Royal KPN N : KPN Q3 2020 Results (Call transcript)

Event transcript

KPN Q3 2020 Results

Wednesday, 28th October 2020

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

Transcript produced by Global Lingo

www.global-lingo.com

KPN Q3 2020 Results

Wednesday, 28th October 2020

KPN Q3 2020 Results Conference Call

Operator: Good day, ladies and gentlemen. Welcome to KPN's third quarter 2020 earnings conference call. 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 star one on your telephone. Please note that this event is being recorded. I would now like to turn the call over to our host today, Mr Reinout van Ierschot, Head of Investor Relations. You may begin sir.

Reinout van Ierschot (Head of IR, KPN): Thank you. And good afternoon, ladies and gentlemen. Thanks for joining us and welcome to KPN's third quarter 2020 results webcast. With me on the call today are Joost Farwerck, our CEO, and Chris Figee, our CFO. Before turning to the Q3 presentation, I would like to remind you of the Safe Harbour statement on page two of the slides, that also applies to any statements made during this presentation. In particular, today's presentation may include forward-looking statements, including the company'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 Harbour statement.

Let's now move to the core of the presentation. I would now like to hand over to our CEO, Joost Farwerck.

Joost Farwerck (CEO, KPN): Yes. Thank you, Reinout. And welcome to our third quarter results presentation.

Let me first take you through some of our highlights. First of all, in the quarter, we saw EBITDA growing at 1.3% and we saw solid Free Cash Flow growth. We also continue to deliver cost savings, which is reflected in the results.

Operationally, there were positive signs in the Consumer segment. We saw the postpaid base returning to growth and an accelerating inflow of fiber customers fuelling stabilizing broadband base. COVID-19 continue to impact our revenues, but lower costs partly mitigate the impact on EBITDA level.

I'm proud of our employees who continue to serve our customers in these challenging times. We execute on our strategy and with a solid set of results, we're now able to give a clear picture of the full year's outlook.

Next, I would like to highlight a few key figures. Corrected for a number of divestments, revenues declined by 3.7% year-on-year. Growth in Wholesale was offset by lower revenues from Consumer and Business. Roughly 0.7% of this decline is related to COVID-19.

EBITDA increased 1.3% year-on-year as the effect of lower revenues was more than offset by good cost control. And Free Cash Flow increased more than 7% year-on-year to € 241 million. Chris will give you more details on our financials later in this presentation.

Turning to our outlook. In the first nine months, we are on track with the execution of our strategy while maintaining a robust financial position. We are now able to give a clear picture of our full year outlook. We expect Adjusted EBITDA after leases of approximately € 2.320 billion, Capex at €1.1 billion, Free Cash Flow of approximately € 750 million. And to be clear, this Free Cash Flow and Capex outlook includes all acquisition Capex as well. We reiterate our dividend commitment and we intent to pay a regular dividend per share of € 0.13 over 2020.

www.global-lingo.com

2

KPN Q3 2020 Results

Wednesday, 28th October 2020

In the first nine months of the year, we have seen solid progress on each of our strategic pillars. As we generally do every other year, we will host a strategic update to the market in the afternoon of 24th of November. On this day, we will provide you with an update of our strategic and financial ambitions for coming years.

Fiber is the best and future-proof technology and our organic fiber build increased further in the third quarter, even though this included the summer holidays during which construction capacity is lower. Fiber activations accelerated, providing us a solid activation rate of approximately 50% over the 12 months passed. And we continue to add new areas where we roll out fiber. We're currently active in 90 areas and we are reaching completion in six of our 25 largest cities.

Fiber clearly outperforms copper on all metrics and fuels the stabilizing broadband base. Fiber ARPU is higher than copper. The churn is much lower and the NPS is a number of points higher.

Consumer fiber revenues grew nearly 8% in the third quarter, driven by a growing base and an uplift in ARPU. Fiber service revenues are bound to exceed copper service revenue declines as our rollout is ramping up further. All in all, we see a positive net present value from our fiber investments.

Let's now move to the performance of the segments.

Fixed Consumer revenues were somewhat lower this quarter fully driven by a decline of legacy services, such as Traditional Voice and Digitenne. The trend is starting to turn for mobile service revenues. Although still declining at 4.4% year-on-year, this is an improvement compared to the first half of this year.

Q3 NPS stood at plus 12. Customer satisfaction is one of our main priorities, so this result is clearly disappointing, and we have a plan in place to restore customer appreciation. This decline has to do with our customers having more questions and need for support now that the majority is working from home, which is putting pressure on our customer service center, a bit of an industry trend, and a change in the interface of our IPTV products, leading to questions since some customers need to get used to the new layout and features.

Looking at our Consumer KPIs across the third quarter, we can see that the converged base is relatively stable around 50% of broadband customers and more than 60% of postpaid customers. The total broadband net adds were in line with last quarter and moving towards a stabilizing retail base. The commercial success of our fiber rollout is reflected in 27,000 new fiber customers, and we're confident that this will contribute to an improving broadband base going forward.

And after a long period of decline, the mobile postpaid base returned to growth, and at the same time we kept the postpaid ARPU stable at €17. Travel restrictions due to COVID-19 led to lower roaming revenues and this was partly offset by increased national out-of-bundle usage. We're happy to see the underlying trend developing favorably, with improving inflow ARPU from our unlimited bundles and the effect of repricing wearing out.

Now we can move to the Business segment.

Business revenues declined nearly 8% year-on-year, largely impacted by COVID-19 as we saw lower roaming revenues and delayed IT projects. Also, our strategic customer migrations continue to impact service revenues in the short term. After the migrations, the new

www.global-lingo.com

3

KPN Q3 2020 Results

Wednesday, 28th October 2020

propositions provide us significant opportunities for up and cross-sell of additional Cloud, Security and Workspace services.

As soon as we obtained the new spectrum licenses, we switched on our 5G network and introduced distinctive 5G services for our B2B customers, as mentioned in this slide. We are currently the only operator in the Netherlands offering 5G value-added services and supporting businesses in developing new applications and optimizing their process with 5G.

We are making solid progress on the migration of our business customers to the new portfolios. However, the pace was somewhat impacted by COVID as we were often unable to enter the customers' premises. We continue to innovate our business product portfolio. For KPN One customers we now provide a 4G backup facility ensuring greater business continuity. And we added several cloud communications services such as Broadcom, Microsoft Teams to our Smart Combination portfolio. And these are indispensable features for teamwork when working from home.

Let's move to Wholesale.

Correcting for the sale of NLDC, the data centres last year, revenues in Wholesale increased by almost 5%, partly supported by the sale of small assets. We added 22,000 broadband lines in our Wholesale segment. So looking at our total portfolio of Wholesale and retail, we see solid growth of broadband penetration on our network, leading to a total broadband network share of approximately 52% in the Netherlands. We also renewed another long-term MVNO contract in the quarter. All in all, another good quarter for our Wholesale division.

And we believe that sustainable business is better business. We have reached some important milestones in this respect and we also have an ambitious agenda for the years to come. We commit ourselves to the three sustainable development goals from the United Nations mentioned in this slide. And during the quarter, we made some nice contributions to these SDGs as you can see over here. Our efforts in this respect, do not go unnoticed and KPN continues to be recognized by various ratings and benchmarks.

Now I would like to hand over to Chris to give you more details on our financials.

Chris Figee (CFO, KPN): Thank you, Joost. Let me summarize our Group financials for the first nine months by explaining like-for-like performance.

The Adjusted revenues of KPN declined by 2.9% year-on-year, partly attributable to COVID-

19. The Adjusted EBITDA after leases increased 1.5% year-on-year. Some lower revenues were more than offset by strong cost savings, net-net leading to a positive result. Our EBITDA margin improved 200 basis points year-over-year, to about 45%. And when we compare Q3 of this year to Q3 last year, we see a growing EBITDA.

Year-to-date, Free Cash Flow grew by 13% versus the same period last year. Our operating profit was € 150 million lower due to several incidentals like the book gain on the sale of NLDC in 2019. However, excluding these incidentals, operating profit would have increased by € 29 million year-on-year.

Similarly, net profit was € 144 million lower as it was boosted by the same incidentals last year. Excluding these, net profit would have increased by about € 31 million, mainly driven by lower financing costs.

www.global-lingo.com

4