome to KPN's Q2 and a half year 2025 results webcast. With me today are Joost Harweg, our CEO, and KSPG, our CFO. As usual, before we begin our presentation, I would like to remind you of the safe harbor on page two of the slides. which applies to any statements made during this presentation. In particular, today's presentation may include forward-looking statements, including KPM's expectations regarding its outlook and ambitions, which were also included in the press release published this morning. All such statements are subject to the safe harbor. Now, let me hand over to our CEO, Joost Farberg.

Joost Farberg Yes, thank you, Matthijs, and welcome, everyone. Let's start with the highlights of the second quarter. We levered a strong quarter. Our group service revenues increased by 3.7%, with growth visible across all segments. And within the mix, consumers saw a quarter of good commercial momentum, both in fixed and mobile. Business continued to perform strongly, driven by all business divisions, and wholesale further accelerated. As a result, we delivered strong EBITDA growth and alongside our operational performance, our EBITDA benefited from a favorable legal settlement related to intellectual property rights. KPN has a large portfolio of IPRs with over 300 patents, which demonstrates our commitment to innovation and our extensive portfolio and successful defense of our IPR allows us to license our technologies to major telecom vendors providing regular income streams and occasional settlements. As expected, our free cash flow declined year-on-year, mainly due to working capital phasing, higher interest, and tax payments, but will recover in the second half of the year. We further expanded our Fiverr footprint, and together with our transport joint venture, we now cover two-thirds of the Netherlands with Fiverr. And we raised our full-year 2025 outlook for EBITDA and free cash flow. And the upgrade reflects the benefits from two IPR cases settled in June and July, combined with the solid business and financial progress we've made so far. We launched our Connect, Activate, and Grow strategy in November 2023 and are now halfway through, now almost halfway through the execution of this ambitious plan with significant progress achieved, so we're well on track. Our strategy is built on three key pillars. We continue to invest in the leading networks. Two, we continue to grow and protect our customer base. And three, we further modernize and simplify our operating model. And together, these strategic priorities support our ambition to grow our service revenues and adjusted EBITDA by approximately 3% and our free cash flow by approximately 7% per annum on average in the coming years, or simply put, our 337 CAGR framework. And given that we're now nearly halfway through our strategic period, we look forward to providing you with a strategy update on November the 5th. Let me now walk you through some business details. We continue to lead the Dutch fiber market. In the second quarter, we expanded our fiber footprint by adding 160,000 homes together with transports, now jointly covering two-thirds of Dutch households. Our efforts in connecting homes and activated customers have paid off. reaching nearly 80% of total homes connected to the fiber footprint, while more than two-thirds of our retail base now enjoys the benefits of fiber. Let's have a look at the consumer segment. Consumer service revenues continue to grow, driven by consistent fiber and mobile service revenue growth. Customer satisfaction remains stable, and there's our full attention. And let's take a deeper look into our second quarter KPIs. A focus on loyalty and base management is paying off as we recorded a healthy inflow of 13,000 broadband net ads. Fixed RQ grew by 1.2%. Our post-paid base increased by 37,000, which is a good improvement compared to the previous quarter. Our post-paid revenue declined primarily due to increased promotional activity in the non-free sector. And as a result, mobile service revenues grew by 1.3%. However, we expect this to improve in the coming quarters. Let's now move to the B2B segment. B2B delivered another strong quarter, achieving 5.7% year-on-year growth with good performance across all divisions. Commercial momentum in mobile remains solid, adding 22,000 new customers. In today's complex world, we help Dutch businesses become digitally resilient with security delivering encouraging growth across both SME and LCE, underscoring its strategic importance. Net Promoter Score is stable, which reflects the continued trust from our B2B customers for the stability, reliability, and quality of our networks and services. SME remains strong, driven by cloud and workspace, broadband, and ongoing momentum in mobile. LCE increased by 1.7% year-on-year, driven by ongoing growth in IoT, broadband, and cloud and workspace, partly offset by continued price pressure in mobile. And Taylor Solutions delivered another strong quarter as planned, with growth driven by higher project revenues. And as you know, this business remains subject to project timing and seasonality. Then wholesale service revenues further improved in Q2. mainly driven by the strong performance in mobile. Broadband service revenues increased as well, despite the declining pace, driven by fiber. Mobile service revenues remained strong, mainly driven by continued growth of our travel sim business. And other service revenues saw a slight increase, mainly due to an uptick in business growth. Now turning to ESG, this remains a core element of our strategy with a clear focus on three key areas, responsible, inclusive, and sustainable. And the core of our ESG strategy is to make our network even more reliable and secure by design. Expanding our fiber network is a key enabler for this goal, helping us to connect everyone in the Netherlands to a sustainable future. And at the same time, we continue to build a better internet, One that offers seamless access to a responsible, inclusive, safer, and greener internet powered by fiber and 5G. So our commitment to sustainability is evidenced by several top ratings and important independent ESG benchmarks. Our next slide shows our progress on carbon reduction, circularity, and diversity. We continue to reduce our carbon footprint across the value chain. Earlier this year, we began sourcing solar energy from a solar farming partnership with MNACO. advancing our green electricity goals. Scope 2 emissions increased by 30% year-on-year, while scope 3 emissions slightly increased due to an expanded scope. And next to this, we made further improvements on our diversity target, reaching 32% of women in our senior management. Now, let me hand it over to Chris to give you more details, not specifically on diversity, but on our financials.

Now let me take you through our financial performance. Our financial performance benefited from a favorable settlement in June related to two intellectual property rights. While these IPR revenues and related costs are normal courses of business for KPM, due to the specific nature of these settlements this year, we exclude this one of benefit and a few metrics to illustrate our underlying business performance. To that point, let me start by highlighting some key figures for the second quarter and also for the first half of the year. First, adjusted revenues grew by 5.8% year-on-year on Q2, driven by continued service revenue growth across all segments and higher non-service revenues, including LTO and VIPR benefits. Second, our adjusted EBDA grew by 6.4% compared to last year, driven by higher revenues, VIPR settlements, and of course, contributions from newly acquired set of LTO. Note that we sold the same amount of value of IP addresses as we did in Q2 last year. Third, our net profit declined by 8% despite strong EBITDA growth due to one-off costs related to hedge accounting. And finally, as anticipated, our free cash flow declined by 15% or just over 15 million euros compared to the first half of last year, mainly due to working capital phasing. I will share more detail on the underlying cash development later in this presentation and obviously in your Q&A. In the second quarter, our underlying revenues, excluding one of items in LTO, showed healthy growth, increasing 3.4% year-on-year, fully driven by growth in service revenues. Group service revenues grew by 3.7%, supported by all segments. And in the mix, we saw consumer service revenues increase by 1.3% year-on-year, driven by both fixed and mobile, with solid commercial income in both postpaid and broadband data. Business service revenue growth continued to perform well, growing by 5.7% year-on-year with all divisions contributing. And finally, wholesale service revenues grew by more than 8% year-on-year, mainly by the ongoing success of our profitable and good-margin international sponsored roaming business. On a life-like basis, the adjusted EBDF KPN grew by 4% year-on-year, well above the 3% T&D hurdle. Our underlying EBITDA margin was 30 basis points higher compared to last year at 45.5%. The increase in direct cost or cost of goods sold was mainly driven by service revenue mix in B2B and higher third-party access costs to this transport. Our indirect cost base was broadly stable, the savings from digitization and less staff were offset by inflationary effects such as wage annexation. In the quarter, we further scaled down our workforce by about 70 FTEs, And over the last 12 months, we reduced our total workforce by almost 300 FTEs. In the first half of the year, our operational free cash flow increased by 18%, and on an underlying basis, driven by both EBITDA growth and lower CAPEX. CAPEX was €50 million lower compared to previous year, but mostly related to timing of FIBA payments. For the remainder of the year, CAPEX has stepped up, fully in line, and stayed in line with our full-year guidance of 1.5%. 5 billion euros. For the full year 2025, and excluding IPR benefits, we expect high single-digit growth rate in the operational free cash flow. Now let's focus on the moving parts of our full free cash flow. We generated 390 million euros in free cash flows so far this year, representing a cash margin of about 11% of revenue. The anticipated year-to-year decline in the first half free cash flow was mainly caused by temporary negative impacts from changes in working capital related to timing, such as the timing of bill runs, the actual cash settlement of the IPR benefits, lower capex, which is translated to a temporary drag on working capital, timing of inventory build-up, and some other small effects, such as pension contributions. We expect these negative effects to reverse fully in the second half of the year. In addition to working capital, We also face higher interest payments and increased cash taxes as per the plan. Consistent with our guidance, our free cash generation will be stronger in the second half of this year. The improvements is supported by one, continued operating cash generation, second, the normalization of tax interest payments throughout the year, and three, the unwinding of the drag on working capital. Finally, we added the quarter with a cash position of 331 million euros, absorbing the impact of the final dividend payment over 24, share buyback payments, and our bond redemption in April. Let's discuss return on capital. KHDM remains focused on creating long-term value, which is evidenced by a strong return on capital employed. Our ROCE improved by 20 basis points year-on-year to 14.6% due to operational and fishing improvements, and including LTO as well on a fully consolidated basis. Actually, our PR effect, our ROC return on capital is 14.5%. For the current years, we should scope to further enhance ROC, reaching a 2027 financial ambition of 15%, consistent with continuous creation of shareholder and stakeholder value. We continue to have a strong balance sheet. At the end of June, we had a leverage ratio of 2.5 times. Our ratio slightly increased during the quarter, mainly driven by dividend and share buyback payment. partly offset by our free cash regeneration and higher ADBA. Similar to 2024, we expect the leverage to be driven 2.4 times by the end of the year, supported by increased free cash generation in the second half of the year. Our interest corpus ratio remains sequentially stable at 9.6 times. And as a result of the bulk redemptions in April, we increased the average maturity and lowered the average cost of our outstanding debt, which is now reduced by 11 basis points sequenced to 3.6%. In addition to the bond redemption, we also benefited from lower interest rates and from a swap restructuring when executing Q2. Our exposure to floating rates remains limited at 14% and our total liquidity of around 1.4 billion euros remains strong, covering debt maturities until the end of 2028. Now let's turn to our outlook for 2025 and mid-term ambitions. Given the reported results in the first half of the year, we feel confident in raising our full year's guidance for EBITDA and cash flow. We now expect an adjusted EBITDA analysis of more than 2.6302,630,000 euros and a free cash flow of more than 940,000 euros. The 30 million increase in EBITDA and 20 million increase in free cash flow guidance are primarily due to the two IPR cases that we settled in June and early July. The total full year contributions from these two settlements is estimated at around 25 million euros EBITDA pre-tax, with 9 billion already recognized in Q2 and the remaining in Q3. In addition to the IPR-related uplift, we also see some upside in the underlying business performance. It is clear that excluding these IPR settlements, we would have confidently reiterated our financial guidance for the year. And the difference between the increase in adjusted EBITDA and free cash flow upgrades This is mainly due to taxes on settlements and some small working capital tax. Other output items have been reiterated. Group service revenue growth set at about 3%, driven by growth across all segments, and CapEx will remain stable at the peak level at around 1.25 billion euros. As of the 23rd of July of this year, eBay has bought back 58 million shares of about 233 million and completed 93% of our 250 million share buyback program. And finally, we reiterate our mid-term or 3-in-3-7 ambitions as provided at the Capital Market Day. Let me briefly wrap up with the key takeaways. We simply delivered a strong quarter with good business results augmented by one-off IPR benefits. Group service revenues continued to grow across all segments, leading to healthy underlying EBITDA growth, fully consistent with our 3-in-3-7 ambition. In fact, for the second quarter in a row, Underlying service revenue and EBITDA growth came in above the 3% hurdle. We continue to lead as a tribal market, now covering two-thirds of the Netherlands, while steadily progressing with connecting homes. Currently, more than two-thirds of our retail base are in fiber, which bodes well for the future. We see healthy customer inflow across both consumer and business, despite a competitive market. As planned, our free cash flow generation will be back-end loaded and will come out as planned for the full year. Overall, we are well on track this year, and continue to make good progress towards our annual and mid-term targets. Obviously, our financial performance this year benefited from the IPR settlements, but also the underlying EBITDA growth supports the effect of the guidance, and we feel confident in the cash generation for the remainder of the year. And of course, next year we will again distribute all of our free cash to shareholders, and it's important again to highlight that if we had not achieved the IPR settlements, we would have fully happily and cheerfully reiterated our outlook. Finally, as we approach the halfway point of our strategy, we look forward to providing you with updates of our strategy on November 6th. Thanks for listening. Let's turn to your questions.

Yeah, thank you, Chris. As always, before we start the Q&A session, I kindly request that you limit your questions to two, please. Operator, please proceed with the Q&A.

Thank you very much. Ladies and gentlemen, as you've been told, we will start now the Q&A session. So if you would like to ask a question, you might do so by pressing star 1 now on your telephone keypad. And to redraw your question, it's star 2. The first question comes from the line of Polotan calling from UBS. Please go ahead.

Hi, thanks for asking the questions. I have two. The first one is just on consumer broadband net ads. Can you comment on what has driven the step up in broadband net ads in Q2 and has the broadband market become more promotional in Q3? The second question is when can we expect an update on the ACM review of the Glassport Delta Fibre deal? And can you comment on how you think about use of cash and whether you would look to buy fiber assets rather than build fiber?

Well, Paulo, thanks for your questions. Consumer broadband edits in Q2 were much better than in Q1. Promotional activities in the Dutch market are pretty, well, intensive, I should say. I think that our main competitor moved a bit to a more reasonable environment recently, so that would be good. But we especially see us benefiting from our own combi-fordale and our fiber footprint supporting this inflow. On the promotional activities for the near future, I don't think much will change. However, I think it's important that we all that we want to create value on broadband and that is the most important thing for us and I think for our competitors as well. On ACM, yeah, that's a good question. We're waiting in the process. I think after summer they will get their vision on the situation and then we can react. So we're in the middle of a process around this deal between Glassport and Delta. And let's see what will come out of it. We think we have a strong position. And for us, it's always buy or build. I mean, per area, we can decide to buy or to build an asset if the opportunity is there. And in this case, it's for us best to buy. But if it's not doable, then we have to find an alternative.

Thanks. The next question comes from the line. Maurice Patrick calling from Barclays. Please go ahead.

Yeah, thanks guys for taking the question. If I could just ask a little bit more about the broadband competition. Just keen to understand if you are seeing a change in competitive intensity after Vodafone Zico has changed its pricing. They obviously have made a material adjustment to their EBITDA guidance for the year. I think it signals a desire to stabilize that base. And just linked to that, there's been some noise around fixed wireless access propositions and some of your competition and how that might stimulate their growth. I'm just curious to understand if you've seen any impact from that on the total of broadband markets and, in fact, your net ads. Thank you.

Yeah, Maurice, let me fix all those questions. On broadband, on the main competitive price action, they've seen some lines pricing, but it is still very close to KPM, I think. If you look at details, maybe a euro to cheaper than 100 megabits and a few euros more expensive on one gig, so it's still very close. What I think what we've seen notably in broadband, the last one is improvement in churn, improvement in migrations. If you look at page eight in our document, the graph on the top left-hand side, you can infer that actually churn has gone down, both on copper and on fiber. We've seen less migrations from the back book, so that's actually supportive. So we've seen stable growth in growth apps. Fiber continues to do well, but has some notable reduction in churn. I relate that to our loyalty programs that we've installed a higher portion of clients in contract. That supports a lot. I think the copper to fiber mix is gradually improving in KPM. And the fourth one is possibly, there might be some fatigue in the market with regards to these commercial activities. that's more speculation actually we see the loan program being contract-based the corporate five makes all supporting turn so i think that's that's good um also reasonably to q3 as well i mean i was here only uh in july but so far so good in terms of broadband commercial intensity as such i would say it's relatively stable uh has not deteriorated further for the And on fixed wireless, we don't see a lot of outflow to fixed wireless customers. When we check, there's some but not a whole lot. I feel that fixed wireless is really addressing a different market segment. There's not a real condition of fiber, but other customers have otherwise gone for a different solution.

It's a bit of a niche segment, we think, first of all, because of all households in the Netherlands are connected to a fixed network or

We also use fixed wireless access, but that's always in combination with a coupling line in super rural areas, but that's what we do already for a very long time. So for us, fixed wireless network is always in convergence with a fixed connection as a total service in super rural areas. But so far, not really a change in the market.

Thanks, guys. The next question comes from the line of the Please go ahead.

Thank you. I've got two questions. So firstly, you saw strong revenue trends in wholesale. Can you comment on how we should think about the revenue growth going forward and to what degree you expect sponsored roaming revenues to fall off in H2? And secondly, you're now getting close to the end point on the fiber rollout and less than the billion euros of CapEx. I appreciate you have the November strategy update, but at this stage, Would you be able to share any broad thoughts on whether you think structurally there's room for CapEx to continue to fall beyond 27? Some of your peers have obviously targeted lower post-fiber CapEx. Thank you.

Yeah, on your first question on wholesale, it's really well. They will continue to grow. Whether we keep this space, I don't know, but I think it's going to be north of 5% . And there's a fair pipeline of new, customers waiting to be signed up for these type of solutions. So this, I see growth in the second half of the year, possibly be spilling over also into next year on this specific point. There is some whisper that there's a concern about margins on this product. We're not concerned on margins on this. I mean, this is a, we don't really detail these margins out, but it's not far off from what KT and Zepeda margins are at all. So it actually is a profitable business journey on the marginal return on capital. It's a very profitable business, and as I said, Maybe not the full 8% that we saw in the first half of the year, but this is a significant growth option for H2 and possibly into next year as well.

And on your fiber rollout question, I mean, we've built a bold plan to move up to 80% fiber footprint in the Netherlands somewhere end of 26. So often we get the question, do we get to 80% or what after the 80% are you going to roll out to 100%? I think 80% is a good target since it is a lot. I don't, I'm not familiar with many incumbents trying to cover really that much of the country as we do, taking into account that 80% of that is home connected as well. So on that capital market, I don't want to, of course, for the day itself by telling you what we're all working on. But, of course, we will give insights on the step-down in CapEx and how to get there, the fiber footprint and how to move further to 2030. And these are all relevant questions. If it's going to be 75 or 85, I think for us it's also important to really, at the end of the building program, make the step-down in CapEx and, of course, give you also an idea how we will run the free cash flow after 2017.

That's it. Thank you, guys. The next question comes from the line of Andrew Lee calling from Goldman Sachs. Please go ahead.

Good afternoon. I just had one question which is around wholesale and I guess follows on from your questions on competition earlier. Your wholesale broadband net ads step down more than they have in quite some time down, I think, 21,000 in the quarter. Could you just talk through what's driving that just gives a bit more color around the competitive intensity you're facing and how you see that playing out over the coming courses and if there's anything you can do to alleviate that pressure. Thank you. Sure.

So also, I mean, first and foremost, also top line continues to grow and EBITDA continues to grow. We expect the wholesale business to be a growth business once the next year. The mix of growth appears to be shifting away from broadband towards, you know, alternative mobile-type solutions with sufficiently healthy margin. On this particular point, I think what we're seeing is there's growth on fiber. We see a little bit more, you know, wholesale competition for growth. There's growth on fiber. And there's some, then, churn on copper. We think it's churn towards compete networks and overbuild areas. It is actually true on lower RQ copper lines that are, you know, one of our, you know, main drawback lines is shifting them to the overbuilt situations in alternative networks, which has accelerated. I don't think it will stop at the end, but at the end there is a limit because at some point there's only so much overbuilt we have. So I would expect this to continue into Q3, possibly into Q4, but then at some point, the overbuild is actually gone on copper. So it's copper lined in overbuild areas where I think there are six or two other areas. That is a bit of a drag on earnings. At the same time, this is lower margin business, lower up your business, and there's a price increase that we generally put through on broadband. And there's still growth on high margin fiber. So revenue-wise, the impact is manageable. Base-wise, you can see it. And I think that will continue for some time until the overbuild situation, you know, until the copper lines and overbuild situation has been reduced to a smaller amount. I mean, that's what's happening. But then again, you know, also we've been fairly agile in our strategy trying to find new revenue sources, which is, you know, mobile related.

Thank you.

The next question comes from the line of Max Finley, calling from the Rothschild and called Redburn. Please go ahead.

Hi, it's actually Steve here. Thanks for taking the questions. I'll go for three, but the two are very, very short, hopefully. First of all, sorry, just on minority dividends, you had a 28 million euro minority dividend come through in the second quarter. Is that related to the Altair deal? And just remind us how we should think about that kind of going forward and, you know, whether we should be including that in free cash flow. Secondly, just coming back to Glassport, can you, The associate losses kind of picked up a little bit in the quarter. I mean, they're small numbers. I would have expected it to be kind of moving into profit at this stage as your network loading improves. Can you just sort of maybe cast a little bit of a light on that and maybe remind us how the kind of put and call works with ABP? Because I think it needs to be profitable or free cash. They're positive before they can put the states, but I can't remember. Maybe please help us on that. And finally, just on the IPR settlement. What are the costs associated with that? And should we expect any more IPR settlements or things of that ilk going forward to help either down cash flow? Thanks a lot.

Yes, Steve. On the Altio question on the mountain, it's a one-off dividend from Altio. It's a one-off. So I wouldn't plan on 28 million of dividends from Altio going forward. I mean, it is a good deal because if you look at the numbers, you can see the cash payment equalization thing that we did. Then you also received a dividend part of the mental restructuring of that business. So the net cash out to KPN was actually relatively small, about 70 million, which also explains, I think it's, without dumping our chest, it's a better deal than people expected or envisaged. It also explains why our return on capital on both to KPN is up, including the consolidation of this business. So it's a one-off. There will be dividends to KPN going forward, but not of this magnitude. This was a one-off, like restructuring of the balance sheet. But then again, I mean, the cash out review is probably around net net about 70 or so, 70 or so million. So it underlines the high return on capital of this transaction. On Classport, well, Classport is actually EBITDA and EBIT positive at this point in time. There's this interest cost and some financial derivative accounting issues moving from the EBIT and full net profit. Also, the clustered went to a refinancing as well. So, I think those two elements feed in. Actually, as I said, clustered is performing above plan financially. It's just the interest charges and hedge accounting that affect the bridge from EBIT to net profit, but EBIT and EBITDA are positive. In terms of consolidation, basically the only Two formal conditions are it happens between 26 and 2030, and the number of HPs, home spas delivered to reach a certain threshold. I think we're nearly at that threshold, so the consolidation trigger is almost at our discretion. And first, it's important to want the full free cash flow positive. That should be 28, 29. I keep hoping for 28. It might be 29 around that date, and then we'll consolidate. But there's no further limitations as far as there's no requirement for it to be free cash or positive. It just makes sense to do it right there. But my core summary is, financially, Class 4 is performing actually better than planned at EBIT and positive. It's just the interest cost that they need to make.

Steve, on the IPR settlements. Yeah, so it's not that we have these settlements every quarter, right? IPR revenues are normal course of business. We have a large portfolio of IPR with over 300 million tenants, and that demonstrates a bit the innovation power of KPN and usually providing financial benefits between 8 and 10 million per year. Every now and then, we have a discussion with a large worldwide telecom vendor, and sometimes that leads to a real, yeah, lawsuit. this time we were able to come to reasonable settlements. Indeed, the costs related to that are relatively high, but that's also because this is a very specific job done by six people in our own organization, and for this we hire international lawyers and we pay them a fee for the outcome of the settlement. It could be that we have another settlement perhaps somewhere next year, but usually what I like more is that they just pay for what we ask them and that we have a continuous flow of income. These settlements, not only good for a one-time effect, but also means that in the future they will pay for the IBR they use.

The IBR cash settlement and the cash for increase is net over any cost of any lower fees. So this is a net benefit to KPMG. Yeah, sure. Once again, the lawyers have done fairly well. Yes.

Good business. Yes. Okay. Thanks, guys. Thank you very much.

The next question comes from the line of David Backman calling from IMG.

Please go ahead. Yes. Hi. Good afternoon, everyone, and thanks for taking my question. The first on ADC growth, which was very good, actually better than what you're guided for. So you go back to growth faster than expected. So could you comment on what has been driving this and what you would expect going forward? So I think you mentioned IoT, broadband, also CPaaS. And then secondly, on consumers. So you delivered quite a nice performance on Meta, indeed, especially in six. Then the sales growth was a bit lower and a bit lower than what you get for mobile. So could you comment on what we should expect for the coming quarters? especially in the brand mix, let's say, and also your strategy. I've read recently that your phone would stop SNC, if this is correct or not. Thank you.

Yeah, so to start on your LCE question, I mean, B2B is doing great. It's growing about 5%, which is, compared to what it does, I think, an outstanding job. But having said that, LCE is our focus item to get it up above the current growth rate. goes a bit up and down. And that is because there, this large enterprise segment, we're finalizing the movement from old to new portfolio. So still we have to migrate some legacy portfolio to the new environment. Having said that, I'm okay with the current results. We always focused on real inflection to happen in the second quarter. In reality, we report growth now for a couple of quarters in a row. But it's the parts of B2B that we are really focused on to get it faster growing. On mobile, we see a strong inflow of NetApps, but there's pressure on pricing, of course. That's a competitive market. And on connectivity, we are doing better and better. We're also rolling out fiber in business areas. So when we report home spots, that's not about the business areas in the Netherlands, but we also have a program to roll out fiber there. and that's really speeding up and improving. So yes, all in all, that's one of our intention points to get LCE to the average of B2B growth in our domain. And the consumer, yeah, mobile service revenues a bit weak, you could say, in total. I'm positive on the KPN development. I mean, we report blended service revenues and RQs, but the KPN brand is really doing good with high RQs on unlimited. Of course, we added Ufone in the game, and that's big base. So it's difficult to compare KPN with KPN and Ufone compared to two years ago, for instance. And in the no-frills segment, that's where the competition is heating up, I would say. So there we have to be careful. I mean, we show strong growth of NetApps, but for us it's all about the balance between NetApp growth and value creation. quarter by quarter developments, I would say usually we expect a better quarter in Q3 because of development seasonality. We're going to increase the prices. So looking at the current situation, I would say that we largely improved Q3 and Q4 compared to Q2. Chris? Yeah, I think David.

When you look back at Q1, and this data is a bit lagging, that we did increase service revenue market share in the Netherlands. We're gaining a bit of share across all the groups. As Jo said, activity is most pronounced in the no-fill segment, but not spitting over into premium segments. So I think at KTN level, we're gaining net ads, especially in unlimited. We're introducing a bunch of new unlimited propositions as well over the summer, including growing roaming bundles. I think it's doing well. And that competitive density is to this point quite contained, but contained through the no-frills areas. And as Joseph said, the second half of the year, I expect gradual bottoming out with a higher numbering to form and the price increases being pushed through. So I would say, you know, without looking too much on a quarter-to-quarter basis, because this is a long-term business, but I would expect, you know, over the second half of the year, H2 as a whole, it continues to be around 2% serving revenue growth. on an average basis. That should be feasible, but more till the end. But then again, let's not fall through the step of diminishing this thing on a quarterly basis. We're in the long-term path, and I think the second half will look better than the first half.

Thank you very much.

The next question comes from the line of Joshua Miles calling from the MPP exam.

Please go ahead. Hi, guys. Thanks for the questions. I have two, please.

The first one is just around the comments you made there about the no-frill mix versus KPN. Could you give us a bit more color both on where the sub-brand kind of penetration is today on your postpaid mobile, on your broadband base? And then maybe just an example in the last quarter of the 37,000 postpaid net ads you added, what was the split there between KPN and Ufone? Because it looks like there is some RP dilution from the mix shift as well. Probably good to get a sphere there. The second question was around the recent deal signed between Vodafone CIGO and Delta Fiber, where Vodafone CIGO is going to be wholesaling from Delta in about 600,000 new homes from next year. How do you think that will impact your retail broadband net ads, your wholesale broadband net ads? And perhaps if you could give us an idea of what your market share, your retail market share in those 600,000 homes is today, that would be very helpful. Thanks.

Yeah, Joshua, to start on your second question, we don't believe that the Vodafone Zegel wholesale deal on Delta is a structural change in the strategy more than, yeah, opportunistic move. They clearly have a, at least that's what we read, because, yeah, it's not really clear, They speak to a network strategy, of course. That's their business model. I think they can do a DOCSIS upgrade in main parts of the Netherlands, and this deals really centered around the areas where they don't have a network in the first place because that's a Delta network, and that's in the limited households, and our market share is lower than compared to the average of the Netherlands. So not that really impactful on KPM developments, I would say. We follow our strategy, and we do not think this is a big paradigm shift in the photovoltaic strategy. And your question on no frills, yeah, I think the main part of the base is KPM, right? So that's roughly 75%. And so the rest of that is senior EU phone. So, yeah, so that's why it's so important for us to really focus on the KPN strategy, the unlimited part, and keep it separated from that no-frill game.

I mean, on the Delta Zip, as you mean, there's 600,000 HP. I don't know how much who's connecting, but as you said, confirmed the market share of KPN growth is less than average. A chunk of that is in fiber, so I would not need to worry about that because this is already in fiber. There is some copper base, but these are copper clients that have been already exposed to competing fiber for some time. So I don't expect an immediate shift also because, you know, obviously we're not pretty into the details of the transaction, but our understanding of the typical Delta wholesale agreement is very much in line with our ACM commitment. So I don't think there's immediately to a price fight or something. So if you look at all that, it will be impacted. It's probably going to be manageable and not really affecting the total result of KPM. And there's some of this question on no-fills and fills. In KPM, it's only about three-quarters of mobile-based KPM and one-quarter is on the other side. So that affects the report that I'm doing.

Yeah, on the big side, almost everything is KPM, right? So there's only a limited part, probably around 5% is no-fills.

Thanks. Maybe just one follow-up on that commentary around your market share in the areas where there's no cable being lower nationally. It seems quite surprising given that Roto-Ventigo's national market share is around 40%. So in those areas today, is it the case that Delta 5 already has quite a lot of market share on the retail side, or that your ISP partners over-indexed to those rural areas rather than KPM? It just seems like a Usually, you would expect in a non-table area to be higher.

I would think in those areas, it would be higher market share already. So, I mean, let's see what the outcome is, but I wouldn't rule out that some of the zero gains would come at the expense of Delta, because I think that's where they have a relatively large share.

And, I mean, we give you averages of market shares. You mentioned 40% is lower nowadays. Us is a bit stronger than, but all in all, it's different per region, right? So the original Delta region is where Delta is super strong, but it's limited to a million households or less. The larger cities, Zico is strong. And us, we are strong in more or less the rest of the country. So it depends a bit on the area what our market position is, and that's how we also took the decisions on fiber rollout.

Thanks very much. The next question comes from the line of the CEG, calling from Citi. Please go ahead.

Hello. Hi. Good afternoon. Thank you for taking my questions. I have two, please. The first question is really on the consumer service revenue growth. Chris, I think you mentioned at Q1 result call, you're talking about you don't expect consumer to be the main contributor to your service revenue this year. But now you're having accelerated fiber penetration in the consumer broadband base, and you expect mobile service revenue to improve as well. And just looking out for the next coming quarters, maybe one or two years, do you see there could be a possibility that consumer service revenue growth could be more in line with the group service revenue trend, which is around 3% going forward? And so my second question is on the indirect cost. I think also you talk about some potential reductions in your indirect costs, but still, by this quarter, we're having to see too much move going forward. I'm just wondering if you can help us understand how to think about those lines going forward.

Thank you. Yeah, I think the revenue growth level for this year, probably also not for next. Obviously, in the long run, I see that opportunity with, you know, fiber coming in and copper churn becoming less distinctly because we have less copper customers. It's going to take some time to get there. I think also because we have a combi for deal products, which we also explained on the payment discount products, where some of the charges of that are added and booked in the fixed RPU. So there's a reporting element to this as well. So I would say the growth of KPM in the coming years will be driven by, you know, business and wholesale. And consumer needs some top-line legging somewhat. I mean, bottom line could be better. This is high-margin business. But top-line growth in consumer will probably be, you know, not the leading part of business and also will continue to drive this going forward. That is a fair outlook. On internet costs, I think the cost-based KPM, we stay effectively flat. over the quarter in the first half year. And if you strip out all one-offs, interventals, wrinkles, underlying effects, we effectively have a flat cost base with, I would say, about 300 FDEs decline. So that's actually going quite well. That supports, you know, at the diagram point forward. I mean, in this business, you have positive service revenue growth, positive growth, profit growth with a flat cost base that crickles down to your bottom line. So on the cost side, I would say flat is for the year. FTE declined by 300 in the last 12 months, and we aim to surely continue at this pace of reducing FTEs and reducing labor costs going forward, so that should help us in the midst of long-term. I hope it gives you some color how we look at the business in the midst of long-term FTEs.

That's very clear. Thank you.

The next question comes from the line of Ajay Soni calling from JP Morgan. Please go ahead. Hi, guys.

Thanks for taking my question. My first is actually just on the FTE reductions which you referenced there. So I feel like you're reducing around 70 FTEs per quarter. I just want to know where these reductions are coming from and you're expecting these for the rest of 25 and into 26. And then my second question is just around the EBITDA growth. I think previously you highlighted Q3 would be slightly softer on an underlying basis and then stepping up again in Q4. If I could just confirm that, please. Thank you.

So on the e-reduction, we have a workforce of around 10,000. One-third roughly is working in the customer interface. There's technical people, and there's a lot of people working in support. And we have programs in place to make the company more digital and to make these end-to-end processes far more first-time rights. especially focus on customer quality, but also relate to simplification and, yeah, at the end, FTE reduction. So it's not an FTE reduction program, but it's leading to FTE reduction. I think in the future we will benefit from this more than we do today, but still we see a step down in FTE already in a run rate, and that is good because the benefits really kick in next year. So for us this will be an important step. focus points, and I think there's lots of opportunities here. I think it has done a lot in optimizing your operating model, but since there's a lot of opportunities on these big transformation programs supported by AI platforms, we think we can go further. So that's for us an important focus point, and like Chris described, the first steps down in FTE are in the run-based.

The second question on Q3, I'm most to blame because I sent the guide for how the distribution looks like, but in the end, it's all about the long-term view, right? This is about getting us towards 2027 and the anticipated and promised capex step down, and we should try to look through quarterly fluctuations. But then again, as you're asking, Q3 will be a bit softer, but obviously, I'd like to tell you what roughly the pattern is so that you can you know, place and position and other contexts in which these things happen. The Q3 will be a bit softer. I think actually mostly due to accounting for holiday provisions. Now, let's not dwell on this too long. Q3 will indeed be a bit softer than Q2, although I felt that the initial hint that we gave is probably the floor. It could be a bit better than what we initially guided for in terms of Q3 without going overboard on the quarterly guidance. There is a pattern in the year which is affected by these, you know, holiday provision schemes. But I think Q3 will look a bit better than what we initially got if we ever look at the also including but also excluding the IPR benefits that will land in Q3. I would like to see that immediately-wise it will be fine. So with that in mind, in the end, we'll pursue, you know, $20.63 million this year, 2,630,000,000 for the year. That's the plan for the year, and there will be some distribution, but I think in light of that, I would say financially, trading-wise, Q3 looks, you know, it's going to be less than Q2, obviously, but it's going to be a bit better than what we initially wanted to get. But then again, that's only one quarter. It's about the long-term story.

Okay, thank you. And the final question is for Paul Sidney from Ehrenberg. Please go ahead.

Yeah, thank you very much. I also had two questions, please. Firstly, a question for Chris. You've upgraded free cash flow guidance twice this year already, but most of that is mechanical, but there's some organic upgrades in there. You're clearly guiding for falling capex in 2027. I'm not wanting to preempt any message at the strategic update in November, but are your thoughts around capital allocation changing? Will excess free cash flow continue to be used for sheltered remuneration? Are there any caps on the level of buybacks you can do more than 80% potentially acquisitions that you could do that perhaps weren't possible a few years ago. And secondly, you've clearly articulated the 7% pre-cash flow pay gap out to 2027. But how do you expect return on capital to evolve the next few years? Could this get close to 20% over time in your opinion?

Thank you. Well, first of all, thanks for noting that the that we increase our free cash flow twice in a year. I would expect the flowers and cheers in this call, but I'll get them from Joost. For sure. For sure. I think we're on track to meet our free cash flow guidance, right? And the increase, number one, is due to the acquisitions. We want to be fair that what we buy, we add to our free cash flow guidance. And the second increase is an IPR benefit. It's a one-off, but we want to make sure that we do not use the one-offs to meet the underlying business. The one-offs are really on top of, and as we share our free cash from the shareholders, basically they're yours. And that's the result of this. We distribute them to shareholders. Plan A is still to distribute all our free cash from the shareholders. And that's what we typically do. We can do that with investing, you know, 1.2 billion, 1.25 billion in traffic. And if you make a step up to 1 billion, we'll still be investing about 70% of revenue. So we'll then stay fully invested and investing fully and able to distribute all our free cash for shareholders. That is the plan that we stick to. I would say, over time, you'll see the portion of dividends going up. I think in the long run, it would be fair to run this back at 80% payout ratio for your free cash flow and the remainder in buybacks. I mean, that's not cast in stone, but I think that's probably a good long-term anchor point for your dividends. So, basically, it means that whilst our free cash flow is ratcheting up, our dividends will be going in line with, and you think in the end was something like 80% of free cash flow in dividends and the remainder in buybacks. The specific distribution, we'll decide on that when we get to 27. Perhaps we can say a little bit more in the capital markets in the second half of the year, but I think that's the end game for us. The question on return on capital employed, we're moving towards 15%. Could we go to 20? I'd love to have that problem. First, I think 15% is a good level. I think that's consistent with a significant amount of value creation. I think if we run this business at 15%, we'll be doing very well. I mean, there's a point if you run your business at 15%, I think the marginal investment is probably better to allocate towards growth than more return if you're running at 15%, right? So I'd love to get to 20%. We'll do anything we can to get to up, of course, our return on capital employed to higher levels. But I think at this point it's fair to assume that 15% is what we're going to, and it's fully consistent with shareholder value creation and a fairly equal spread over our cost of capital. And I think with that, we could also stand out in Europe and we won't hesitate to do more. But at some point, investing in growth at this level of profitability might create more value for you guys. And obviously, in line of same disciplines, to make sure we generate sufficient cash in everything that we do. Thank you, Chris.

Thank you. Okay. Thank you all for your attention and questions. That's the webcast. In case you have any further questions, please feel free to reach out to the RFP. If you go on holiday, please enjoy your holidays. Goodbye.

Bye.

Ladies and gentlemen, this concludes today's conference. Thank you for attending and have a nice day.