Earnings Call: Q2 2021

Jul 27, 2021

Good day, ladies and gentlemen. Welcome to KPN's Second Quarter twenty twenty one 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. I will now turn the call over to your host for today, Reinout von Eirschfeldt, Head of Investor Relations. You may begin. Good afternoon, ladies and gentlemen. Thanks for joining us. Welcome to KPN's second quarter and half year twenty twenty one results webcast. With me today are Joost Faurek, our CEO and Chris Vige, our CFO. As usual, before turning to our presentation, I'd like to remind you of the safe harbor on Page two of the slides, which also applies to any statements made during this presentation. In particular, today's presentation may include forward looking statements, including KPN's expectations with respect to its outlook and ambitions, which were also included in the press release published this morning. All such statements are subject to the safe harbor. Let me now hand over to our CEO, Joost Farwijk. Thank you, Reinhard, 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 four years, we saw growth in consumer mobile service revenues supported by 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 ends. We're installing fiber at a record pace. We've passed the milestone of 3,000,000 households and nearly half of Dutch houses now have fiber connection, the vast majority via our network, the network of The Netherlands. The joint venture with APG, which is called Hlaasport, is now up and running and enables us to further accelerate the fiber rollout together. 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 five gs 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'm 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. And 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. And as a first step, we intend to buy back shares worth EUR200 million 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 May, the Boards of KPN reviewed both approaches carefully, taking into account the interests 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 focuses on both short- medium term business improvements and long term sustainable value creation. And this was illustrated by the acceleration of our fiber rollout to unprecedented levels in the Dutch markets. And that's not only a plan on paper, we're 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 Growth 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. And together with the Glassport joint venture, we expect to reach 80% of Dutch households by the 2026. And 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 upgrade existing customers from copper to fiber. And 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. And 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 five gs in The Netherlands. Let's now move to our customers. In the consumer market, we aim to be the preferred digital partner for households. And to provide the best digital access, KPN continued its Super Wi Fi campaign and made the one gig proposition more accessible by lowering the price point while doubling the upload speeds. Regardless of the subscription, all our fiber customers can upload just as quickly as they can download and this is a unique advantage of a cable and important when working from home or gaming online. Furthermore, we improved customer interaction in the MyKBN 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 great games in our interface. We've also managed to turn the tide in mobile service revenues, which returned to growth for the first time since the first quarter in twenty seventeen. And this was supported by 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'm very glad to see that our efforts in this area are paying off. Consumer Net Promoter Score improved to plus 14 as we successfully invested in increased capacity, improved processes and knowledge training for our customer support. And as a result, the amount of issues that were solved first time right increased more than 10% since the start of the year. And that's important because especially for these colleagues, it is difficult to perform on the highest level with all COVID-nineteen 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 fueling the stabilization of broadband net adds. Fiber ARPA is significantly higher compared to copper and that's due to higher speed take up, more value added services and more sims per households. And importantly, fiber service revenue growth is offsetting the copper declines and 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 and 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 segments focusing on three distinctive customer segments: SME, LCE and Tailored Solutions. And to remove complexity and to improve efficiency in our SME and LCE segments, we've 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. And 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. LC and tailored solutions declined mainly because the second quarter last year was quite strong despite COVID. Also, our business NPS improved markedly as customer continued to value KPN for the the stability, reliability and the quality of our network and services. Now 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. And the graph you see here on the left illustrates the customer journey of a migrated KPN ONE 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. And the order we've 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 KPN1 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. And this means we're on track to stabilize service revenues in SME by the end of the year. In Wholesale, revenues increased 9% in the second quarter, supported by our attractive open access policy. Year to date, we've added 16,000 broadband lines, corrected for the migration of 22,000 OXIO customers coming to our consumer portfolio. Now with ESG fully embedded in our strategy and operations, we are contributing to making The Netherlands a better place, not only by conducting our own operations fully sustainably, but also by using our technology to make other companies and other activities more sustainable. For instance, in agriculture, logistics, traffic management and health, we contribute with our digital services. And we've again been awarded a AAA ESG rating by MSCI, the highest possible score. So that's all good. And now I would like to turn to Chris to take you through our financials. Thank you, Jorst. Let me start by summarizing some key figures for the second quarter. Our adjusted revenues increased by 0.2%, supported by growth in mass market service revenues and some non service revenues. The adjusted EBITDA after leases increased by 0.6% and our free cash flow in the quarter was more or less flat versus last year. For the full first half year, free cash flow increased by 17% year on year despite higher CapEx. Our return on capital employed increased by 50 basis points to 10.3%. The adjusted group revenues increased 0.2% year on year. Consumer revenues were flat as growth in mobile service revenues and non service revenues countered declining legacy services. Fiber and copper revenue developments effectively canceled each other out. Business revenues declined nearly 5%, mostly driven by our LCE and tailored solutions performance, with SME revenue developments turning increasingly favorable. Wholesale revenues grew by 9%, mainly driven by broadband. And other revenues were partly supported by nonrecurring benefits related to IPR or intellectual property rights. Six months ahead of schedule, we've already managed to grow mass market service revenues. These activities, which together represent about 75% of our revenues and 90% of our EBITDA, are now growing both year on year as well as sequentially. And Joost already took you through the main drivers. We see this as an important proof point for the success of our strategy and the first step towards full and complete top line growth for the group. Our EBITDA grew 0.6% compared to last year despite a tough comparison base in terms of cost savings. The cost savings run rate this quarter was impacted by two factors: first, temporarily elevated spend to improve customer support, which has paid off with an improving NPS in Consumer and Business segments, and we expect these additional costs to fade throughout the rest of the year. Secondly, less tailwind from COVID related savings. Last year, we experienced a strict lockdown in Q2 and shops and offices were mostly closed. As a result, we've had a difficult comparison base for costs related to travel, housing and facilities and marketing. And finally, a few other elements affected our cost performance this quarter, such as the rotation to holiday provisions and the fact that we're planning a larger restructuring in the B2B segment, which will help push down costs, but this will be executed in the second half of the year. Now let's turn to CapEx. We are accelerating the rollout of fiber to prepare for the years to come, and CapEx related to fiber was €218,000,000 in the first half of the year, driving the entire step up in CapEx spend. In the same period, we stepped down other CapEx by €29,000,000 mainly driven by rationalization and increased effectiveness of our investment programs in copper infrastructure, IT and mobile access. Our non fiber CapEx to sales ratio was contained to about 16%. For the coming years, we expect fiber CapEx to remain broadly stable between $450,000,000 and €500,000,000 per year. And after 2026, when the fiber rollout is largely complete, we expect to significantly reduce our capital intensity levels. In the first half of the year, we've seen strong underlying cash generation, despite higher CapEx and higher taxes. The higher CapEx 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 euros 33,000,000 lower cash interest paid as a result of bond redemptions last year and lower cash restructuring. Please note that our reported free cash flow excludes the effects of the JV with APG. Our free cash flow margin improved to 11.7% of revenues. On Slide 24, we report our return on capital employed. Upon request, we've given a little bit more insight into the breakdown of our capital employed, which we hope helpful. Our ROCE, return on capital employed, is solid, has increased 50 basis points year on year to 10.3%, a level consistent with a healthy value creation. And we see room to further optimize ROCE in the years to come, driven by fiber investments, cost savings and an improving top line profile. On ninth June, KPN and APG announced the closing and effective launch of the fiber joint venture called Glassport. APG has agreed to pay nearly EUR $480,000,000 for a 50% stake in the JV. For this transaction, KPN has recorded a net cash inflow of EUR $217,000,000 in the first half of this year, which is classified as a cash in cash flow from investing activities. This transaction has had several implications on our balance sheet and P and L in the second quarter. In the P and L, you can see an CHF840 million incidental book gain in line with revenues, EBITDA, operating profit and profit before tax. This amount equates to the transaction value minus goodwill and some minor prepayments. P and L taxes related to the transaction are €191,000,000 and consequently, the net effect of €649,000,000 is visible in profit for the period. On our balance sheet, the following movements are visible: first, a reduction of €64,000,000 goodwill related to the transaction second, other non current assets, which include the book value of 50% ownership and a financial asset representing a discounted value of future payments for APG Thirdly, current assets and specifically cash and cash equivalents include the initial payment by APG. And total equity includes a net effect of the aforementioned €649,000,000 in profit for the period. Our balance sheet continues to be resilient. Committed liquidity, consisting of €795,000,000 of cash and short term investments and a €1,250,000,000 undrawn RCF, together cover debt maturities through twenty twenty three. First Q1, our net debt declined by €20,000,000 mainly driven by the payment we received from Flasport and all other corresponding Flasport cash flows, by the free cash flow generated during the quarter and a sum of those was partly offset by the final dividend payment over 2020 in April. Our leverage ratio is now at 2.2 times, comfortably below our ceiling of 2.5 times. Reassured by the growth in mass market service revenues, good and solid strategic progress, we confidently reiterate our 2021 outlook. We expect the adjusted EBITDA after leases to come in at €2,345,000,000 a CapEx of €1,200,000,000 and we expect free cash flow of €765,000,000 in line with last year. Our regular dividend will grow to €13.6 per share over 2021 and we will already reward our shareholders with an interim dividend of EUR0.04 per share. And finally, we reiterate all our ambitions for 2023 as outlined in the strategy update last November. The execution of our strategy is on track, and we are focused to deliver long term value to all our stakeholders. KPN remains fully committed to an investment grade credit profile and aims for a leverage of no more than 2.5 times. Our progressive dividend policy targets growth of 3% to 5% per annum. Our proposed 2021 dividend implies growth of 4.6% and is at the top end of this range. We are confident that this progressive dividend policy can now be complemented with a structural incremental set of capital returns to our shareholders, driven and supported by: one, the continued strong execution of our Accelerate to Growth strategy, which already led to an earlier than planned and sustainable mass market service revenue inflection by two, a healthy outlook for our free cash flow generation, taking into account our CapEx commitments and thirdly, a robust balance sheet and disciplined financial framework, with a leverage ratio comfortably below our targeted level. We will continue to run an efficient balance sheet going forward, providing scope for attractive cash returns to our shareholders and will not retain more cash than is absolutely needed. We also, of course, expect to retain ample flexibility to pursue bolt on growth investments as they may arise, such as the acquisition of OXIO recently and to acquire further spectrum. So while we invest strongly to deliver on our strategy to drive growth, we see no reason to retain our free cash flow this year. We intend to execute a share buyback program of €200,000,000 this year, effectively returning all 2021 free cash flow to our shareholders. So to summarize, today's results show an important proof point of the success of our strategy. We returned to mass market service revenue growth already and earlier than planned, and we will structurally return additional capital to our shareholders, starting with a CHF 200,000,000 share buyback this year. Thank you for listening. Now let's turn to your questions. Ladies and gentlemen, we will start the question and answer session now. The first question is from Mr. Keval Kiroya, Deutsche Bank. Go ahead please. Thank you for taking the questions. I've got two, please. Firstly, you've highlighted that some of the items which weighed on Q2 OpEx reduction. But can you elaborate a bit more on how we should think about the level of OpEx reduction in the second half? When you gave the €250,000,000 target, you did update the 2019 to 2021 target, which I think implies about €100,000,000 to €120,000,000 of cost reduction in 2021. Do you still see that as achievable? And secondly, if we add the dividend and the welcome buyback, you're distributing roughly 100% of 2021 free cash flow. As you think about future additional cash returns, would you consider distributing more than 100% as a tool to increase leverage as your EBITDA also grows? Thank you. Well, first on thanks for your question. On OpEx reduction, this comes in batches. We run a cost efficiency program now for years, and we aim to continue that. And we expect to do more in the second half of the year than we did in the first half of the year. To give you an example, we are working already for six months on two large reorganizations that will affect in the months to come, that will impact our OpEx as well. And also in this quarter, we saw clearly less cost reduction due to holiday provisioning, skipping in, etcetera. So we are, yes, really confident in our OpEx reduction. If we completely meet the 100,000,000 for this year, I can say. In total, we also add some more costs to drive mass market revenues up. But in total, I'm happy with the balance of things, and I expect more cost reduction to come in the third and fourth quarter. Yes, I think the CHF $250,000,000 definitely stands. We'll meet the CHF $250,000,000. And as Jo said, we've incurred some more costs when it comes to customer support and a number of larger reorganizations, which will come in the second half of the year, end of Q3, beginning of Q4. And to your second question, on the free cash flow, indeed, as you correctly point out, Keval, we retained no cash this year. As we said, additional capital returns will be a structural part of our shareholder reward. The exact number next year, we will determine next year, but it's certainly possible that we'll exceed our free cash flow any given year in terms of what we return. It depends a bit on how the world evolves, depends on additional investment opportunities, it depends a bit on spectrum, But we're not necessarily constrained by our free cash flow any given year when it comes to capital returns. That's clear. Thank you. The next question is from Mr. Joshua Mills, Exane. Go ahead please. Hi, guys. Thanks for the questions. There's two for me. The first is on the net promoter score improvement, which is quite healthy across both consumer and enterprise. I'd be particularly interested in exactly what you've done to drive that and probably more on the enterprise side. If you could give some specific examples, that'd be helpful. And then the second question is around QR rate, quite familiar topic. But obviously, in Q2, there were these headlines around historic potential security lapses in Huawei equipment. I know that it's been a kind of big topic of debate in the Dutch and I think also in the government. So my question is, what have the government said to you directly about Huawei within your network? Has the situation changed in the last six months? And do you envisage any situational future costs to take out existing highway equipment from your network, which may not have been included in your prior guidance? Thank you. Yes, Joshua. First, your question on the Net Promoter Score improvements. Yes, we really invested in the front line of the company. Like last quarter, we explained, all these people are working from home to serve our customers. A couple of them we took back to the office, and we really scaled up on people, on training and on support, and which is clearly visible in reduction of calls and in the speed they can handle calls. So 10% improvement there already in the first month, so that's very good. So it's an end to end quality steering we do, starting at the service centers completely until the back end of the company. And this cooperation through the company is super important and that we really improved, but we also invested in that. And that was one of the reasons why we made more cost in that part of the company last quarter. And now we see the cost going down and we see, yes, things more under control. In B2B, we stepped up from two to four, which is also all related to improving customer support and helping out our people. So all in all, I could say that COVID is not helpful for this kind of work, and I think we made the right steps to support our colleagues there. And it pays off. That's clearly visible. Yes, on Huawei, that's every now and then popping up in the news. And for a long time, we're discussing that topic with our government. Like all West European telcos, we have Huawei in our network. Already more than a year ago, we announced our strategy that we only will work in the future with Western vendors in our critical domains. And we also announced that the core network, which of mobile, which is currently delivered by Huawei, will be replaced, and we selected Ericsson for that. And we've been discussing the plan with our government in great detail. The government gave us and the other two operators a message and instruction based on a legal order. And that was not a surprise for us. So we know the plan. What's in the plan is stay secret, but it is, for us, not a surprise. It's completely in the life cycle of things. And so we will not see additional OpEx or CapEx related to that because we have our time and it fits in our strategy. So that's that. Every now and then, Huawei will pop up again in the newspapers, and we are fully aware of that. But it fits in our plans, what we're currently doing and also in our migration plans, and we have the time to do what we have to do. Great. That's really clear. Thank you. The next question is from Mr. Andrew Lee, Goldman Sachs. Go ahead please. Yes. Good afternoon, everyone. I had a question on your balance sheet flexibility and coinciding with your use of the words first step with regards to your buyback. So you mentioned earlier on in the presentation that you rejected those private offers given their failure to show value creation above your strategy. I just wondered has your approach towards target leverage and flexibility changed at all? But maybe specifically your buyback takes you to around, let's say, 2.3 times net debt to EBITDA right now. That's 0.2 times below your ceiling. Is that 0.2 times buffer close to the amount of flexibility you need within your strategy for the longer term? Obviously, I'm thinking about the scope for more buybacks this year and going forward as you delever. Any kind of help you can give us in how you're thinking about the balance sheet and the required level of flexibility would be great. Thank you. Sure, Andrew. Well calculated. I mean this buyback will take us probably end of the year to about 2.3 times net debt to EBITDA, kind of where we my planning as well. For this year, we tend to do €200,000,000 so don't expect anything more this year, but 2021 is €200,000,000 to start. Our ceiling is 2.5x. You may want to end run a bit below that to have some buffer for, as I said, some M and A or spectrum acquisitions. I don't think we necessarily need to stop at 2.3. The effective ceiling, including buffer, is a bit higher than that. So it gives you some feeling for where we are and what the scope is, but we want to start with not retaining any free cash flow this year. And next year, we have to reset the number again. But to your point, 2.5x is the upper limit. We could get run a little below that to keep some flexibility. It depends also, of course, how the speed of our fiber client base develops. As more clients become sticky fiber clients, that also gives some room for additional leverage going forward. It also depends a bit how the Dutch market evolves. If competition is developing healthy margins stay where they are, they'll support things. So, Dimit, there's a couple of things coming together. But at this point, 2.5 times is our ceiling, and you'd run a little bit below that, but not necessarily 2.3 times. Great. Thanks very much. That's really helpful. The next question is from Mr. Matthijs from Leyenhorst, Kepler Cheuvreux. Go ahead please. Yes. Good afternoon, gentlemen. It's regarding the Dutch Competition Authority, ACM. Apparently, they have identified a risk that your access conditions could make it more difficult for competitors to compete. What is your view on this new study? And do you foresee any risk that we could see regulation implemented again? Yes. So for us, it's not a surprise that ACM is working on a new market analysis because that's what they have to do. It's a regulator, and they will always work on the new market analysis every three years, and they look five years ahead. So that's not a surprise. Last time was in 2018 and that one was annual by the highest court in March, the CBB in 2020. So we all know that. So the interesting unusual situation is that we're not regulated. Now according to ACM, there could be a risk that KPN's access conditions could complicate the possibility of competitors to compete with KPN. We don't see that. We have an open network policy, an open access policy. We didn't change the model after we are no longer regulated. I think one of the most important proof points there is that the strongest growth is in the base of the challengers using KPN's network in The Dutch market. That's where the real growth is. Us growing 1,000 organically, ZIGO, I don't know, probably a small decline and then 16,000 growth on our network from these Internet service providers. So that shows that there is good room for them to act, and they're doing that. And we didn't change conditions. We did lower wholesale tariffs when we lowered the one gig price in retail. So we think there's a fair balance. And of course, the regulators will always try to regulate. So that's not a surprise for us. But from a legal standpoint, we think it's very difficult to declare KPN a dominant player in the Dutch market with a market share of 37.8 and Vodafone around 43%, VodafoneZiggo that is. So we'll see. We expect the market analysis and probably they will really look at how to regulate us. We are not that much against regulation. We are much against interfering in pricing because we think the Dutch market is working quite well. But we'll see how it works, and we'll take it step by step. But we're pretty confident that we have a very good standpoint and a solid legal standpoint as well in this whole matter. Thank you. Much appreciated. The next question is from Ms. Siyi He, Citi. Go ahead please. Hello. Hi. Good afternoon. Thank you for taking my questions. I just have one and probably another clarification. My question is on your guidance for your EBITDA. I think during your conference call, you said that you comfortably reiterate the guidance. And when we look at the service revenue trajectory and also cost saving opportunities, it feels like second half becomes materially easier than the first half. Maybe if you can just walk us through what kind of potential headwinds that we should bear in mind that might mean that the EBITDA growth will be less than number simply implies? And my second question is just a clarification. I think very clearly in your presentation, you said that there is a difference between the IT spending revenues between SME and also the larger enterprise. Just wondering why that's the case and whether that is just simply COVID related that you see more delays in public contracts? Siggi, on first question on ACO, we confirm our guidance and reiterate our guidance for the year. Is the second half year facing much headwind? Not necessarily, but if you recall last year, Q3 last year was very strong. Q4 last year was a bit weaker in year on year comps. So you find that the comps on Q3 will be a bit more difficult. Comps in Q4 will be little bit more easy. I'd expect the mass market service and revenue developments to continue. You'd expect SME to join the bandwagon and to build also move to inflection and possibly even some growth, but let's inflect first, but there's positive upside there. We'll see, as Jo said, the cost kicking in, the cost reductions kicking in, Q3 possibly Q4. With that, we feel confident with the EBITDA outlook, confident with the free cash flow outlook. If anything, I'm a bit more bullish actually on free cash flow. I think we can actually surprise a bit on the upside there, although, course, we delivered at first and we can confirm it at the end of Q3. So that's how we look at the year. Let's remain prudent and conservative. Let's reiterate our outlook, confirm what what you need to confirm and share a view that on free cash flow, a little bit more upside might be possible. Georges, do want talk about the SME and LC business? Yes. So your question on, if I'm not mistaken, on SME and LC is in SME, we said we're almost there, 95% migrated inflection coming up, minus 6% last quarter, minus 3% now. And looking at all the quarters behind us, we think we're moving in the right trends and also related to those migrations. On LC, we do the same, but we're later. And that is because it's less profitable, so we decided to prioritize on that Holz Media business. 75% has been migrated in LC. We also tried to do it a little bit more careful than we did in the past on SME. So let's see. I think if we fix that mass market revenues like we're currently doing, if we can really show broadband consumer growth, SME growth, then we have to announce the plan on LC. That's what we're working on. But I'm confident that we can migrate it in the right direction just as we did on SME. That's very good. Thank you. The next question is from Mr. Polo Tang, UBS. Go ahead please. Yes, hi. Thanks for taking the questions. My first one is just really about COVID impacts from here. So can you maybe just talk about where your mobile roaming revenues are currently compared to 2019 levels? And have you seen much of a bounce back or recovery in Q2? And also, are you seeing any indications of rising bad debts amongst SMEs or business clients? Or alternatively, are there positive benefits from COVID in terms of people trading up to faster broadband speeds as they work from home? So really just a kind of question around COVID impacts from here. And the second one is really just coming back to business revenues. You've obviously seen an improvement in terms of SME revenues, but obviously declines are continuing in terms of the rest of the business unit. So can you maybe just kind of talk about some of the puts and takes in terms of business revenues from here and how and the major moving parts and how optimistic are you that total business revenues can stabilize as we look at 2022? Yes. Paul, let me answer the question on COVID. If I go back to if I just talk about revenues first and costs later. On the revenue side, there's little actually roaming revenues kicking in if I look at the outlook for the year. Perhaps roaming revenues could be a few million more, but then you look at that 2,000,000 to €3,000,000 more. We see the biggest source of roaming revenues, roaming profit, particularly our clients traveling across the globe. We see careful travel with inside Europe picking up. We've seen some small pickup in visitor traffic into The Netherlands. We've seen good developments on IoT. But again, that's all inside Europe. So on roaming, I'm afraid that the upside for the year is €3,000,000 That's kind of what it is compared to last year, and that is actually still to happen in Q3 and Q4. So unfortunately, not much there. On the good news side, that debts are not there. We see our clients paying our bills all in time, actually some of them paying it earlier in time. Most of our clients still have quite some cash. So in terms of bad debts, we have not seen an increase in write offs or even a hint that requires us to increase our bad debt provision. So it all feels stable versus last year. On the cost side, we faced a bit of a headwind versus last year, meaning 2020, of course, we had the strict lockdowns in Q2 as which we had no travel, leisure, entertainment or education costs. Today, we've got some homework allowance. So I think on the cost side, COVID is a bit of a tailwind versus last year simply because the give back to our employees. So all in all, it's flattish with a small potential upside in roaming and in a year on year comps, some adverse development when it comes to costs. But all in all, it's not a massive impact yet on our results. Yes. And on LC and integration in B2B, I just said that in SME, we are moving in the right direction. So we will follow that trend, and we worked for quarters on that. We're doing now the same in LC. Integration is a bit different. Integration is, yes, projects we do on large enterprise, and we really are improving there. But it goes a bit up and down. Sometimes we invest in costs related to larger projects. But all in all, we think that we can run that business more in a stable way already soon. And the question is how we strengthen our company by doing that. On LCE, we're doing the same as we did in CV, but it's more complicated. It's larger enterprise customers that have to swap hardware on their side when we start migrating. So we're more prudent in the whole migration program than we were on SME. It's mainly about SDH and ISDN services that we really have to migrate because of the life cycle of the networks and the platforms behind those services. But for the rest, we think we can replicate the services. So we're trying to do it a bit smarter and to support our customers not to change all the hardware on their side. So we will take our time. And after we have done the Schmien flexion end of this year, We'll work on the LC. If it's going to happen next year, I can't promise you yet, but we'll give you more update on that end of this year, I guess. But we'll have you know us. The migration works, but we try to do it in a bit smarter way than we did in the past. Great. Thanks. The next question is from Mr. Jacob Bluestone, Credit Suisse. Go ahead please. Hi, good afternoon. Thanks for taking the question. I had a question just on your improvement in your consumer service revenues. Your fixed and mobile service revenues both saw roughly a 2% improvement in growth. And I was just hoping you could maybe break down what drove that. I guess there was an annualization of comps on the roaming side, but anything else you'd sort of call out? It looks like it's mostly ARPU driven. So was it price action or mix change? Just to sort of help us understand what is it that's driving that service improvement in Q2 versus the Q1 run rate. And then just very briefly, can you also just confirm that you haven't had any further approaches since the press release that you sent out a few months ago? Thank you. Yes. Well, on approaches, I don't have that much to announce, of course. Otherwise, we would have done that. And like I said, we've carefully considered the two approaches and we rejected both unsolicited offers. We're very focused on the execution of our own strategy. We think that's the best way to create value. And we don't have any new information on the whole topic. And for us, most important thing is that we will keep on executing on our strategy and to show good results there. Now for the question on the service revenue in Consumer, I'll hand over to Chris, who knows all about that. Very good, Jacob. When it comes to the mobile side, I mean, the main driver of mobile service revenues is net adds. We have seen positive net adds growth for a few months now. I think it started in early Feb. So March, April, May, June were all months with positive net adds in postpaid, as you also saw in the quarter. With that, ARPU in mobile stable. If you dive a bit deeper, non committed ARPU slightly down versus last year, committed ARPU up, overall ARPU stable, so no roaming impact, just stable ARPUs and ARPU development mostly driven by a solid share of unlimited and some gradual uptick in clients moving to higher bundles. But by and large, in consumer mobile, it's net adds with stable ARPUs. When you look at on the consumer fixed side, we, of course, have seen some decline in net adds in the first quarter and plus 1% organically in the second quarter and plus 22% from OXIO, where the OXIO impact on one quarter is relatively small. And then when it comes to the ARPU, we've seen the fixed ARPU, a couple of moving parts. Some small pressure on fixed ARPU due to VOIP on the consumer side, to legacy on the consumer side and in the first quarter, value added services, which has returned in the second quarter with more value added services and effectively the stable ARPU. So when you look at the broadband side, declining net adds in Q1 returned to small but not impossible, not negligible growth in Q2 and effectively some stable ARPU. So overall, we found that this year net adds is the main driver of Voter Service revenues. And as you know, we've announced a small price increase inflation, which will kick in, in the summer. That's going to support consumer broadband developments going forward. And consumer mobile side, we continue to see good inflow of net adds. Okay. Thank you. The next question is from Mr. Steve Malcolm, Redburn. Go ahead please. Yes. Good afternoon, guys. Thanks for taking the questions. I'll go for a couple. Just on the Dutch competitive competitive environment, we've seen a couple of kind of interesting developments as they go in the quarter. I know they launched a broadband only product for the first time, they also lost the Formula One rise to get impact their sports offering. So maybe just any thoughts you've got on your strategy in response to that? And following up on Chris' comments, any update you can give us on how the price rises landed and whether any wrinkles to look for in Q3 as that comes through? And then after that, just coming back to the point on free cash flow Chris was making, I mean, should we assume that the swing factor is basically working capital? I know you're 70% ahead in the first half versus last year in working capital. Everything else feels like it's the same EBITDA, CapEx, interest. Is that where the swing factor will be as to whether you update guidance in Q3 or not? Thanks. Well, on the competitive environment, well, Dutch market is a competitive market. On the other hand, we've seen consolidation in the markets. We've seen lower price points being taken out. Like Chris just mentioned, we increased our tariffs and another large player followed a month later. So on the mobile side, T Mobile built up a very important postpaid consumer back books. They are the largest in the consumer market in The Netherlands, Us number two and Vodafone number three. So they're no longer a challenger. They are more or less protecting their back book. So that ends up in a three player market. We have a lot of challengers around us, mainly on our network, challengers like Le Barra, Leica, UPhone. They're all also customers of KPN. So there's enough of lower priced propositions out in the markets. I think we stand out with the quality play. It's clearly feasible that customers in The Netherlands like to pay for quality and, for instance, a gig symmetrical up and down is different than what others can supply in the market. So I think that's the game we have to play in this environment. Of course, T Mobile is up for sale, but we expect the buyer of T Mobile also to aim for value creation instead of anything else. So it's a busy market. We're a small country with a lot of providers. But what we did last quarters is that we really differentiate in a way we should, and that is by leading the quality game and customers like to pay for that. On free cash flow, Chris? Yes. Steve, on free cash flow, indeed, you're right. The main change will be on working capital management, which I think is going support our free cash flow. One little point of note, mean, year Q3 was very strong. If you recall, last year Q3, we had a big impact on the working capital. So the delta free cash flow will show up not in Q3, but likely will show up in Q4, driven by working capital. We're tightly managing our inventories, tightly managing our payment terms, relationship with vendors and suppliers, smart working capital solutions with them. So that's kind of the driver of our free cash flow developments. Today, we're EUR 43,000,000 ahead of last year. Don't want to disappoint you, but we're not going to be EUR 43,000,000 over last year for the full year, but the upside will be mostly there in Q4, driven by working capital and cash management areas. Okay. Thanks guys. The next question is from Mr. Usman Ghazi, Berenberg. Go ahead please. Hi, gentlemen. I've got two questions, please. The first one is from the report actually rather than the presentation. In the report, I think for the first time, you specifically outlined that in Consumer, you have an ambition to grow service revenues by the 2021. So I mean, could you go perhaps highlight the factors that will get you to that growth number? Because if I look at the numbers today, guess the legacy declines of 20%, they're weighing. So are they expected to moderate? Or is the MSR growth expected to pick up? Is there any color there would be helpful? And then just on the shape of the mass market service revenue trend through the year, so I guess Q3, we should see an additional kicker with SME kind of stabilizing Then in Q4, you're indicating that consumers should be growing as well. So, I mean, the it seems to me that the mass market service revenue trend is not only sustainable, but that it should be should be getting better through H2. So is that kind of the right way of framing this? Yes. Well, on mass market service revenues, we're positive. We think that we will improve the whole trend of mass market service revenues in the second half of this year. So and like we said, it's our strategy and it's our plans we announced last year to inflect in the second half of the year. So that's our wholly target. Well, we've seen inflection on the total of things in this quarter. And you're right, SME will further improve. It's in the trend. If you look at quarters behind us, we'll think year on year, we'll show improvement in the quarters to come in SME. And also on the consumer side, we want to improve further service revenues supported by all commercial actions. Consumer, end of this year? Well, I think on the consumer side, we see mobile service revenue growth to continue to grow. Consumer broadband, I mean, it's on the brink. I think we make good chance to get there. So with the price increases coming up, it depends a bit on how the net adds, of course, will evolve. And legacy will continue to decline, although because the decline in legacy tends to take place in Q1. That's where you step down typically. So the remainder of this year, may see some decline, but a little bit less, and then it's a seasonal thing. So will consumer service revenue as a whole grow? I think we're getting close. Ask us again in Q3, we've got more visibility. The total mass market service revenue will definitely continue to grow. As SME joins, mobile continues to grow, wholesale continues to grow. And then it's the broadband side of things, which is going to be on the brink of growth with the drag from legacy actually fading away gradually during the year. Got you. And my second question was on the coming back to regulation. I mean, it used to you you know, you're obviously right that you haven't changed any of your wholesale, kind of pricing, you know, since the court ruling. But I guess what has changed is the nature of the or or rather, you know, the incremental fiber deployment that you announced after the core tooling, you know, is a point to multipoint network, which, you know, gives an excuse to an alternative operator to say that, look, this kind of network discriminates against, us if we want you know, in terms of replicating owner economics as as with the ODF product that you have out there. So is there is there any way to, you know, reduce the risk from this from a complaint by an alternative operator that the nature of the fiber deployment is discriminatory? Or do you not see it like that at all? Well, I think when it comes to which you said it correctly, we have not changed anything. Actually, when you look at what we've offered, we've actually kept the same location with ODF to all our customers. We have kept actually reduced our also prices a tiny bit, in line with the pricing that we've reduced in the, for example, one gig in the consumer market. So that's all aligned. When it comes to point to multipoint, we have a VULA offer, which is actually a virtual local unbundled solution. I'm even sure what VULA stands for, but it's virtually unbundled something. So effectively, it is an unbundled offer, which we think is actually quite attractive and works very well. Georges, do want to add to that? Well, yes, you mentioned ODF access, and of course, that's the passive access on fiber, and that's what we do in most of the fiber areas point to point. But wholesale partners only buy it in the really larger areas, on large points of presence. Otherwise, it doesn't make any sense to roll out your backhaul to these kind of areas. So it's a bit theoretical that we have to offer this kind of service in the smaller regions because we have that Vuela service to replace that. And on the other hand, you mentioned the idea of having a different position on the network side. This whole regulation, of course, is in the first place on our retail market position. But this is all theory, so let's see what the draft market analysis of our regulator will show. There will be a consultation process, and I can assure you we will join it in great detail and then we really understand what the plans are. But like I said, from a legal standpoint and looking at the way the market has been regulated in the past and also in other countries, we think we have a fair and open network policy that really is serving the whole market. Thank you. The next question is from Mr. Uriel Rade, Jefferies. Go ahead please. Thank you. I have two questions, please. The first one is on the IPR benefit that you mentioned. Is that was that sort of one dispute that's relatively big one that sort of came out and you're highlighting it? Or are there further installments of this sort of thing coming potentially if this goes your way? And could you confirm that the impact is actually larger than the revenue and EBITDA growth you had. I think you talked about revenue and EBITDA growth for the group, which was €4,000,000 year on year, both revenues and EBITDA. I think the IPR benefit was larger than that potentially, which would mean that the underlying revenue and EBITDA is still in decline. The second question is on the joint venture with APG. In the big picture, you've got to partner in to provide the capital upfront, but of course, you will pay out to them over time a share of the returns when they come. On the other hand, you now return some of that cash that you got from APG as you got them in to shareholders. Could you describe how that creates value for KPN shareholders? Because it sounds like we could have accelerated the fiber rollout with your own capital rather than returning it to shareholders. Effectively, what you're saying is the returns you could make in fiber are lower than the returns you're making by buying back shares. And I was just wondering how you think about that balance. Ulrik, on the first question, IPR, we do have a regular stream of IPR type of revenues. It's something that generates income, has generated income before and will generate income in the future. It's a bit lumpy, so you can't have it every quarter. It's lumpy in terms of timing, in terms of size, but it is a fixed I would say almost like a product fixed set of revenues. You could say if you strip it out, yes, it would impact our EBITDA. At the same time, it's one of the incidental that goes to our results. If you all fairness look to our results last year and this year, you strip out all those like one offs or semi one offs or lumpy type of revenues. Last year, you have deltas in holiday provisions. You've got deltas in a way we reserve for STIs and LTIs, long term and short term incentive programs for our staff. You may have other different one offs. If you strip all those one offs and you include IPR there as well, you'd still have a 3,000,000 to €4,000,000 EBITDA growth. So as you strip one out, you strip the other one out as well. And the underlying EBITDA growth, it still is around 3,000,000 to €4,000,000 in this quarter on quarter, so Q2 last year to Q2 this year. So that's one. When it comes to the joint venture, actually the share buyback in my mind is not the money we receive from ABG. I know it feels like it's the same amount of euros, but it's really driven by the organic replicable generation of cash from our group. And that's why we're paying out effectively not retaining any cash and this effectively paying out our free cash flow. Could we have invested in fiber? Possibly, we could. But again, we set out the JV for a few reasons. One is the cost of capital from the from our partner, from APG, appears to be lower than our own cost of equity. So it's an effective way to fund this business. You might actually argue that return on capital and buying back your own shares is bigger than the cost of capital from the capital APG provides. And more importantly, we felt that this JV gives us much more flexibility to further accelerate our fiber into a scale that we couldn't do ourselves, we didn't want to do ourselves without affecting our free cash flow. So the JV with APG is to be separate from the share buyback. It's relatively low cost of equity capital with a deep pocketed partner that has more that allows us scale up fiber to a level that we wouldn't be able to do ourselves without affecting our free cash flow. And secondly, the ongoing cash generation of the business and the balance sheet that we have, even without the APG joint venture, looks very promising. It means if we had done a JV, we still would have come to the same share buyback conclusion. So to me, are separate worlds that you can't immediately connect. At least we, in our minds, don't connect them. Very clear. Thank you very much. Thank you. The next question is from Mr. David Fatma, ING. Go ahead please. Thank you. Good afternoon, everyone. Thanks for taking my question. The first one is on the working capital evolution also for the coming years. Could you describe the evolution that you expect in particular in relation with the capital investment, the fiber CapEx? Or is it evolving in any positive development there? And then concerning fiber and the take up rate, how should we be thinking about the evolution, the progress that you could have on the take up rate going forward? And any potential swing to expect, let's say, quarter on quarter, loan business, let's say? Well, to start on fiber, what we see is an improvement in the take up rates, and it's also because of a change in our strategy. So when we enter a new fiber area, we're focused on migrating as much customers as we can to fiber in the first wave. In the past, we did that later in the second wave. And we're in the middle of improving our total performance there. So end to end customer service, the salespeople and the rollout to the network organization hand in hand, a very important business we are working on to improve on a daily base. So it is very important to improve the take up. And currently, we're doing well and we'll keep on focusing on upgrading customers faster and sooner to fiber. And it's also new for us because in the past, we rolled out like 250,000 lines per year. Now we do 500, including APG in one point five years, for now maybe 700,000, 750,000 per year. So that is a lot. We're working on 100 areas at the same time. So we're building and selling and delivering all in the same time in 100 different areas on new fiber, and we also have older areas. So it's really something we are trying to optimize, but this is one of the most important topics, the upgrade to fiber faster than we did in the past. So that's one of our main KPIs. And on working capital? Yes, that's my it has become my hobby since I joined KPN. When you're looking at working capital, I mean, the fiber rollout or the increase in fiber rollout has a negative implication for working capital as fiber is the growth is paid up a portion of the cash is paid upfront to the construction company. So effectively, it's not even the level of fiber, but the delta in fiber that's driving the amount of working capital drag that we have. And this year is the last year where we have a big increase in our fiber rollout. From next year, it will be stable at the level that we reached this year as we committed in our Capital Markets Day. So 2021 is the last and final year of an increase in fiber rollout on our own balance sheet. That drives an investment in working capital. So this year, we'll still commit investments in capital to working capital. I it will still be a drag on cash flow, albeit a lot less than last year. All our measures that we're taking today are either countering that working capital drag by taking other measures to optimize the other ports of working capital. So that means that this year, we'll still have an investment in working capital. From next year, the investment will be very close to flattish Unless, of course, our business grows massively, we've got more inventory, but we'll sort it out by then. So I would think this year, commitment of cash in working capital less than last year countered and mitigated by working capital measures. And next year, the impact the investment in working capital will be a lot, lot smaller and very close to zero. Thank you very much. And one very quick follow-up on the swing in take up rate. Should we expect any particular swing from one quarter to the other, given the scope of the super large scope of the rollout? Well, you saw the swing in this quarter. And the more we roll out, the more we will push the upgrades. But this is where we are. And like I said, it's super important for us to further improve there. We're already doing much better than we did in the past. And in the coming quarters, we'll give you more updates on how we do the fiber thing. But that's, of course, one of our challenges looking forward. Thank you very much. The next question is from Mr. Luigi Minerva, HSBC. Go ahead please. Yes. Thanks for taking my questions. The first one is on the pace of the fiber deployment. And clearly, it's gaining speed. And I was wondering if you can share with us your kind of key learning points, now what how have you improved in your fiber deployment compared to a year or or two years ago and whether, you know, you see still some room for further improvement, you know, for example, in in the way you do the digging or in the way you get the authorizations. And I appreciate also the nature of the market is a bit one where you have also other further deployments and there's an element of who gets there first in a given area. So probably you also improved in on that respect. And my second question is on the relationship the wholesale relationship with the JV. So when the JV will start deploying fiber KTN's retail business will wholesale fiber access from the JV. What are going to be the terms of that wholesale access? And how will that impact your P and L and cash flow? Thank you. Well, on the speed of rolling out fiber, I can mention three important drivers to speed it up for us at least. The first one is capacity. I think the most important change we did end of last year, maybe yes, last year, that is that we locked in a lot of construction capacity for the years to come. So in the past, we did that more on a quarterly base. When one quarter was done, we asked for more capacity four quarters in a row. But that does not give enough confirmation They like to have long term visibility on the portfolio and for good reason because then they can plan more efficiently in some areas in The Netherlands. So we worked out a plan for the whole Netherlands together with these contractors and we signed off the construction plans for the years to come. And that is an important partnership we built there. Of course, we know all these contractors, but now it's really about longer term partnerships we did together. The way we roll out changed in the innovation part of construction together with contractors. We can speed up the rollout by improving the way we connect households. It's a bit technical, but instead of bringing all the hardware into households, we can preinstall more equipment outside the household, dug in the ground, perfectly sealed, but in a more efficient way than we did in the past to connect all customers when they order for Fiber Line. And the third thing is that every municipality has its own plan. We build for every municipality, every village a plan. And you have to go to these civil servants for a permit. It works different in different areas. And we have an organization working on the permits for also the years to come. Because if you try to roll out fiber, digging a hole and putting fiber in it, that's the easiest part. That's probably taking two weeks. The rest of the twelve months is all about engineering, permits and construction planning with your contractors. So that whole plan, that we've improved and that gives us the opportunity to roll out faster and with far more capacities. These are the most important changes, I would say, in the fiber rollout. And on the JV interface? Rui, let me firstly outline to you how the financial interaction between KPN and JV works, where JV works. JV itself provides fiber in wholesale broadband access. To this extent, the JV has a passive fiber product and procures the active layer, the access services from KPN. So KPN provides at cost the active layer to the JV, which will be added to the JV's passive lines for wholesale broadband access, which means in practice for KPN as being one of the wholesale clients of that JV, I guess, and we hope and we count on other wholesale clients. But basically, KPN is if we sell fiber on a JV area, the consumer unit books consumer revenues. Our TDO or network unit pays wholesale broadband access fees to the JV and the JV pays back a compensation for the active layer to KPN in the segment Other. That will be how this thing will flow through the KPN P and L. The impact of KPN will be relatively small in the beginning. The JV has got 12,000 homes passed right now. I think we're going to add to 70,000, 80,000 fiber the home connections in TV for this year. So 2021 impact will be relatively small. I think next year, the JV will ramp up to 150,000 to 200,000 fiber to the homes rollout. So I guess by in the course of next year, the second half of next year in 2023, this could become meaningfully large. So as I said, streams through the consumer revenues in network and the segment Other, but this thing will really impact in our P and L at more size in the second half of next year and in 2023. And then we'll also see in the minority interest line of KPN a stake that we have in the profit of the JV. Yes. And so although we will see some more OpEx in our company because of this construction, the whole business case is also upfront consolidation still very interesting for us because with the JV, we focus on areas where we have a lower market share and the business opportunity in total of things is very interesting for us altogether. So the total business case also in the first years works quite well. Thank you very much. Okay. Thank you, Joss and Chris. That concludes the Q2 call. If there's any further questions, please contact the Investor Relations team. Thank you.