Event transcript

KPN Q2 2021 Results

Tuesday, 27 July 2021

DISCLAIMER

The information contained in this event transcript is a textual representation of the applicable webcast and while efforts are made to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the webcast. In no way does Koninklijke KPN N.V. ("KPN") assume any responsibility for any investment or other decisions made based upon the information provided in this event transcript, and KPN advises to use all available information about the company, the stock and the market in any investment or other decision. In particular, the transcript should be regarded in its entire context, including the setting of the webcast in which it was brought and the presentation or any other documents used or published in relation thereto.

KPN reserves the right to make changes to this document and its content without obligation to notify any person of such changes

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Operator: Good day, ladies and gentlemen. Welcome to KPN's second quarter 2021 earnings webcast and 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 may do so by pressing *1 on your telephone.

I will now turn the call over to your host for today, Reinout van Ierschot, Head of Investor Relations. You may begin.

Reinout van Ierschot (Head of IR, KPN): Good afternoon, ladies and gentlemen. Thanks for joining us. Welcome to KPN's second quarter and half-year 2021 results webcast. With me today are Joost Farwerck, our CEO, and Chris Figee, our CFO.

As usual, before turning to our presentation, I would like to remind you of the Safe Harbor on page 2 of the slides, which also applies to any statement 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 Farwerck.

Joost Farwerck (CEO, KPN): Thank you Reinout and welcome everyone.

Today's results show an important proof point of the progress on our strategy and execution, as we are delivering ahead of schedule. Mass-market service revenues grew in the second quarter, the first step towards sustainable top-line growth for the whole company.

For the first time in 4 years we saw growth in Consumer Mobile service revenues supported by a strong performance of our Unlimited proposition. And our broadband base has grown in the second quarter. We also see service revenue trend improving in SME. Total SME service revenues grew compared to last quarter, which keeps us well on track to stabilize before the year end.

We are installing fiber at a record pace. We have passed the milestone of 3 million households and nearly half of Dutch houses now have a fiber connection, the vast majority via our network; the network of the Netherlands. The joint venture with APG, which is called "Glaspoort", is now up and running and enables us to further accelerate the fiber rollout together.

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Our efforts in modernizing the mobile network are paying off. Our mobile network has yet again been recognized as the best mobile network with fastest 5G in the Netherlands.

We were able to grow adjusted EBITDA in the second quarter, despite the elevated spend to improve our customer support and facing a tougher comparison base in terms of COVID related savings. I am glad to see that these investments are paying off and that customer experience and Net Promoter Score are improving again. With mass-market service revenues growing ahead of schedule and our best-in-class network coupled with NPS being back on track, we reiterate our outlook and ambitions.

Finally, while we keep investing to drive further growth and maintain room for value creating growth opportunities, we pay out a progressive dividend that is comfortably covered by Free Cash Flow. The confidence in our strategy and the successful execution of our strategy gives us comfort around our multi-year cash generation perspective, enabling us to structurally return additional capital to our shareholders. As a first step, we intend to buy back shares worth € 200m this year.

Let me briefly touch base on the two unrelated unsolicited approaches we rejected in the second quarter. As stated in our press release issued at the beginning of May, the Boards of KPN reviewed both approaches carefully, taking into account the interest of all stakeholders.

Both approaches were rejected as they failed to provide tangible added value over our strategy. When we updated our strategy last November, we were determined to implement a strategy that focusses on both short-to-medium-term business improvement and long-term sustainable value creation. This was illustrated by the acceleration of our fiber rollout to unprecedented levels in the Dutch market. That is not only a plan on paper. We are actually executing which is clearly visible in today's numbers.

Revenue growth, cost reductions and lower future capital intensity levels once the fiber rollout is behind us, will fuel growth of Free Cash Flow further, and that in turn, will fuel attractive shareholder returns. We are fully confident that our "Accelerate to grow" strategy will create long-term sustainable value for all our stakeholders.

Let's now look at the first pillar of our strategy, our best-in-class networks.

In the second quarter, we rolled out fiber to 113,000 households. Together with the Glaspoort Joint Venture, we expect to reach 80% of Dutch households by the end of 2026. After reaching that point, Capex will come down to a much lower, sustainable level. In the meantime - and visible in our Homes Activated - we continue to successfully add new fiber customers and

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upgrade existing customers from copper to fiber. That will deliver higher quality service and better customer experience, leading to a growing fiber customer base. And we foresee significant cost savings as we gradually shut down our copper network in the coming years. All in all, fiber is at the heart of our strategy to return to sustainable revenue growth.

We are proud that Ookla once again recognized our leading mobile network. With this recognition we retain our position as the best mobile network in the Netherlands, with the highest up- and download speed, the best coverage, and the fastest 5G in the Netherlands.

Let's now move to our customers. In the Consumer market, we aim to be the preferred digital partner for households.

To provide the best digital access, KPN continued its SuperWiFi campaign and made the 1Gig proposition more accessible by lowering the price point, while doubling the upload speed. Regardless of the subscription, all our fiber customers can upload just as quickly as they can download. And this is a unique advantage over cable, and important when working from home or gaming online.

Furthermore, we improved customer interaction in the MyKPN app and we signed a unique entertainment partnership with Microsoft and we upgraded the Xbox Game Pass Ultimate into our offering. Our customers can now play more than 100 games in our interface.

We have also managed to turn the tide in Mobile service revenues, which returned to growth for the first time since the first quarter in 2017. This was supported by a strong commercial performance of especially our Unlimited data proposition.

Fixed-Mobile revenues increased more than 3%. Total Consumer service revenues still declined 0.7%, but showed growth compared to the first quarter.

Customer satisfaction remains one of our top priorities. And I am very glad to see that our efforts in this area are paying off. The Consumer Net Promoter Score improved to +14, as we successfully invested in increased capacity, improved processes and knowledge training for our customer support. As a result, the amount of issues that were solved first time right increased more than 10% since the start of the year. That is important because especially for these colleagues it is difficult to perform on the highest level with all COVID-19 rules and restrictions still in place out there.

Now let's take a deeper look into our Consumer KPIs. We have again delivered a solid fiber inflow, reflected by 47,000 new customers in the quarter, further fuelling the stabilization of

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broadband net ads. Fiber ARPA is significantly higher compared to copper, and that is due to higher speed take-up, more Value Added Services, and more SIMs per household. And importantly, fiber service revenue growth is offsetting the copper declines. The decline in Consumer Fixed service revenues is fully driven by Legacy services.

As we accelerate our fiber rollout, we are confident fiber is set to make up for Legacy declines as well, setting the stage for increasing Fixed service revenues.

Our Postpaid base improved by 16,000 net adds and Postpaid ARPU grew by 1.1%. Combined, this led to a return to growth in Mobile service revenues.

Let's now move to the B2B segment. This year we started to run the Business segment focussing on three distinctive customer segments: SME, LCE, and Tailored Solutions.

To remove complexity and to improve efficiency in our SME and LCE segments, we have introduced a simple target portfolio with standardized building blocks. Since more than half of B2B EBITDA comes from SME, we have prioritized transforming that segment. The decline in Business revenues was broadly in line with the first quarter. As roaming impact lapsed, SME service revenues improved to minus 3%. And we expect the SME service revenue trend to improve further in the next quarters.

LCE and Tailored Solutions declined, mainly because the second quarter last year was quite strong, despite COVID. Also, our Business NPS improved markedly as customers continued to value KPN for the stability, the reliability and the quality of our network and services.

The transformation of the SME segment is taking place and is taking shape with 95% of SME customers now migrated to the future-proof portfolio. The graph you see here on the left illustrated the customer journey of a migrated KPN EEN customer. First, ARPU takes a hit when a customer is migrated to the target portfolio. But after migration we are well positioned to up- and cross-sell additional products. The order we have shown here is purely illustrative, but generally, when a customer takes two additional products the ARPU returns to -or surpasses- pre-migration levels. And in that light, it is positive to see that the number of triple-play customers within the KPN EEN proposition increased by more than 50% compared to last year.

Quarter on quarter, revenues grew 2.6% and the trend is backed by healthy base developments. This means we are on track to stabilize service revenues in SME by the end of the year.

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Koninklijke KPN NV published this content on 27 July 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 29 July 2021 14:08:07 UTC.