Good day, ladies and gentlemen. Welcome to KPN's second quarter 2021 earnings webcast and conference call. Please note that this event is being recorded. At this time, all participants are in listen only mode. We will be facilitating a question- and- answer session towards the end of today's prepared remarks. If you would like to ask a question, you may do so by pressing star one on your telephone. I will now turn the call over to your host for today, Reinout van Ierschot, Head of Investor Relations. You may begin.
Good afternoon, ladies and gentlemen. Thanks for joining us. Welcome to KPN second quarter and half year 2021 results webcast. With me today are Joost Farwerck, our CEO, and Chris Figee, our CFO. As usual, before turning to our presentation, I'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 Farwerck.
Thank you, Reinout, and welcome everyone. Today's results show an important proof point of the progress on our strategy and execution as we are delivering ahead of schedule. Mass market service revenues grew in the second quarter, the first step towards sustainable top-line growth for the whole company. For the first time in 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 million 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 Glaspoort, 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 5G in the Netherlands. We were able to grow adjusted EBITDA in the second quarter despite the elevated spend to improve our customer support and facing a tougher comparison base in terms of COVID related savings. I'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. The confidence in our strategy and the successful execution of our strategy gives us comfort around our multi-year cash generation perspective, enabling us to structurally return additional capital to our shareholders. As a first step, we intend to buy back shares worth EUR 200 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 beginning of 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 to medium term business improvements and long-term sustainable value creation. This was illustrated by the acceleration of our fiber rollout to unprecedented levels in the Dutch market. 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 accelerated 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 Glaspoort joint venture, we expect to reach 80% of Dutch households by the end of 2026. After reaching that point, CapEx will come down to a much lower sustainable level. In the meantime, and visible in our homes activated, we continue to successfully add new fiber customers and upgrade existing customers from copper to fiber. That will deliver higher quality service and better customer experience, leading to a growing fiber customer base. We foresee significant cost savings as we gradually shut down our copper network in the coming years. All in all, fiber is at the heart of our strategy to return to sustainable revenue growth. We are proud that Ookla once again recognized our leading mobile network.
With this recognition, we retain our position as the best mobile network in the Netherlands, with the highest up and download speed, the best coverage, and the fastest 5G in the Netherlands. Let's now move to our customers. In the consumer market, we aim to be the preferred digital partner for households. To provide the best digital access, KPN continued its SuperWifi campaign and made the 1 gig proposition more accessible by lowering the price point while doubling the upload speed. Regardless of the subscription, all our fiber customers can upload just as quickly as they can download, and this is a unique advantage of cable, and important when working from home or gaming online. Furthermore, we improved customer interaction in the MijnKPN 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 2017. This was supported by a strong commercial performance of especially our unlimited data proposition. Fixed mobile revenues increased more than 3%. Total consumer service revenues still declined 0.7%, but showed growth compared to the first quarter. Customer satisfaction remains one of our top priorities, and I'm very glad to see that our efforts in this area are paying off. Consumer net promoter score improved to + 14 as we successfully invested in increased capacity, improved processes, and knowledge training for our customer support. As a result, the amount of issues that were solved first time right increased more than 10% since the start of the year.
That's important because especially for these colleagues, it is difficult to perform on the highest level with all COVID-19 rules and restrictions still in place out there. Now let's take a deeper look into our consumer KPIs. We have again delivered a solid fiber inflow, reflected by 47,000 new customers in the quarter, further fueling the stabilization of broadband net adds. Fiber ARPA is significantly higher compared to copper. That's due to higher speed take-up, more value-added services, and more SIMs per household. Importantly, fiber service revenue growth is offsetting the copper declines. The decline in consumer fixed service revenues is fully driven by legacy services. As we accelerate our fiber rollout, we are confident fiber is set to make up for legacy declines as well, setting the stage for increasing fixed service revenues.
Our postpaid base improved by 16,000 net adds. Postpaid ARPU grew by 1.1%. Combined, this led to a return to growth in mobile service revenues. Let's now move to the B2B segment. This year, we started to run the business segment, focusing on three distinctive customer segments, SME, LCE, and tailored solutions. 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. The decline in business revenues was broadly in line with the first quarter. As roaming impact lapsed, SME service revenues improved to -3%. We expect the SME service revenue trend to improve further in the next quarters.
LCE and tailored solutions declined mainly because the second quarter last year was quite strong despite COVID. Also, our business NPS improved markedly as customers continued to value KPN for the stability, the reliability, and the quality of our network and services. 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. The graph you see here on the left illustrates a 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. 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.
In that light, it is positive to see that the number of triple play customers within the KPN One proposition increased by more than 50% compared to last year. Quarter-on-quarter, revenues grew 2.6%, and the trend is backed by healthy base developments. This means we'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 Oxxio Commerce 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. We've again been awarded a triple-A ESG rating by MSCI, the highest possible score. That's all good. Now I would like to turn to Chris to take you through our financials.
Thank you, Joost. 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 counter 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 solution performance, with SME revenue developments turning increasingly favorable.
Wholesale revenues grew by 9%, mainly driven by broadband. Other revenues were partly supported by non-recurring 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. 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 runway 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. 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 cost related to travel, housing, and facilities, and marketing. Finally, a few other elements affected our cost performance this quarter, such as the notation to holiday provisions and the fact that we're planning a larger restructuring in the B2B segment, which will help push down costs. This will be executed in the second half of the year. Let us turn to CapEx. We are accelerating the rollout of fiber to prepare for the years to come.
CapEx related to fiber was EUR 218 million 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 EUR 29 million, mainly driven by rationalization and increased effectiveness of our effective 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 EUR 450 million and EUR 500 million per year. After 2026, when the fiber roll-out 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, 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 33 million 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 is 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. 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 the 9th of June, KPN and APG announced the closing and effective launch of the fiber joint venture called Glaspoort. APG has agreed to pay nearly EUR 480 million for a 50% stake in the JV. For this transaction, KPN has recorded a net cash inflow of EUR 217 million in the first half of this year, which is classified as a cash flow from investing activities. This transaction has had several implications on our balance sheet and P&L in the second quarter. In the P&L, you can see an EUR 840 million incidental book gain in lines revenues, EBITDA, operating profit, and profit before tax. This amount equates to the transaction value minus goodwill and some minor prepayments. P&L taxes related to the transaction are EUR 191 million, and consequently, the net effect of EUR 649 million is visible in profit for the period.
On our balance sheet, the following movements are visible. First, a reduction of EUR 64 million goodwill related to the transaction. Second, other non-current assets, which include the book value of 50% ownership and the financial asset representing the discounted value of future payments by APG. Thirdly, current assets, specifically cash and cash equivalents, include the initial payment by APG. Total equity includes the net effect of the aforementioned EUR 649 million in profit for the period. Our balance sheet continues to be resilient. Committed liquidity, consisting of EUR 795 million of cash and short-term investments and a EUR 1.25 billion undrawn RCF together cover debt maturities through 2023.
For Q1, our net debt declined by EUR 20 million, mainly driven by the payment we received from Glaspoort and all other corresponding Glaspoort 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 this year. 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 EUR 2,345 million, a CapEx of EUR 1.2 billion, and we expect free cash flow of EUR 765 million in line with last year.
Our regular dividend will grow to EUR 0.136 per share over 2021. We will already reward our shareholders with an interim dividend of EUR 0.045 per share. 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%-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 Grow 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. Thirdly, a robust balance sheet and a disciplined financial framework with our 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 Oxxio recently, and to acquire further spectrum.
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 EUR 200 million this year, effectively returning all 2021 free cash flow to our shareholders. To summarize, today's results show an important proof point of the success of our strategy. We return to mass market service revenue growth already and earlier than planned, and we will structurally return additional capital to our shareholders, starting with a EUR 200 million 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. 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 for taking the questions. I've got two, please. Firstly, you've highlighted that some of the items which weighed on Q2 OpEx reduction. 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 EUR 250 million target, you did update the 2019-2021 target, which I think implied about EUR 100 million-EUR 120 million of cost reduction in 2021. Do you still see that as achievable? 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, 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
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're working already for six months on two large reorganizations that will affect in the months to come, and that will impact our OpEx as well. Also in this quarter, we saw clearly less cost reduction due to holiday provisionings keeping in, et cetera. We are really confident in our OpEx reduction. If it completely meets the EUR 100 million for this year, I can't say. In total, we also add some more cost to drive mass market revenues up. In total, I'm happy with the balance of things, and I expect more cost reduction to come in the third and fourth quarter. Yeah.
Yeah. I think the EUR 250 million definitely stands. We'll meet the EUR 250 million. As Joost said, we've incurred some more cost when it comes to the customer support and a number of large reorganizations, which will come in the second half of the year and of Q3, beginning of Q4. To your second question on the free cash flow, indeed, as you correctly point out, Keval, we retain 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.
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 from me. The first is on the net promoter score improvement, which is quite healthy across both consumer and enterprise. I'd just 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. The second question is around Huawei. It's a quite familiar topic, but obviously in Q2, there are these headlines around historic potential security lapses in Huawei equipment. I know that it's been a big topic of debate in the Dutch press, and I think also in the government. 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?
Do you envisage any situation or future costs to take out existing Huawei equipment from your network, which you may not have been included in your prior guidance? Thank you.
Joshua, first, your question on the net promoter score improvements. 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 a reduction of calls and in the speed they can handle calls. 10% improvement there already in the first month, so that's very good. It's an end-to-end quality steering we do, starting at the service centers completely until the back end of the company. This cooperation through the company is super important, and that we really improved. We also invested in that.
That was one of the reasons why we made more cost in that part of the company last quarter. Now we see the calls going down and we see the 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. 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. 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. We also announced that the core network of mobile, which is currently delivered by Huawei, will be replaced, and we selected Ericsson for that. We've been discussing the plan with our government in great detail. The government gave us and the other two operators a message, an instruction based on a legal order. That was not a surprise for us. We know the plan. What's in the plan is state secret, but it is, for us, not a surprise. It's completely in the life cycle of things. We will not see additional OpEx or CapEx related to that, because we have our time, and it fits in our strategy. That's that.
Every now and then, Huawei will pop up again in the newspapers, and we are fully aware of that. 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.
Yeah, good afternoon, everyone. I had a question on your
Flexibility and coinciding with your use of the words first step with regards to your buyback. 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? 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 de-lever. 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. This buyback will take us probably end of the year to about 2.3 times net debt to EBITDA. Kind of where my planning as well. For this year, we tend to do EUR 200 million, don't expect anything more this year. 2021 is EUR 200 million to start. Our ceiling is 2.5 times. You may want to end run a bit below that to have some buffer for, as I said, some M&A or selective acquisitions. I don't think we necessarily need to stop at 2.3. The effective ceiling, including buffer, is a bit higher than that. It gives you some feeling for where we are and what the scope is. We want to start with not retaining any free cash for this year, and next year we have to reset the number again.
To your point, 2.5 times 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, that'll support things. To me, it's a couple of things coming together. 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 van Leijenhorst, Kepler Cheuvreux. Go ahead, please.
Yeah, good afternoon, gentlemen. It's regarding the Authority for Consumers and Markets, 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? Do you foresee any risk that we could see regulation implemented again?
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 a new market analysis every three years, and they look five years ahead. That's not a surprise. Last time was in 2018, and that one was annulled by the highest court in March, the CBB, in 2020. We all know that. 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 were 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. Ziggo, I don't know, probably a small decline. 16,000 growth on our network from these internet service providers. That shows that there is good room for them to act, and they're doing that. We didn't change conditions. We did lower wholesale tariffs when we lowered the 1 gig price in retail. We think there's a fair balance. Of course, regulators will always try to regulate. That's not a surprise for us. 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. 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. We'll see how it works, and we'll take it step by step. 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. Appreciate it.
The next question is from Miss Siyi He, Citi. Go ahead, please.
Hello. Hi. Good afternoon. Thank you for taking my questions. I just have one, and that's probably a matter of clarification. My question is on your guidance for your EBITDA. I think during your conference call, you said that you're comfortably reiterating guidance. When we look at your service revenue trajectory and also cost saving opportunities, it feels like second half the comps become 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 EBITDA growth will be less than the number simply implies. My second question is just a clarification. I think in your presentation, you have said that there is a difference between the IT spending revenues between SME and also the larger enterprise. I am just wondering why that's the case and whether that is just simply COVID-19 related, as you see more delays in public contracts. Thank you very much.
Well, on the first question, on H2, we confirm our guidance and reiterate our guidance for the year. Is the second half year facing much headwind? Not necessarily. You recall last year, Q3 last year was very strong. Q4 last year was a bit weaker. In year and year comps, you find that the comps on Q3 will be a bit more difficult. The comps on Q4 will be a 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 also move to inflection and possibly even some growth. Let's inflect first, but there's positive upside there. We'll see, as Joost said, 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, of course, we need to deliver it at first, and we can confirm it at the end of Q3. That's how I look at the year. Let's remain prudent and conservative. Let's reiterate our outlook, confirm what we need to confirm, and share with you that on free cash flow, a little bit more upside might be possible. Joost, you want to talk to the SME and LC business?
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, -6% last quarter, -3% now. Looking at all the quarters behind us, we think we're moving in the right trends, and that's related to those migrations. On LC, we do the same, but we're later, and that is because it's less profitable. We decided to prioritize on that whole SME business. 75% has been migrated in LC, and we also try to do it a little bit more careful than we did in the past on SME. 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.
I'm confident that we can migrate it in the right direction, just as we did on SME.
That's very clear. Thank you.
The next question is from Mr. Polo Tang, UBS. Go ahead, please.
Yeah. Hi. Thanks for taking questions. My first one is just really about COVID impacts from here. 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? Are you seeing any indications of rising bad debts amongst SMEs or business clients? Alternatively, are there positive benefits from COVID in terms of people triggering up to faster broadband speeds as they work from home? Really just a question around COVID impacts from here. 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.
Can you maybe just talk about some of the puts and takes in terms of business revenues from here, and the major moving parts, and how optimistic are you that total business revenues can stabilize as we look at 2022?
Yeah, Polo, let me answer your question on COVID-19. If I just talk about revenues first and cost 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, if you think about EUR 2 million-EUR 3 million more. The biggest source of roaming revenues or roaming profit, particularly our clients traveling across the globe. We see a careful travel inside Europe picking up. We've seen some small pickup in visitor traffic into the Netherlands. We've seen good developments on IoT. Again, that's all inside Europe. On roaming, I'm afraid that the upside for the year is EUR 3 million. That's what it is compared to last year. That is actually still to happen in Q3 and Q4. Unfortunately, not much there yet.
On the good news side, bad debts are not there. We see our clients paying our bills all in time. Actually, some of them paying it earlier than time. Most of our clients still have quite some cash. In terms of bad debts, we have not seen an increase in write-offs or even hints that requires us to increase our bad debt provision. It all feels stable for the last year. On the cost side, we face a bit of a headwind for the 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 home work allowance.
I think on the cost side, COVID is a bit of a tail headwind for the last year, simply because the give back to our employees. All in all, it's flattish with a small potential upside in roaming and in a year comp, some adverse development when it comes to costs. All in all, it's not a massive impact yet on our results.
Yeah. On LCE and integration, in B2B, I just said that in SME, we are moving in the right direction. We will follow that trend and we worked four quarters on that. We're doing now the same in LC. Integration is a bit different. Integration is a project we do on large enterprise, and we really are improving there. It goes a bit up and down. Sometimes we invest in costs, related to larger projects. All in all, we think that we can run that business more in a stable way, already soon. The question is, how we strengthen our company by doing that? On LCE, we're doing the same as we did in SME, but it's more complicated. It's larger enterprise, customers, that have to swap hardware on their side when we start migrating.
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. For the rest, we think we can replicate the services. We're trying to do it a bit smarter and to support our customers not to change all the hardware on their side. We will take our time. After we have done the SME and selection, 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. You know us, the migration works, but we try to do it a bit smarter way than we did in the past.
Great. Thanks.
The next question is from Mr. Jakob 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 2% improvement in growth. I was just hoping you could maybe break down what drove that. I guess there's an annualization of comps on the roaming side. Anything else you'd sort of call out? It looks like it's mostly ARPU driven, so is it price action or mix change? Just to help us understand what is it that's driving that service improvement in Q2 versus the Q1 run rate. 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.
Yeah. Well, on approaches, I don't have that much to announce, of course, otherwise we would have done that. 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. We don't have any new information on the whole topic. 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 and consumer, I'll hand off to Chris, who knows all about that.
Very good, Jakob. When it comes to the mobile side, the main driver of mobile service revenues is net adds. We have seen positive net add growth for a few months now. I think it started in early February. March, April, May, June, all months with positive net adds and 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. No roaming impact is stable ARPUs. Net ARPU development mostly driven by a solid share of unlimited, and some gradual uptick in clients moving to higher bundles. 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 +1 organically in the second quarter, and +22 from Oxxio. The Oxxio impact on one quarter is relatively small. When it comes to the ARPU, we've seen the fixed ARPU, two moving parts. Some small pressure on fixed ARPU due to VoIP on the consumer side due to legacy on the consumer side, and in the first quarter, lower value-added services, which has returned in the second quarter with more value-added services, and effectively stable ARPU. When you look at the broadband side, decline net adds in Q1 return to small, but not impossible, not negligible growth in Q2, and effectively some stable ARPU.
Overall, we found that this year net adds is the main driver of our service revenues. As you know, we've announced a small price increase inflation, which will kick in in the summer. That's going to support the consumer broadband developments going forward. 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.
Yeah. Good afternoon, guys. Thanks for taking the questions. I'll go for a couple. Just on the Dutch competitive environment. We've seen a couple of interesting developments as they go in the quarter. I think they launched a broadband-only product for the first time, and they also lost the Formula 1 rights. They get impact to their sports offering. Maybe just any thoughts you've got on your strategy in response to that and following up on Chris's comments, any update you can give us on how the price rise has landed and whether any wrinkles to look for in Q3 as that comes through? After that, just coming back to the point on free cash flow Chris was making. Should we assume that the swing factor is basically working capital? I know you're EUR 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, the Dutch market is a competitive market. On the other hand, we've seen consolidation in the market. 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. On the mobile side, T-Mobile built up a very important postpaid consumer back books. They're the largest in the consumer market, in the Netherlands. Us number two, and Vodafone at number three. They're no longer a challenger. They are more or less protecting their back book. That ends up in a three-player market. We have a lot of challengers around us, mainly on our network. Challengers like Lebara, Lyca, Youfone. They're all also customers of KPN. There's enough of lower priced propositions out in the market. I think we stand out with the quality play.
It's clearly visible that customers in the Netherlands like to pay for quality. For instance, a gig symmetrical up and down is different than what others can supply in the market. I think that's the game we have to play in this environment. Of course, T-Mobile's up for sale, but we expect the buyer of T-Mobile also to aim for value creation instead of anything else. It's a busy market. We're a small country with a lot of providers. What we did last quarters is that we really differentiate in the way we should, and that is by leading the quality game, and the customers like to pay for that. On free cash flow, Chris?
Yes, Steve, free cash flow, indeed, you're right, the main change will be on working capital management, which I think is going to support our free cash flow. One little point of note, last year, Q3 was very strong. If you recall, last year, Q3, we had a big impact on the working capital. 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. That's the drive of our free cash flow developments. Today, we're EUR 43 million ahead of last year. I don't want to disappoint you, but we're not going to be EUR 43 million over last year for the full year.
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 end of 2021. Could you perhaps highlight the factors that will get you to that growth number? Because if I look at the numbers today, I guess the legacy declines of 20%, they're weighing. Are they expected to moderate, or is the MSR growth expected to pick up? Any color there would be helpful. Just on the shape of the mass market service revenue trend through the year. I guess Q3, we should see an additional kicker with SME stabilizing from where we are today. In Q4, you're indicating that consumer should be growing as well.
It seems to me that the mass market service revenue trend is not only sustainable, but that it should be getting better through H2. Is that the right way of framing this? Thank you.
Yeah. 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. 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. That's our holy target. Well, we've seen inflection on the total of things in this quarter. You're right, SME will further improve. It's in the trend. If you look at the quarters behind us, we think year- on- year, we'll show improvement in the quarters to come in SME. 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, it's on the brink. I think we make good chance to get there. With the price increases coming up, it depends a bit on how the net adds, of course, will evolve. Legacy will continue to decline, although, because a decline in legacy tends to take place in Q1, that's where you step down, typically. The remainder of this year, you may see some decline, but a little bit less, and then it's a seasonal thing. Will consumer service revenues 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.
It's the broadband side of things, which is going to be on the brink of growth, with the drive from legacy actually fading away gradually during the year.
Thank you. My second question was coming back to regulation. You're obviously right that you haven't changed any of your wholesale kind of pricing since the court ruling. I guess what has changed is the nature of the incremental fiber deployment that you announced after the court ruling, is a point to multipoint network, which gives an excuse to an alternative operator to say that, Look, this kind of network discriminates against us in terms of replicating owner economics as with the ODF product that you have out there. Is there any way to reduce the risk from a complaint by an alternative operator that look, 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 actually reduced our wholesale prices a tiny bit, in line with the pricing that we reduced in the, for example, 1 gig in the consumer market. 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 not even sure what VULA stands for, but it's a virtually unbundled something. Effectively, it is an unbundled offer, which we think is actually quite attractive and works very well. Joost, you want to add to that?
Well, you mentioned ODF access, and of course, that's the passive access on fiber.
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. It's a bit theoretical that we have to offer that kind of service in the smaller regions, because we have that VULA service to replace that. 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. This is all theory, so let's see what the draft market analysis of our regulator will show. There will be a consultation process. I can assure you we will join it in great detail.
We really understand what the plans are. 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. Ulrich Rathe, Jefferies. Go ahead, please.
Yeah, thank you. Two questions, please. The first one is on the IPR benefit that you mentioned. Was that one dispute that, relatively big one that came out and you are highlighting it, or are there further installments of this sort of thing coming potentially, if it goes your way? Could you confirm that the impact is actually larger than the revenue and EBITDA growth that you had? I think you talked about revenue and EBITDA growth for the group, which was EUR 4 million 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 got the partner in to provide the capital up front, 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? It sounds as if you 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. I was just wondering how you think about that balance. Thank you.
Yeah. 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 EBITDA. At the same time, it's one of the incidental that goes to our results. If you look to our result last year and this year, and 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 the way we reserve for STI and LTI, long-term and short-term incentive programs for our staff. You may have other different one-offs. If you strip out all those one-offs and you include IPR there as well, you'd still have a EUR 3 million-EUR 4 million EBITDA growth. As you strip one out, you strip the other one out as well, and the underlying EBITDA growth, it still is around EUR 3 million-EUR 4 million in this quarter-on-quarter. Q2 last year to Q2 this year. That's one. When it comes to the joint venture, actually the share buyback in my mind is not the money we receive from APG. I know it feels like it's the same amount of euros, it's really driven by the organic replicable generation of cash from our group.
That's why we're paying out, effectively not retaining any cash in this, effectively paying out our free cash flow. Could we have invested in the fiber? Possibly we could. Again, we set out to do the JV for a few reasons. One is, the cost of capital from our partner, from APG, appears to be lower than our own cost of equity. 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. 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, or we didn't want to do ourselves without affecting our free cash flow.
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 allows to scale up fiber to a level that we wouldn't be able to do ourselves without affecting our free cash flow. Secondly, the ongoing cash generation of the business and the balance sheet that we have, even without the APG joint venture, looks very promising. Means if we hadn't done the JV, we still would've come to the same share buyback conclusion. To me, they are separate worlds, and 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 Vagman, ING. Go ahead, please.
Yes, thank you. Good afternoon, everyone, and 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, and in particular, in relation with the capital investment, the fiber CapEx? How is it evolving, and any positive development there? 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 lumpiness let's say. Thank you.
Well, to start on fiber. What we see is an improvement in the take-up rate, and it's also because of a change in our strategy. 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. We're in the middle of improving our total performance there. End-to-end customer service, the salespeople and the rollout, the network organization, hand in hand. Very important business we are working on to improve on a daily base. 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. It's all also new for us because in the past we rolled out 250,000 lines per year.
We do 500,000, including APG in 1.5 years from now, maybe 700,000-750,000 per year. That is a lot. We're working on 100 areas at the same time. 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. It's really something we are trying to optimize. This is one of the most important topics. The upgrade to fiber faster than we did in the past. That's one of our main KPIs. On working capital? Yeah. That has become my hobby since I joined KPN. When you're looking at working capital, the fiber rollout or the increase in fiber rollout has a negative implication for working capital as the portion of the cash is paid up front to the construction company.
Effectively, it's not even the level of fiber, but the delta in fiber that's driving the amount of the working capital drag that we have. 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 reach this year as we committed in our capital markets day. 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. This year, we'll still commit investments and capital to working capital, I mean, 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 countering that working capital drag by taking other measures to optimize the other parts of working capital.
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. I would think this year commitment of cash in working capital less than last year, countered and mitigated by working capital measures. Next year, the investment in working capital will be a lot smaller and very close to zero.
Thank you very much. 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 super large scope of the rollout?
You saw the swing in this quarter, and the more we roll out, the more we will push the upgrades. This is where we are. 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. In the coming quarters, we'll give you more updates on how we do the fiber thing. 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. Thank you 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 key learning points. How have you improved in your fiber deployment compared to a year or two years ago? Whether you see still some room for further improvement, for example, in the way you do the digging or in the way you get the authorizations. I appreciate also the nature of the market is a bit one where you have also other fiber deployments, and there's an element of who gets there first in a given area. Probably you also improved on that respect. My second question is on the wholesale relationship with the JV.
When the JV will start deploying fiber, KPN'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&L and cash flow? Thank you.
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, that is that we locked in a lot of construction capacity for the years to come. 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. That does not give enough confirmation to these contractors. They like to have a long-term visibility on portfolio, and for good reason, because then they can plan more efficiently in some areas in the Netherlands. 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.
That is an important partnership we built there. Of course, we know all these contractors, but now it is 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 rollouts by improving the way we connect households. It is a bit technical, but instead of bringing all the hardware into households, we can pre-install 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 our customers when they order for a fiber line. The third thing is that every municipality has its own plan. We built for every municipality, every village, a plan. You have to go to these civil servants for a permit. It works different in different areas.
We have an organization working on the permits for also the years to come. 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 12 months is all about engineering, permits, and construction planning with your contractors. 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 rollouts. On the JV interface.
Luigi, let me first outline to you how the financial interaction between KPN and the JV works. The 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. KPN provides at cost the active layer to the JV, which will be added to the JV's passive lines for wholesale broadband access. 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. 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&L. Now, the impact of KPN will be relatively small in the beginning, meaning JV's got 12,000 homes passed right now. I think we're going to add to 70,000, 80,000 fiber to the home connections in the JV for this year. 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. I guess in the course of next year, the second half of next year in 2023, this could become meaningfully large. As I said, streams through the consumer revenues in network and the segment other. This thing will really impacting our P&L at more size in the second half of next year and in 2023.
We'll also see in the minority interest line of KPN, a stake that we have in the profit of the JV.
Yeah. 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 all together. The total business case also in the first years works quite well.
Thank you very much.
Okay. Thank you, Joost and Chris. That concludes the Q2 call. If there's any further questions, please contact the investor relations team. Thank you.