Thank you and good afternoon, ladies and gentlemen. Thanks for joining us. Welcome to KPN's Third Quarter 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 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. Also, such statements are subject to the Safe Harbor. Let me now hand over to our CEO, Joost Farwerck.
Thank you, Reinout, 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 segment. We delivered service revenue growth in SME ahead of our commitment to stabilize before 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 further to 67,000 net adds across consumer and business this quarter. Consumer mobile service revenues continued to grow, supported by strong performance of our unlimited propositions.
With 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 results, we announced a EUR 200 million share buyback, reflecting our confidence in the successful execution of our strategy. We've nearly completed this leg of our 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. We remain confident that this strategy will create long-term sustainable value for all our stakeholders. We rolled out fiber 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 FTTH to 313,000 homes, and over the last 12 months, we have added 424,000 homes. We continue to successfully add new fiber customers and upgrade existing copper customers in fiber areas. This will be a key driver for sustainable revenue growth. The joint venture, Glaspoort, is now fully up and running and has recently started its wholesale broadband access services for wholesale providers. Together with Glaspoort, we're going to jointly reach 80% of Dutch households by the end of 2026. 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 over the last quarter and a higher ARPU level. Fixed mobile revenues increased 3%-5%, and total consumer service revenues grew slightly by EUR 2 million. 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 our efforts in this area are paying off. Consumer NPS recovered strongly to +15, and this is a reflection of the success of our attractive KPN and Simyo lineup, the quality of our products and services, and the customer journey improvements in several areas, such as customers moving into new homes, complementary fiber upgrades of copper 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 net adds were again relatively stable this quarter. Within the mix, we see a positive inflow on our KPN 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 ARPA remains significantly higher compared to copper due to the take-up of higher speeds, more value-added services, and more SIMs per household. Importantly, for the first time, our fiber service revenue growth was higher than the copper decline. We've delivered 27,000 postpaid net adds in the third quarter in consumer markets, and together with 1.7% higher postpaid ARPU, this led to mobile service revenue growth of 2.4%. Let's now move to the B2B segment.
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 -5% in previous quarters. The performance in LCE and Tailored Solutions was aligned with our expectations. As we highlighted earlier, it will take us some more time than in SME to deliver the turnaround there.
Business NPS remained at a positive level of +3 as customers continue to value KPN for the stability and 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 KPN One 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 other, driven by unlimited, is now offsetting that effect. This led to stabilization mobile service revenues in SME in the third quarter, an improving trend compared to -11% in Q1 and -4% in Q2. Finally, in fixed voice, the pace of the decline here moderated from around -20% to approximately -10%. This is partly due to the annualization of the phase out of ISDN2 last year, which reduced the year-on-year headwinds. All in all, group 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 post-paid growth for the group, including consumer and B2B of 100,000 this quarter. Wholesale 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 markets. 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 model, we guarantee sufficient room for wholesale providers to grow and to compete. 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?
Okay. 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 EBITDA 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 with 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-over-year is not a good proxy for a normalized run rate. Second, we continue to see somewhat less tailwind from COVID-related savings. Finally, some other elements affected our staff cost performance this quarter, certainly when compared to last year. These include our recent CLA increase, rotations to employee-related provisions, lower CapEx charging, and importantly, large restructurings in B2B and T&DO. These were effectuated as of 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 through the last years, 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 KPN. 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 2.9% growth driven by the success of our KPN One portfolio. In consumer, mobile service revenues continued to grow. As Joost said, fiber broadband service revenues were higher this quarter than the decline in copper. 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 a stable to small growth from here on. Also excluding wholesale, there's some growth. Our growth base is widening. In terms of revenue growth going forward, we expect some technical headwinds in the year-on-year comparison in Q4. We'll still grow our mass market service revenues, but due to technical comparisons at a slightly slower pace than Q3. Notably, B2B will face a tougher revenue comp due to a spike in Q4 last year, which is mainly related to pass-through revenues in LCE and Tailored Solutions. In B2C, more than half of the EUR 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. In summary, our revenue will continue to grow. The base comparisons will prove difficult to read in Q4 and Q1, but underlying the solid growth rate in mass market service revenues. In terms of cash, we've seen strong cash generation this year, despite higher CapEx and taxes. The higher CapEx related to the accelerated fiber rollout caused our operational free cash flow to decline, but this was countered by several other line items. More favorable developments in working capital, as our continued effort to reduce working capital intensity is paying off. EUR 38 million lower cash interest paid as a result of bond redemption 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 EUR 700 million cash and shorter investments and a EUR 1 billion undrawn sustainability-linked 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 EUR 92 million, mainly driven by the EUR 0.045 cents per share interim dividend in August for a total of EUR 189 million and EUR 19 million worth of share repurchase in August and September as part of the EUR 200 million share buyback program for 2021, which is, as we speak, now nearly completed. Again, these were partly offset by free cash flow generated during the quarter. Our leverage ratio of 2.3 x is one notch higher compared to last quarter, but still comfortably below our ceiling of 2.5 x. Reassured by our current financial performance and good strategic progress, we confidently reiterate our 2021 outlook and our ambitions for 2023.
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 with a EUR 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. Today's results show another important proof points of 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 increased gradually. Our margins, both in EBITDA and free cash flow terms, developed favourably, and we feel confident about the cash generating rate of the group.
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 one on your telephone. The first question is from Mr. Keval Khiroya, Deutsche Bank. Go ahead, please.
Thank you. I've got two questions, please. The first one being the revenue growth trends are obviously very impressive. But Chris, as you highlighted, the Q3 OpEx reduction was a bit weaker. Can you help quantify the level of improvement we should expect for Q4? On my numbers, I was expecting EUR 25 million-EUR 30 million of OpEx reduction in Q4 based on the full year EBITDA guidance. Does that seem reasonable to you? 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. Both those questions on OpEx, please. Thank you.
Well, Keval, two questions on costs. First, let me outline again on cost. I think we're seeing structural improvement in cost. 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 talk about, 40 to 50 attrition FTEs leaving the company. We're hiring a bit back, but net-net, we're declining our staff level structurally. 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. The number you present for or we present for Q3 is a bit unflattering and distorted by the comparison. Finally, as I said, the restructurings that we planned for this year are more back-end loaded and kicking in in Q4. Long story short, you asked, what's the guidance and outlook for Q4? You said you've got EUR 25 million to EUR 30 million in your models. That's a reasonable model.
I would. If I had such a model, I'd keep it. I'd keep that model up and running. That seems like a reasonable estimate to me. As far as next year is concerned, well, our program is running. We've got our targeted commitments. We see FTE levels declining, restructuring kicking in. We'll give you the full year guidance for 2021 when that moment is due. That's gonna be done at the full year results. At this point in time, we stick to our overall commitments and we keep the cost program running.
Perfect. Thanks, Chris.
The next question is from Mr. Joshua Mills, Exane. 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'd be great just to get a bit more of an overview and detail as to how you see the potential timing, the areas that could be impacted, in what way those might be impacted. Finally, you talk about extending some wholesale deals with larger customers. My question was, have you know, changed terms with T-Mobile before or after the recent announcement of the business sale? The second question was just around inflation. You've talked about how the FTE reductions you're making can deliver longer term cost savings.
Are there any areas within your cost base which are subject to rising inflation, and how are the payroll contracts set up to reflect that as well? Thank you.
Well, Joshua, let me first cover the ACM question you raised. ACM is our regulators 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 in last year. We currently were not regulated. In the whole discussion around market analysis on the fixed broadband, we believe we have a strong position and a solid case. The market with our consumer broadband share of 38% against Ziggo with 42% did not really change compared to last year. We follow an open wholesale policy. We did not change after we were deregulated. That's dynamic reflecting competitive dynamics in the market, you could say.
We see wholesale 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. 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 document, 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 KPN'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.
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 market, but, well, 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 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, you think about inflation. If you think about the different cost factors, I mean, staff is one thing. I think here 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 as there are more other factors at play. Let's see how these negotiations work out. For now, I think continuation of our current wage policy is probably fair to assume. With that, you know, it's not just pay. 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. I think the energy headwind next year is probably up to EUR 5 million, not more than that, simply because we've actually forward bought much of our energy.
When that energy stays elevated, 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 also to some extent compensated by the fact we've also forward procured quite some of our materials. On the rest, it means that we have to be smarter in procurement. That means consolidation of procurement, for example, in active mid and long tail of our spend to consolidate suppliers. We focus more on catalog buying, more standard buying to counter all these effects. In summary, is there some inflation? Yes, there is. So far it feels manageable and we can counter it by, you know, volume assignments and other measures. It's not.
I mean, it's cost will no longer be or energy inflation will no longer be a tailwind. It's a bit of a headwind, but nothing that would keep us awake at night from where we are today.
Okay. That's very clear. Thank you.
The next question is from Mr. Ulrich Rathe, Jefferies. Go ahead, please.
Thank you. I have two questions, please. My first one is on the inflection of mass market service revenue. They're reporting 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? Obviously there is a bit of sort of pandemic help in there, I suppose, at the moment. 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, 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. I was wondering, is there a point at which you think the broadband customer base shrinkage can be stopped? I understand a bit about the higher ARPU, the revenue growth that comes with the dynamics, but simply on the volume side that it can be stopped. Thank you.
Yeah, Ulrich, 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 area 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 Mbps-500 Mbps per household via double copper line. What we now saw is that for the first time we were able to more than compensate the loss on copper by fiber.
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 the customers, by this strategy. There's a churn on copper on one hand, and there's a growth on fiber on the other hand. It's our focus area to run that balance and optimize that balance better, along the road. That's what our whole strategy is about. Last quarter or a couple of quarters ago, we were still in the decline. The copper loss was much higher than the fiber gain. Now it's more or less break even. On the revenue side, we do better.
Yeah, step by step we improve this run rate, I would say. On mass market growth rate, yeah, I would say before I hand over to Chris, that it's also a step by step run rate 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. Looking at the run rate, we saw the growth coming in SME, but I'm of course happy that it's really visible now. 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 gained something on interconnect revenues, you know, on interconnect mobile calls, people calling like 800 corporate numbers. At the same time, due to the pandemic, we lost roaming revenues. I'd argue and that's of course a much more higher margin business. I'd argue that revenue wise, it's been flat to slightly negative. EBITDA margin, probably slightly negative. Perhaps a bit of cost benefit due 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, the upcoming comparisons, I think we're well set to grow well into next year.
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 we said, Q4 will be a bit funny because, for example, this revenue correction that we booked, it was a you know unfortunate event in Q4 last year and a correction in Q1 this year. That, for example, I think Q4 expect mass market service revenue growth to be about 0.3%-0.4% simply because of that comparison and going back to 2% or even a bit higher in Q1, simply because of those technicalities. The underlying growth probably around 1.5%-2% in the coming two quarters. I can see it growing well into the next year.
Very helpful. Thank you very much.
The next question is from Mr. Konrad Zomer, ABN AMRO. Go ahead, please.
Hi, good afternoon. First question is on the healthy migration to KPN One. I think you did a great job on migrating SME. I can imagine that to migrate large customers is gonna take more time or is simply more complex. What gives you the confidence that that's running about one year behind the migration of SME? In particular, what should we expect in terms of revenue loss initially? Because we did see that with SME, you've turned it around very quickly. I can imagine it can be a little bit bigger in LCE. My other question is on your statement about shareholder remuneration. You've nearly completed the EUR 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. Can you 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. Konrad Zomer, I will do the first question. Yeah, we migrated all our customers to KPN One in the SME segment. That was not done quickly, but took too long as far as I'm concerned, by the way, but we're there now. By doing this, 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. 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. The difference between how we will follow the last 20% compared to SME is that we have found out that the last 20% is the most difficult part, and it's and the first 20% is the most easy part to migrate when it comes to customers. 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. 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.
It's not only migrating customers but also really moving them up to a better, protected, higher quality, safer, faster, service. 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%. Already 80% has been done on LCE.
Yeah, Konrad Zomer, on the share buyback, as you pointed out correctly, the 2021 program is nearly finished. I guess it will happen probably in the coming weeks. That standard 2021 program, as in this year, we effectively return all the free cash flow we generate this year to our shareholders. We said this is a structural part of our shareholder remuneration policy. That means we're gonna continue this. It doesn't mean we're gonna announce another one every quarter, but we have to announce the 2021 version.
The 2022 one, we'll announce, and what we mean is the continuous and a constant part of our reward program, in which we take free cash flow into account, our balance sheet into account, with the objective to make this a structural repetitive part of our, you know, share reward, and we'll design 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 full year result when we give the outlook for next year.
Okay, thank you very much.
The next question is from Mr. Polo Tang, UBS. Yes, go ahead, please.
Hi. Thanks for taking the question. I just have one. It's really just about EBITDA. Your EBITDA growth year to date is +0.3%. To achieve your guidance for the full year, you need close to 4% EBITDA growth in Q4. Can you maybe 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? What does this mean for the trajectory of EBITDA growth into 2022? Thanks.
Yeah, Polo, it's Chris here. I think it's for Q4, it's easy to talk about the earnings that you need rather than the growth. We've given a guidance for the year. If you go back, you can almost, like, backward solve the amount of EBITDA you need to get there, which will then is a growth over last year. Again, last year, if you remember Q4, it was relatively low EBITDA, so the growth will look good. But to me, it's about the absolute level of EBITDA. If I then look what we need or we guide for Q4 and compare to Q3, for example, the Q3 EBITDA level was affected. You know, September of the Q3 is always high. The classical release of the holiday provision and some other elements.
If you strip those out, we need to continue to run at the current underlying earnings rate, do a bit better, and then we'll hit the number that we require to meet our full year guidance and the growth is a function of that. To me, it's more about confident 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. 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. 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, setup across Europe and in the Netherlands for you guys? i.e., we're just seeing like an acceleration of people's willingness to pay more for more right now, that doesn't necessarily continue. 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? 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're 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. When we started on fiber, people started to buy 50 Mbps. Currently, 100 Mbps is more the average. We don't think that during the pandemic, people ask for an upgrade and later in the time they will ask for a downgrade again. Once you're up on 100 Mbps or 200 Mbps and you found out the difference, people will not move back. By the way, we also priced their speeds on fiber more attractively last quarter because we really tried to motivate our customers to do an upgrade.
We didn't see a real relation between COVID pandemic kicking in and upgrades being asked. It's a more delicate line we see there. We think now we roll out fiber and we move to XGS-PON, which is enabling us to upgrade to 10 Gbps per household. We think there's far more potential in upgrading our customers in the years to come. On B2B, well, we announced that we're going to stabilize our SME business second half of this year. We're a bit ahead of the track with a slight growth in that segment. That's good. Of course, now the jury is out. First of all, keep the growth in the SME, and secondly, how to inflect the other parts of that B2B business.
When we aim for that and we're ready for an update on that when we release our annual figures next year. For us, that of course is a super important milestone because then we have a full top line growing again. 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. First keep that under control, and then soon we will come back to you on how to inflect the other parts of B2B.
Thank you. It's very helpful.
The next question is from Mr. Luigi Minerva, HSBC. Go ahead, please.
Yes. Good afternoon. Thanks for taking my two questions. The first one is on CapEx, and I was wondering, you know, how do you see the CapEx profile evolving in the medium term? I think, Joost, you signaled CapEx normalization starting from 2022. But then when the 5G you know network densification kicks off, what sort of impact will it have? You know, do you think that the capital intensity eventually will kind of you know start growing again if you think about the next five years? Perhaps related to that, but moving to the shareholder remuneration. As you make the share buyback a structural component, and obviously you create a very strong signaling system. I was wondering whether CapEx at some point becomes subordinate to the shareholder remuneration. 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, and it's a huge amount of CapEx for a country like the Netherlands. 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. The whole Netherlands is connected to fiber then. It makes sense to put in the program that we will step down significantly on CapEx.
Now in our industry, there's always the promise of a short-term step-up in CapEx and a longer-term step down. We are aware of that as well. It is for us super important that we stick to the 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. 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 their business case based. We have some field trials out there. 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. I don't think we will start to work on a network that's covering 5G, 3.5 GHz 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%. You know, 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. As Jo said, as soon as the fiber program is done, you know, that mixing 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.
That's the way we look at it. If you think, is it subordinate to shareholder returns? The way we think about it is this, you look at your CapEx 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 CapEx that relates to customer CapEx. To me, that's in general, that's good CapEx, provided of course, you sell profitable products. Assuming that your business is profitable, consumer CapEx tends to be, you know, good CapEx. Then there is CapEx which is more growth oriented, like, which I would qualify fiber at some point, growth oriented CapEx.
It's really clear that that needs to make an attractive return. You know, what we intend to do, of course, is look at the ROI, the IRR of the CapEx you invest there. Of course, you always keep in mind how the IRR of that CapEx stacks up to, for example, buying back your own shares. Not that you immediately could swing CapEx hundreds of millions EUR every year and buy back shares back and forth. You know, it's a good disciplining factor to make sure that the return that you make on the CapEx stacks up to the, you know, alternative of buying back your own shares. That to me is a very good disciplining factor in determining how much you spend in growth and innovation, new products, new initiatives.
For when it comes to our shareholder remuneration policy, I think ultimately you and we want our shareholder returns to be founded in, you know, continuously growing free cash flows. And 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, you know, whatever room you've got on your balance sheet. But long term, it's important that your cash flow will grow. CapEx is an important element to it. And as Joost also alluded, at some point, you know, then 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, the positive repercussions for shareholder returns.
That's great. Thank you.
The next question is from Mr. Usman Ghazi, Berenberg. Go ahead, please.
Hello. 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 just illustrate whether these were tough negotiations, 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? Over what period are these agreements? Are these similar to the previous agreements you used to do with you know, for the seven years, or are these shorter in length? Any kind of color there would be helpful. Just on topic of fiber as well. I don't know about 50%. Let's say is pretty fit. There is a
I'm afraid we're losing you a bit when it comes to the quality of the line. Can't be KPN, so probably something on your side.
Oh, okay. Sorry. Is it better now?
Yeah. It's better. Sorry.
Okay. Sorry.
Would you please repeat your second question?
Yeah. The second question was just on the copper shutdown that you did in six areas in the Netherlands this quarter. I believe it was so 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 that led to a natural kind of migration.
Yeah
in that process. Thanks.
Yeah. Usman, 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. 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. Via that, we can serve them on broadband through the whole country, which makes it far more efficient on their side.
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. It's a win-win kind of situation. I think that's why. It's not only a storyline we tell to convince our regulator that everything is working in the Dutch markets, 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 of certain areas three years in advance, if I'm not mistaken. 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 have to at the end switch off the legacy network. It used to be tougher, but we changed our fiber model a bit. When we roll out fiber, we're more focusing on migrating our customer base to fiber in the early stage, sell off and migrate complementary fiber upgrades earlier in the process than we did in the past to make that migration possible.
Also, the other providers, the wholesale providers, most of them are following that because it's also, of course, important to sell fiber in fiber areas. 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. In 2023, the real program kicks off. We are really going to disconnect several areas with a large base of copper. That is important because of the costs 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. When it comes to efficiency, it's important to do the copper switch off, and we really will start a real program in 2023.
To your point on those would-be forced migrations? 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 gonna happen, and be very clear and repeat that, the customer eventually will move from copper to fiber. 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. For a customer who'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's always customers who do not respond, then you have to chase them, make sure you connect with them.
It's not the unwillingness of the customer. It's like that sometimes customers don't pick up the phone, don't read their emails, don't read their letters. It's not. It's more that, you know, pointing them to it and 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, you know, making sure you connect with customers on time, and it's all about preparation. We see the way you prepare well early on, those transition actually goes pretty smooth. 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. This is just on the length of the wholesale agreements that you've recently signed. I mean, are these kind of, you know, 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. Okay. Thank you.
The next question is from Mr. Jakob Bluestone, Credit Suisse. Go ahead, please.
Hi. Thanks for taking the questions. They're fairly quick. First, 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 can 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 Solutions revenues that went from sort of -4% to -5%, and the LCE sort of looks like it's, you know, fairly unchanged at -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 second, I see there's some press coverage that Vodafone Netherlands has had three service disruptions in October.
Obviously, a little bit difficult for us to gauge, from, I guess, from outside the Netherlands, how significant that is. Just interested in hearing, is that significant from your point of view? Is that something you should, you know, materially benefit from? Thank you.
Yeah. 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. Sometimes they're right, by the way. That's always the toughest part of the whole migration program. Doesn't mean that we're going to push our business additionally down. 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 positive growth. The whole migration around improving the run rate at the end and keep it where it is, so in the short term. 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 competitor failures because before you know it bites you in the neck. The only thing I can say that is super important to invest in quality of your network, and that's what we are doing. We're focused on our end. We decided to upgrade our core mobile network to migrate it to Ericsson. We're investing in our core and access networks intensively. We're focused on that. We never think that we can benefit from bad news on competition. That is a negative business model, and they are not good for the business in general, I would say.
Very clear. Thank you.
Okay. Thank you very much. Thanks, Joost, 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