Collaboration

Mar 23, 2021

Good day, ladies and gentlemen. Welcome to this KPN Investor Relations Conference Call. At this time, all participants are in listen only mode. We will be facilitating a short question and answer session towards the end of today's prepared remarks. Please note that this event is being recorded. I will now turn the call over to your host for today, Reinhard Ischlot, Head of Investor Relations. You may begin. Thank you. Good morning, ladies and gentlemen, and thanks for joining us. Welcome to this brief call covering this morning's announcement that we will form a joint venture with APG to further accelerate the rollout of fiber in The Netherlands. With me on the call today is our CFO, Chris Viger. And as usual, I'd like to remind you of the safe harbor on page two of the slides, which also applies to any statements made during today's presentation. Let me now hand over to Chris. Thank you, Reinout. Good morning, everybody. Welcome to our call. I'm sure you all looked at the materials that we published this morning, so we'll give a quick summary and leave time for questions. This morning, we announced that we are forming a joint venture with giant pension fund APG to further accelerate the rollout of fiber in The Netherlands and enable mostly nationwide coverage of fiber by 2026. This strengthens our strategy as the leading fiber operator in The Netherlands. It accelerates the rollout in the medium dense areas and to businesses, as the JV takes up the long tail of our plans, I. E. It delivers additional homes passed on top of the existing plan that KPN has, about half a million homes a year, and has an attractive valuation by a strong partner, which clearly underlines the value of our state of the art fiber to the home network. So the four things to remember, we accelerate our fiber rollout, there's going to be no increase in KPN CapEx due to this deal, it demonstrates the value of KPN's fiber optic network, and I would think it's a testimony to our value creation and cash generation mindset in the way we run our business. Let's move to the next slide. JV will be structured as a co controlled entity, with APG and KPN both owning 50% of the shares. The JV will roll out fiber to the home to about 685,000 households in medium dense areas, and also connect about 225,000 businesses with fiber in the next five years. KPN and APG will share the risks and returns in these somewhat underserved areas, while most of the construction capacity in terms of number of home passed has already been secured to contractors and has a fully underwritten CapEx facility in place as well. So construction capacity and financing has been arranged and is in place. So the JV is ready to start with everything in place that we announced today. We partner with APG. APG is one of the largest pension funds pension investors globally, with almost $600,000,000,000 in assets under management. APG is an experienced infrastructure investor with strong focus on investing responsibly. APG has commensurate return requirements providing us access to institutional pension capital from a strong Dutch partner with a long term investment horizon, a really mutually enforcing partnership. So APG helps us to further accelerate the digitization of The Netherlands. As announced at our Capital Markets Day, we already plan to roll out fiber to half a million households annually each and every year until 2025. On top of this, the JV is taking up the long tail of our fiber plans by accelerating the rollout in the medium dense areas into businesses. Actually, it brings forward the long tail of our plan to the earlier timeframe. I And think it is interesting to note that with the existing KPN rollout plan, and the additional rollout ambitions and joint venture, most of the fiber opportunity, which is about 8,000,000 households in our country, most of that opportunity will be seized by 2026. We see scope to finalize the fiber rollout in the years thereafter, and a small part of the country simply not economically feasible for fiber rollout. We think about deploying fixed wireless solutions in those areas, making sure that the entirety of The Netherlands ultimately will be provided with superfast Internet. So basically, KPN with the existing plan of 500,000 homes per year, 2,800,000.0 in existing portfolio, and its cooperation in this JV with APG should be able to cover about 80% of The Netherlands in 2025. So looking at our longer term plans, the strategic partnership really brings forward the long tail of our plans. Together, KPN and the JV will roll out at 650,000 lines per year. This is impressive, especially if you realize that the total fiber rollout in The Netherlands across all market participants was just over 500,000 households in 2020. So the entire market did 500 ks households last year. KPN, on its own with a JV, will move to six and fifty thousand households per year in the coming years. We now expect, as I said, to reach about 80% of households covered with fiber in 2026, up from 65% by 2025 in our original plans. As these areas were not in scope before 2025, this move will support our commercial performance a few years earlier than initially expected, by strengthening our customer footprint in less densely populated areas, by growing service revenues, by limiting the churn on our copper network, and enabling accelerated savings related to phasing out services of our copper network. So more footprint, more revenues less churn, and a faster decommissioning of our copper network. Let me touch on the operational side of the JV. Basically, the JV will build, operate and maintain a passive infrastructure. KPN will provide the active layer, and KPN provides in-depth expertise when it comes to planning and designing a fiber network. And KPN will act as an anchor tenant on a network providing services to customers. The JV, as it is important, will operate through an open access model and will be open for all competitors on comparable commercial terms, further fostering competition innovation in The Netherlands. So the JV will operate a passive infrastructure, KPN will drive the active layer, and KPN will become a client of the JV, and the client JV will be open to other wholesale parties as well on a fully open access model. Then the financial terms. APG pays in total €440,000,000 for a 50% stake in a joint venture. Half of this will be paid upfront, with the remainder to be paid in annual installments as the rollout progresses, actually as a function of the number of homes passed that are being delivered. CapEx for the entity is estimated at 1,200,000,000.0 of which about 70% will be financed via largely committed CapEx facility. The remainder will be financed with limited equity investments by the shareholders, as well as through the cash flow generated by the JV itself. Important, KPN's equity contribution is more than covered by the initial payment. So the initial payment that KPN receives more than covers future equity injections by KPN into the entity. The JV will start distributing dividends to its shareholders when it reaches positive cash flows, currently expected after about five years. The JV will initially be deconsolidated, with KPN having a call option on one share. This enables us to potentially obtain control and potentially reconsolidate in the future. The transaction is subject to regulatory approval and expected to start operations in the mid or the end of the second quarter of this year. So the headline equity valuation of €880,000,000 for this JV, which is two times the €440,000,000 payment for 50%, translates into an equity value of about €970 per home passed. If you add the debt proportion of the CapEx facility, the enterprise value would be somewhere between €1,800 and €2,000 per line. This clearly underscores the value of KPN's state of the art fiber optic network, already growing by 2,800,000 homes today, growing by half a million homes per annum in the coming years, and after that 50% ownership of this entity. It's clear what the value of a fiber network is. So, to summarize, we are forming a joint venture with APG, a Dutch heritage pension fund, to further accelerate the fiber rollout in The Netherlands. It's an attractive partnership for KPN in a relatively small additional part of our future fiber footprint. If you think about 2026, this JV constitutes about 12% of the total KPN direct to indirect fiber footprint. A partnership that rolls out fiber in areas that otherwise may have been never addressable for KPN as they were not in existing short term rollout plans. The JV brings these forward and focuses on the medium dense areas and business parks. It allows us accelerate and expand the footprint beyond our target footprint faster, within the current financial framework. It does not have any impact on our objective or goals of this year, it does not impact our CapEx for this year, it just adds bringing in cash in the year. In fact, it accelerates the rollout to maximum executable speed, pulls forward five gs to home upgrade benefits, and all of this again within our current capital allocation and financial framework. As a result, we believe we reach our long term sustainable cash conversion levels earlier. There is significant value creation for the deal, translating into proceeds upfront and proceeds over time. The upfront payment more than covers our equity injections in the entity, and thereby it demonstrates the significant value of KPN's future and current portfolio in terms of fiber. And strategically, it solidifies KPN's position as the leading fiber to the home infrastructure provider in the country. KPN plus the JV together will cover 80% of The Netherlands with fiber in 2026. That ends my short introduction and comments to the deal. Now let me open the call for questions. Reinhard, can you share the instructions? Yes. Thank you, Chris. I would like to ask you to limit your questions to one to give everyone an opportunity or as many analysts as possible to ask a question. Operator, you can open the call for questions. Thank you, sir. The first question is from Mr. Michael Bishop, Goldman Sachs. Go ahead, please. Thanks very much. And thanks, Chris, the presentation. I just like to ask a question on valuation and how you came to the various sort of valuation discussions with APG. I mean, it's clear from the CapEx numbers that you've given and also the EV value per line you gave in the presentation that this is being valued essentially well above the multiple of book value or CapEx invested. But is there anything else you could give us in terms of how you're thinking about or how you thought about the future valuation, perhaps any sort of run rate EBITDA metrics? And then my second question was, you mentioned that KPN would be an anchor tenant and this is an open access model. But have you actually given any sort of formal underpinning of volume within this agreement? Thanks very much. Look, Michael, how does this thing value effectively? There's a business plan developed for the joint venture that leads to, EBITDA, CapEx, and free cash flows. And then it was a discussion with with APG on how to value this cash flow. So effectively, this is a function of the business plan, you know, in terms of fiber to the home that one rolls out, times penetration and RP assumptions, which is valued at an IRR, and that drove actually the the valuation. So it's more of function of, I think, the IRR that EPG applied to future cash flows, and that was where the negotiation discussions hinged upon. We felt that the valuation that was given and our estimate of the IRR were very attractive to us, certainly when you compare it to KPN's own cost of capital. But that's how we looked at it. And secondly, when it comes to being an anchor tenant, basically, we developed a business plan together. And in the areas in scope, KPN will, of course, migrate its customers to the JV, which is required because ultimately it's our desire to decommission the copper network over time. So with that, you know, at some point you have to migrate all your customers out to actually decommission copper. So to your answer, the first one is a simple, you know, DCF valuation, and then you discuss about the discount rate and see where it sticks. And we felt that was an attractive rate compared to the way to the cost that we could raise theoretically raise equity ourselves, and that leads to the value per home passed. And secondly, there are migration agreements embedded in a business plan, and the aim would be to decommission the copper network in these areas at some point in time. Okay. And maybe just to add, please limit your questions to one to give others also opportunity. Apologies for the two questions, but thanks very much for the answers. The next question is from Mr. Polo Tang, UBS. Go ahead please. Yeah. Hi. Thanks for taking the question. So I just have one, and it's really just about, how did the APG joint venture come about? Did you approach them, or did they approach you? And could you clarify if you engaged with, any other third parties or investors? Thanks. Mutual discussions. We did not, Ilfa, enter into a broader auction. We felt speed was more important than let's call it, put it this way. We felt that APG was a very attractive partner, so we engaged in bilateral discussions quickly under the presumption that it would be an attractive transaction. So it was not a broader auction because we wanted to have, we preferred to have a partner that had a natural Dutch heritage that also strengthens KPN's commitment to The Netherlands. There are all sorts of side benefits to it, your qualitative side benefits to it. And that's it. We considered doing an auction. We did not because the deal terms that we got, we felt, were quite attractive. Can I clarify? Did they approach you? Could I mean, you pick on it. I mean, it was not a force. Look. In this situation, you we were in in contact. We discussed I can't even honestly, I can't remember who approached who first. I think it just we discussed things. You meet each other. It was there were a few other deals that went around, and it came to table. If I'm clearly clearly honest, it to be irrelevant, I don't even remember. We we we approached this first. I think it's kind of came up in a discussion, like, don't we explore this? Great. Thanks. The next question is from mister Uslan Ghati, Berenberg. Go ahead, please. Hi, Bill. Thank you for taking my question. Just got a question on, regulation. I guess we we know that, you know, the KPM has been de regulated since last year. But other T Mobile is is lobbying aggressively for for for a change. What happens to this arrangement if, you know, the ACN comes in and, I don't know, let's say, reregulates the network. I mean, does does this I mean, does this JV still stand or other than changes that take place or the or some compensation paid back to APG, etcetera. Yeah. Well, first is one thing. It's to me, it's not a given that ECM will reregulate the network. If you look at the discussion that that KPN is having, well, that's ongoing on the regulatory front, we feel confidence on our that we are fully compliant with the symmetrical access regulation that's out there. So first of that's not a given. Secondly, the discussions between T Mobile and KPN really regard T Mobile and KPN. So this entity is a separate entity. So it's not sure that if and where there would be an outcome of that discussion, whether immediately would affect the entity. It is really discussion today with regard to KPN network. But to the point if there would be change in regulation, I mean, there's always risk to the plan, there will be a risk to the plan, but no immediate repercussions. But again, I wouldn't be too jumpy on assuming that the current regulation or the current request by T Mobile would have immediate impact on KPN, because we believe we've got a pretty strong case and already fully compliant with, you know, symmetrical access regulation. Thank you. The next question is from Mr. David Voigtmann, ING. Go ahead, please. Yes. Good morning, everyone. Can you hear me? Yes. Yes. Yes. Yes. Thank you. Just could you disclose or shed some light on the kind of cost of capital assumption that APG has used in its evaluation and in your evaluation overall? What kind of yeah. Well, David, I'm sorry. That you have to ask, you know, APG, you have to ask them what it comes to be used. We've made our estimate, and our estimate is that it's, like, in in line with a bit of a bit cheaper than our cost of equity. But, you know, it's not I mean, it's not for me to disclose what I I don't even formally know what cost of capital they used. Mhmm. But our sense is that it was, for us, a relatively attractive source of capital. Okay. And when you say a bit lower, it it's really a bit lower or it's really, like, very materially lower? Depends on how you how you define a bit. Know, if you might Exactly. Take a glass of wine and say, I want a bit more. Yeah. Understand what a bit is. No. I think it's a bit lower. It's not a huge amount lower. But but it I still feels that we are a as KPN, we're able to raise equity capital a bit cheaper than the equity capital ourselves. But most importantly, it also means that we can accelerate the rollout of fiber, but stay fully within our current financial framework. It does not affect CapEx, it does not affect free cash flow. So it's a way to to raise equity capital at a bit cheaper than we would argue ourselves, but most importantly, protect the financial framework, our cash flows, and dividends that we've committed to. Thank you for the detail and I'm limiting myself to one question. Yes. Thanks. The next question is from Mr. Steve Malcolm, Redburn. Go ahead please. Yeah. Yeah. Good good morning, guys, and and thanks for the the presentation. They were really interesting. Just quickly, could you clarify the the equity that you are injecting into the JV, is that basically, you know, your active layer plus your retail anchor tenancy? And over the six years of the plan, you will effectively have to inject no cash that all the construction and build out will be done through debt and the APG equity injection? Thanks. Well, basically, the JV has a business plan that has a plan to fund the rollout of fiber, know, 700,000 homes passed in retail at about, you know, two twenty five in business parks, over 900,000 homes passed, around the 900 k homes passed in terms of to the connections. There's a plan. It's about 70% debt financed to a CapEx for the invested equity. The equity will be injected by APT and KPN, but you can see but the point our our equity injection is funded by the upfront So that's actually irrespective of the active layer fees, it is actually funded effectively or overfunded by the cash compensation we get upfront. So ABG paces an amount upfront, dollars $220,000,000 upfront and $220,000,000 over time. That is why it'd be sufficient to cover the equity injections into the JV to meet the financial structure of the JV. And that is completely separate from the active layer income because that's a separate income stream. Okay. And the active layer income is a small number. I mean, we shouldn't assume this makes any difference to your current financial guidance, EBITDA of 2.45 in 2023. Is that outside to that number? I mean, it it will be a larger number in the long term, but in in the coming plan and guidance period does not. I mean, it will be an additional wholesale income stream. I think you can you can probably model it out. But think about, you know, if this JV rolls out a 150,000 homes, you know, connections per year in the coming years, it takes about five years, six years to get to the 900,000. So before this becomes a meaningful active layer income stream, you're probably 2026 and onwards, Then it actually could become a meaningful income stream, and this thing is actually, as we see it, significantly earnings and cash flow accretive. But again, it takes time for the JV to build up its stock of homes passed, and build this material income stream. So in the coming years, no massive income and additional contribution. In the latter part of this decade, yes, there is. Okay. And no cash, basically additional cash needs to be injected by KPAN, it all comes from the APG equity injection and the debt funding? Yes. Indeed. Yes. Okay. Great. Thanks a lot. The next question is from mister Simon Coles, Barclays. Go ahead, please. Morning. Thanks for taking the question. I'm just wondering, operationally, I think you're saying this is completely separate entity. So they are they're dealing with all the contractors that will roll out the network, and they will completely run the network itself in in the future? Is there there's no scope that they might, say, contract that out to to Cape Inn, given you will have, obviously, a sizable workforce running a a fiber network in most of the country. I'm just wondering how that'll work. Thank you. A little excitement. The entity is a separate entity that has a self standing business plan and management team and there will be supervisory board steering through KPN ABG. However, of course, KPN has existing contracts, so the JV can use step in those contracts. So we have spent time working on trying to source capacity on behalf of JV, have JV use existing contracts of KPN. But then, theoretically, it's theirs to use to the users or not. Mean, if in theory, the JV could say, look, we're gonna source our own, you know, fiber construction capacity and leave KPN's, you know, contracts elsewhere, because they are in essence have to air independent. However, of course, we have as KPN made sure in our dealings with contractors, we have secured production capacity that the JV can then procure and use under the same terms and conditions. So in theory, they could be completely separate. In practice, they are extremely likely to use the capacity that we've sourced today. Suddenly, we asked KPN, we have done our work to source the CapEx facility, which is then a procedure that is on the JV's balance sheet. But in theory, they could kind of ignore it and go out to raise funding themselves. In practice, they would use the construction capacity and the financing capacity that KPN has organized, secured through its own network. Thanks. And sorry, just a follow-up. Does that mean sorry, are you potentially moving staff into this JV out of KPM? I'm just not clear on that. Hang on minute. We think the JV will probably run with, you know, think about 30 people in the in the end state that will work there directly. So, yes, there will be some KPN managers stepping up, but actually are leaving KPN and becoming employed by this this group. So take a more entrepreneurial, you know, business role. The entity may hire some people externally. So think about this this JV at the in the end state employing thirty thirty five FTEs out of which, you know, a part will be former KPN employees that, you know, leave the mother ship and then be employed by the JV in the future. Okay, cool. It's very small. Okay, thanks. The next question is from Mr. Konrad Zawen, ABN AMRO. Go ahead please. Hi. Good morning. Question on the deconsolidation of this JV. Is it your intention at some point in a few years' time to consolidate this? And is the main reason not to consolidate it as from now the additional debt that it will bring to KPN's balance sheet? Well, Konrad, I need to pick and choose our words very carefully here. The JV will be deconsolidated. That means that the CapEx debt and debt that the JV runs will not be consolidated by KPN. We have the option to consolidate in a few years' time. It's a function of time and a function of number of homes passed, you've got the option to consolidate. Think of that as option is only kind of executable when the majority of the CapEx is behind this and the majority of the homes passed have been delivered. And then and again, I need to pick my words very carefully, we have the option to consolidate. Okay. I hear you. Thank you. The next question is from Mr. Joshua Mills, Exane. Go ahead please. Hi, guys. So I just wanted to understand from an on the ground perspective, what if there's any difference between these new areas that you've talked about rolling out to and then the assumptions which you laid out at your Capital Markets Day. So should we assume that things like the take up rate, the ARPU uplift and the returns in these areas are similar, to those, laid out in the Capital Markets Day or different? And in particular, does your business plan just require or the commitments you made just require you to migrate existing KPN customers in the new areas to the JV? Or in order to hit the requirements of the JV, do you need to actually increase your market share in this 910,000 homes? Thank you. Joshua, look, in the principle, the assumptions are similar, except when you move to semi dense areas, the cost per home pass tend to be a bit higher, not the most, and business parks are a different story, but on the retail side you move to slightly less dense areas, so the cost per home path is a bit higher than the classical KPN area, but not massive. Business parks of course has a slightly different ROI program. But the same ROI pro profile, but a different, you know, CapEx to earnings profile. When it comes to assumptions that are very similar to what KPN has, it is actually not predicated on the the DV. It's not predicated on winning massive markets here. It's mostly about moving clients from copper to fiber, and having a reasonable wholesale access, wholesale penetration similar to KPN. If we were to gain market share, that would be an add on in terms of the business plan. So think about predominantly KPN migrations, plus a reasonable wholesale business on top of it. And so there are similar assumptions as our Capital Markets Day, with the delta being slightly more expensive lines, cost per home pass a bit higher, and then on business parks, you find when you go to business park, the cost per home pass or cost per, you know, business connected tends to be a bit higher because you have to dig longer distances. At the same time, businesses are often willing to pay a bit more. So similar ROI, but slightly different CapEx and income streams. Thanks, Faike. The next question is from Mr. Ulrich Wasser, Jefferies. Go ahead, please. Yes, thanks. Thanks very much. So on a black sheet of paper, you you could do this alone. I think it was actually in your plan in the outer years beyond 02/2025. Now you do it faster and without additional cash outlay as I understand it. What you give up for that is is share in future returns. Now the the one thing you you are saying here is that you the upfront payments are from APG are covering the the cash outlay during the rollout, which suggests that you have left very significant returns in the joint venture. As I understand it, these returns are essentially, is that they're essentially discretionary, right, because you set the the transfer price into into KPN at the wholesale level. I'm just wondering how do you think about that strategically? Because at the end of the day, you you you're not telling us how much returns you you you are handing over to your partner for the benefit of doing it faster or doing something faster that you could have done yourself. So it looks like a like a good deal to APG. How how would you address that from from of KPN investor point of view? Thank you. Yeah. I it it it's a good question. I think it's an attractive deal for both of us. Look, two things, we're bringing indeed for the long tail of our plants, thereby reducing the churn risk. If you look at the churn risk of KPN, the biggest churn, copper churn we have is in areas in medium dense areas where we have copper and others roll out fiber. By bringing forward this business, you definitely dramatically reduce the churn risk and protect your KPN client base. That's one. Secondly, so when you come to the JV, where do we make money? We make money as KPN by providing the active layer, which is relatively, you know, high margin income stream, which is a scalable business. Secondly, we still own 50% of the JV, and we get a payment upfront. When we look at it I think APG is an attractive long term investment. We also have, because we actually, as I said, we still own 50% of the JV, we get paid upfront a significant amount that crystallizes almost the future value, and we protect the churn in these areas, which could be at risk of increasingly increasing over the coming years. If all the other players would roll out fiber, we would only be able to roll out fiber at the end of this decade. So it's a combination of the churn prevention, combination of the income streams through the active layer that we provide, and the third thing is the upfront payment. So we feel the combination of that warrants doing this together with APG earlier than later on our own. Got it. So big part is the land grab and capping the the alternate opportunity, so they don't have less blue water rather than. Okay. Landgraab is your words. That's not something I would I would I would use, but it need it is actually preventing churn and and protecting your customer base that is actually very valuable to us. Got it. Thank you. The last question is from miss Sihei, Citi. Go ahead, please. Thank you very much for taking my questions. Just want I have one, please. And just as always, today's announcement, you basically have a JV form to roll out additional one minute homes and have the option to consolidate to have the majority of the stake. My question is, when you think about your existing fiber homes, and how do you think about potential structural options around your existing fibers? Does it change your previous view that it's important to own a 100% of your fiber assets going forward? Thank you. Well, I would say good question. We are still convinced that it's valuable to own a 100% of the fiber assets. So the 500,000 homes we roll out ourselves, we continue to roll ourselves on our own balance sheet. We said we own 2,800,000 homes today. We're adding about 2,500,000 on our own balance sheet in the coming years. This is actually a additional plan set on top of that with the aim of accelerating the rollout bringing forward that long tail and reducing the churn. But in principle, KPN prefers to hold on to own these assets ourselves. We just felt in this case, the combination of churn prevention, acceleration, and the payment upfront was a was a good alternative. But as a matter of structure, I wouldn't count on us now starting to sell fiber assets in a fire sale in the coming years. We still prefer to own our own this network ourselves. Even if I'm very we're very even if we're very happy with the price that we received for this greenfield Jiffy, it it does show the value of our fiber network. It definitely does. But at this point, strategy is to stay majority owner of fiber assets. Thank you very much. Okay. Thank you. That concludes the call. If there's any further questions, please contact the IR team. Thank you very much. Thank you.