U.S. Markets close in 19 mins

Edited Transcript of KPN.AS earnings conference call or presentation 30-Jan-19 12:00pm GMT

Q4 2018 Koninklijke KPN NV Earnings Call

The Hague Feb 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Koninklijke KPN NV earnings conference call or presentation Wednesday, January 30, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Bisera Grubesic

Koninklijke KPN N.V. - Head of IR

* Jan Cornelis De Jager

Koninklijke KPN N.V. - CFO & Member of the Management Board

* Maximo Ibarra

Koninklijke KPN N.V. - Chairman of the Management Board & CEO

================================================================================

Conference Call Participants

================================================================================

* Emmanuel Carlier

Kempen & Co. N.V., Research Division - Research Analyst

* Frederic Emile Alfred Boulan

BofA Merrill Lynch, Research Division - Senior Analyst

* Keval Khiroya

Deutsche Bank AG, Research Division - Research Analyst

* Konrad Zomer

ABN AMRO Bank N.V., Research Division - Equity Research Analyst

* Luigi Minerva

HSBC, Research Division - Senior Analyst

* Matthijs Van Leijenhorst

Kepler Cheuvreux, Research Division - Analyst

* Paul Sidney

Crédit Suisse AG, Research Division - Research Analyst

* Samuel McHugh

Exane BNP Paribas, Research Division - Analyst of Telecom Operators

* Simon Alexander Arulraj Coles

Barclays Bank PLC, Research Division - Research Analyst

* Siyi He

Citigroup Inc, Research Division - VP

* Yin Kin Tang

UBS Investment Bank, Research Division - MD and Head of Telecom Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen. Welcome to KPN's Fourth Quarter and Full Year 2018 Earnings Webcast and Conference Call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to our host for today's conference, Bisera Grubesic, Head of Investor Relations. You may begin.

--------------------------------------------------------------------------------

Bisera Grubesic, Koninklijke KPN N.V. - Head of IR [2]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen. Welcome to KPN's fourth quarter and full year 2018 results presentation. Before turning to the core of the presentation, I would like to draw your attention to the safe harbor statement on Page 2 of the slides that also applies to any statement made during today's presentation. In particular, today's presentation may include forward-looking statements, including the company's expectations with respect to its outlook and ambitions, which were also included in the press release published this morning. All such statements are subject to the safe harbor statements.

I would now like to hand over to our CEO, Mr. Maximo Ibarra.

--------------------------------------------------------------------------------

Maximo Ibarra, Koninklijke KPN N.V. - Chairman of the Management Board & CEO [3]

--------------------------------------------------------------------------------

Thanks, Bisera, and welcome, everyone. Jan Kees and I will take you through a short presentation on our fourth quarter and full year results, the 2018 outlook and financial ambitions for the 2019, 2021 period.

Three key highlights of 2018. The second wave of simplification has generated EUR 225 million of run rate savings in 2 years. The final year of this program now rolls over into our new OpEx reduction program. Second, we delivered a solid set of results for 2018, in line with our outlook. Adjusted EBITDA grew by 0.8%. CapEx was EUR 1.1 billion, and we generated EUR 804 million of free cash flow, up 10% year-on-year. This provides a strong foundation to execute our strategy, which we presented at our Capital Markets Day in November. We're determined to deliver organic sustainable growth of adjusted EBITDA and free cash flow.

Before turning to the Q4 results, let me provide you a short recap of what we shared at the Capital Markets Day. Our ambition for the 3 years plan, 2019, 2021 is to deliver organic growth of adjusted EBITDA and free cash flow in a sustainable way. To achieve this, we are accelerating the execution of our strategy following 3 strategic pillars: First pillar is that, the best converged smart infrastructure. We're building the digital highways of the Netherlands to become the undisputed quality leader in the market. Second, we have a strong focus on profitable growth segments. This means that we will leverage our strong market position to further drive our convergent strategy with a clear focus on value over volume. And third, the acceleration of simplification and digitalization. We will accelerate our IT simplification, rationalize our core network, and we're moving to a more simplified organization. Overall, we'll reshape KPN into an even more focused and resilient company, delivering organic sustainable growth. We are confident that our strategy will maximize value for all stakeholders.

Fixed mobile convergence is crucial for our services, and today's environment requires a converged network approach as well where fixed mobile networks are truly integrated. We have already built a solid foundation to our 30% Fiber to the Home penetration. This provides a starting point of our accelerated fiber rollout of 1 million homes in the next 3 years. In 2018, we have made the necessary preparations to make this happen. This month, digging has already started in selective areas and we expect to cover more than 40% of households by the end of 2021.

Now let's have a look at our Consumer segment. We've seen ongoing success of our converged proposition in the fourth quarter. This further strengthens our position as the leading convergent operator in the Netherlands. As we have shown at the Capital Markets Day, we see a higher ARPU and lower churn of converged customers. With 18,000, 1-8, new converged houses in Q4, we grew our convergent base by nearly 100k in 2018. 46% of the broadband base is now our converged household. In addition, we added 32,000, 3-2, converged postpaid customers in the fourth quarter, reaching 57% of our total customer base. For the KPN brand, already 70% of postpaid customers is converged.

SIMs per household continue to grow to 1.54 as per year-end. We expect this to grow with more than 10% by end of 2021. The investments in access and digital customer experience enable us to grow our converged penetration further. We aim to grow our converged broadband base by 300k and the penetration of our postpaid base to 70% in the next 3 years.

We continue to see competitive pressure in the mobile segment, while this is reflected by a declining postpaid customer base. Our postpaid ARPU at EUR 18 was in line with the same quarter last year. In Q4, we grew our overall broadband base driven by our successful targeted household strategy. We believe that our accelerated fiber rollout and personalized household approach will contribute to grow of our high-value broadband base going forward.

Our consumer Net Promoter Score rose to plus 14, up 1 point from last year. We continue to see that customer satisfaction for our converged base is significantly higher. This is why it is so important for us to continue to grow converged propositions.

This will drive more RGUs per household, increase ARPU per household and lower churn in marketing expenses. All in all, we're confident our strategy will drive sustainable service revenue growth in Consumer in the coming years.

Moving to Business. Overall, we have seen continued pressure on revenues in Business, but the organic trend has been improving slightly year by year. The connectivity market has been declining over the past years due to rationalization, migration to new technologies and mobile repricing.

IT services saw its revenue declining in Q4. We saw growth in security and cloud services, but this was offset by a decline in legacy IT products, such as PBX.

Higher revenues from professional services were supported by additional project-based work at our largest customers. In the fourth quarter, we continued to be recognized for our innovative IT solutions. We won a Computable Award for our Data Services Hub that provide real-time information in the ice skating stadium in Heerenveen. This is not the right pronunciation, but I think it's quite close to the right one.

Transformation of the operating platform, a key element of our business strategy is our accelerated transformation to a digitized lean operating model. This includes end-to-end digitalization and automation of the IT chain to further streamline our sales and delivery processes. We will deploy the KPN ecosystem as they go to operating platform for its mid and large enterprise customers. This digital portal consist of standardized building blocks and offer automation of core processes such as service, delivery and billing. This allow us to have a much faster time to market, and introducing new services and offerings. 41% of SME customers have now migrated away from a legacy portfolio to a new future-proof portfolio such as the convergent proposition KPN ONE. We aim to have all SMEs and LE customers, large enterprise, on this platform during 2020.

Customers, we have one platform for all their connectivity and IT services and have flexibility to scale services up or down in real time without human intervention. This allow us for attractive up and cross-sell opportunities and contributes positively to customer satisfaction. Overall business customer satisfaction improved to an NPS of 0.

Let me now hand over to Jan Kees. Please, Jan Kees?

--------------------------------------------------------------------------------

Jan Cornelis De Jager, Koninklijke KPN N.V. - CFO & Member of the Management Board [4]

--------------------------------------------------------------------------------

Thank you, Maximo, and welcome, everyone. As Maximo said, we delivered on our full year outlook. At plus 0.8%, adjusted EBITDA slightly grew compared to 2017, and we generated EUR 804 million free cash flow, up 10% year-on-year.

From this table, I would like to highlight net profit. Q4 net profit came in at a loss of EUR 45 million. However, this was negatively impacted by a EUR 107 million one-off related to the revaluation of our deferred tax asset. The Dutch Corporate Income Tax is being gradually reduced to 20.5% from the current 25%, and the reduction will ultimately take effect in 2021, gradually. This negatively impacts our DTA position as the losses were taxed at the higher tariff. In general, a lower corporate tax rate will, of course, be positive for us in the longer term.

Excluding this one-off, net profit would have been a positive EUR 62 million or up 10% compared to the fourth quarter of 2017.

Now let's look more closely to our revenues.

Revenues declined by 1.1%, an improving trend compared to Q3 and to full year figure of minus 1.9%. In Consumer, the decline was mainly driven by lower mobile service revenues, which declined 2.2% year-on-year. The regulatory effect lapsed in Q3, which also supported the improving Q-on-Q trend. Residential revenues declined somewhat driven by a lower base for DVB-T, TV product and traditional voice services. This was partly offset by increasing ARPU per household. Maximo already discussed the main developments in Business.

In Wholesale, all temporary effects have now lapsed, resulting in a broadly stable revenue level over the last few quarters.

Looking at EBITDA, we see that our simplification and digitalization initiatives are delivering cost savings, with the main driver being lower expenses related to IT and TI. Personnel expenses were slightly higher compared to last year as a result of the new collective labor agreement. Other operating expenses were lower mainly as a result from lower costs related to billing and collection and housing and facilities.

We are proud about the strong results from our Simplification program. Since the start of this program in 2014, we have generated approximately EUR 685 million of run rate OpEx and CapEx savings. And as announced during the Capital Markets Day, the final year rolled over into a new multi-year OpEx reduction program that started on the 1st of January. This new program will generate approximately EUR 350 million, net indirect OpEx savings by the end of 2021. And just to recap from our CMD, we have outlined 5 key initiatives that will drive the OpEx reduction: Rationalization and simplification of our portfolio; end-to-end digitalization and automation of our front and back end processes; moving to an OIP network and virtualization; the IT landscape rationalization; and five, a more effective, more efficient organization.

Now let's look at our main cash flow metrics. The EUR 74 million higher free cash flow in 2018, excluding Telefónica Deutschland dividend, was mainly driven by lower interest rate and CapEx and a higher EBITDA.

On the next slide you see the free cash flow development from reported EBITDA. All in all, we believe 10% free cash flow growth in 2018 is a strong performance. So let's move straight to our financial position.

Net debt was EUR 312 million lower compared to Q3. This was mainly driven by free cash flow generation and the sale of Telefónica Deutschland shares during the quarter. At 31st of December, we owned a stake of 4.4% in Telefónica Deutschland. Our financial position remains solid with a net debt-to-EBITDA ratio of 2.5x at the end of Q4.

During the Capital Markets Day, there were a lot of questions on restructuring, and this is still a topic that came back repeatedly in discussions afterwards. So before turning to the outlook, let me spend a few minutes on the financial impact of restructuring. And we've again included this slide on restructuring to provide some further clarity around the timing of the financial impact.

At the time we record the provision in our P&L, time is 0 -- T is 0, we see a negative impact on reported EBITDA, but not yet on the free cash flow. It generally takes around 2 to 4 quarters before employees leave the company and restructuring cash becomes effective. From that moment onwards, though somewhat backloaded, we see the benefits will start to become feasible in our financials.

For 2018, we recorded EUR 102 million restructuring cost in the P&L. Cash payments related to restructuring totaled EUR 92 million in 2018. And the difference was added to restructuring-related provisions. We expect restructuring charges for the foreseeable future as we are digitalizing more and more processes and continuously simplifying our company. This supports a structural reduction in total personnel expenses over time. It's clearly positive from an NPV, net present value, point of view and also accretive after a given period to EBITDA and free cash flow.

Now let's turn to the outlook. At our Capital Markets Day, we presented our strategy of organic sustainable growth of adjusted EBITDA and free cash flow. And this is what we will deliver. Therefore, it is very important to see our 2019 outlook in perspective of our ambitions for the period until 2021. And compared to our Capital Markets Day, we decided to provide you with a bit more clarity on these ambitions.

For 2019, we expect adjusted EBITDA to be in line with 2018. We continue to see some pressure on revenues and the accelerated simplification and digitalization measures will contribute to EBITDA growth from 2020 onwards, which is in line with our ambition to deliver organic growth of adjusted EBITDA in the '19 to '21 period. This is supported by the net indirect OpEx savings of approximately EUR 315 million yearly and our ongoing focus on convergence and value resulting in growth in profitable segments and revenue stabilization.

We expect a stable CapEx level of EUR 1.1 billion for the coming 3 years. And there will be a substantial change in the mix though towards more access investments as already also explained in the CMD. Free cash flow for 2019 will be negatively impacted by front-end loaded one-off higher restructuring charges. Therefore, free cash flow will be incidentally lower this year compared to 2018. These charges will deliver financial benefits from 2020 onwards. Driven by solid EBITDA growth, we expect a mid-single digit CAGR for free cash flow over the coming 3 years. The 2018 free cash flow level of EUR 804 million forms the basis for this CAGR. So '19 is included in the 3 year CAGR of mid-single digit for free cash flow.

Finally, despite incidentally lower free cash flow, we intend to grow the regular dividend over 2019 to EUR 0.125 per share. The progressive dividends reflects our confidence in the execution of our strategy for the coming years, which will deliver organic sustainable growth of adjusted EBITDA and free cash flow.

So let me now briefly wrap up with the key takeaways. The second variable simplification has generated EUR 225 million of run rate savings. We delivered a solid set of results for 2018, in line with our outlook. And this provides a strong foundation to execute our strategy further. We are determined to deliver organic sustainable growth of adjusted EBITDA and free cash flow.

Thank you, now, and let's move to our questions -- to your questions.

--------------------------------------------------------------------------------

Bisera Grubesic, Koninklijke KPN N.V. - Head of IR [5]

--------------------------------------------------------------------------------

Yes. Ladies and gentlemen, we are ready to start with the Q&A. Could you please limit your questions to 2 each. In case, there is still time, you can always request more questions later in the Q&A session. Operator, we can now start with the Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is coming from Keval Khiroya, Deutsche Bank.

--------------------------------------------------------------------------------

Keval Khiroya, Deutsche Bank AG, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

Two questions, please. Firstly, thanks for the clarification on the restructuring charges. But I was just trying to hope would get some more color on how restructuring charges in 2019 should compare to 2018. Could you help us with some numbers at all? And if not, would you be able to tell us roughly what portion of the 2019 to 2021 restructuring charges will be in the initial year? And then secondly, when it comes to the OpEx target of EUR 250 million reduction from 2019 to 2021, could you remind us in terms of the phasing of that and will that be more weighted towards 2020 and 2021 as well?

--------------------------------------------------------------------------------

Jan Cornelis De Jager, Koninklijke KPN N.V. - CFO & Member of the Management Board [3]

--------------------------------------------------------------------------------

Yes. So very good question, obviously, but it's annual so at the same time difficult to answer the correct number for the real charges in 2019. And it has a background because first of all, we want, of course, to accelerate as much as possible restructuring in 2019. The more successful we are in that year, the more real charges we have. But also we are implementing measures to have more organic attrition as well, or for example, to reduce labor related expense not only in the own labor related force but also in the externally hired force. And on that side, that would mean that you have less restructuring charges partly because of this. As a result of the total, we still will have substantially materially higher real charges in 2019. But the exact effect of the phasing and the acceleration of restructuring on our own personnel and total personnel and the mix within the labor-related spend between own personnel where we have labor-related reduction costs because we have redundancy packages and the other buckets, external personnel or suppliers related to labor spend where we do not have restructuring cost. The exact mix of that is at this moment difficult to measure. It will be elevated, the restructuring charges, in 2019. It will be materially higher. On the one hand, as a result of a successful strategy to front load the 3-year restructuring as much as possible in the first year, so we can benefit for the full 3 year or the second and the third year from that in EBITDA and free cash flow already starting in 2020. And at the same time, we try to mitigate the effect as well, by also reducing other labor-related spend buckets not being our own personnel.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

The next question is coming from Mr. Polo Tang, UBS.

--------------------------------------------------------------------------------

Yin Kin Tang, UBS Investment Bank, Research Division - MD and Head of Telecom Research [5]

--------------------------------------------------------------------------------

I've got some 2 questions. The first question is about Consumer. How optimistic are you that Consumer revenues can stabilize and grow going forward. And can you maybe talk about the moving parts we should think about? And the second question is really just about EBITDA margins within the business unit and the mix shift effect. So specifically, can you give us a rough sense of the EBITDA margin on your legacy revenues within Business? And what kind of EBITDA margins are you making on your new services within Business?

--------------------------------------------------------------------------------

Maximo Ibarra, Koninklijke KPN N.V. - Chairman of the Management Board & CEO [6]

--------------------------------------------------------------------------------

Yes. About your first question and how optimistic we are in terms of the evolution of the market, the competitive market in 2019, quarter-by-quarter, what I can tell you is that the market remains highly competitive. We believe, in general, that we can have better dynamics in the future, but for the moment it is quite difficult to say if this is going to improve in the first quarter or in the second quarter or the third quarter. So what we see is that the mobile market remains -- still remains very competitive. About your second question, which is the EBITDA margin, in particular, for the Business, the strategy that we have in the Business, which is exactly the strategy we have in the Consumer segment is the value over volume. In the Business market, we don't have issues or problems or, I mean, critical situations when it comes to the customer base. We just simply have to shift from a strategy where customer base is important -- to a strategy where customer base remains important, but also the value and the profitability of the contracts. So this is exactly explanation for value for money -- sorry, value over volume. And this is, in particular, for the larger enterprise and corporate market. So that is the journey that we will follow. And in the Capital Markets Day, we gave an indication about the fact that the end-to-end B2B EBITDA will stabilize in mid-2020. And this is an important target that we have because we see this value over volume strategy that we start paying off in the next quarters.

--------------------------------------------------------------------------------

Yin Kin Tang, UBS Investment Bank, Research Division - MD and Head of Telecom Research [7]

--------------------------------------------------------------------------------

Maybe just a followup on that second point. Could you maybe give an idea in terms of what the difference in EBITDA margin is between the legacy business revenues and the new service revenues?

--------------------------------------------------------------------------------

Maximo Ibarra, Koninklijke KPN N.V. - Chairman of the Management Board & CEO [8]

--------------------------------------------------------------------------------

It depends on the type of the revenues. Okay, if your question is, of course, the profitability of voice revenues is higher than some IT service revenues that we can get, for example, with cloud services or workspaces. But you know what we're doing is that when it comes for example, for the -- to the small, medium enterprise, traditional service revenues, telecom service revenues, will remain very important. And when it comes to the IT space, we are just focusing on those services that can guarantee the best profitability moving forward. So, of course, when we move a customer, which revenues are 100% telecom service revenues to a customer that has less in percentage, less telecom service revenues and more IT service revenues, then the profitability goes down. But what is important for us is that in terms of the value management of the contract, we'll be able to shift to a more value management of the contract, which means higher profitability. So our expectation is that profitability will remain stable and the number of contracts that are highly profitable will increase.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

The next question comes from Mr. Sam McHugh, Exane BNP.

--------------------------------------------------------------------------------

Samuel McHugh, Exane BNP Paribas, Research Division - Analyst of Telecom Operators [10]

--------------------------------------------------------------------------------

Two questions, if I can. First on Fiber to the Home build. Should we assume your build is going to be pretty even over the next 3 years in terms of incremental build? And in terms about your go-to-market strategy for that, are you taking prebuild indications of interest from customers. I'm just trying to figuring out when we should start to see some positive benefit in terms of the broadband business? And then secondly, in mobile, we've seen some good improvement. You're saying that no frill segment remains pretty competitive. I think we have seen a few more rational price moves recently. So simple question is, do you think you can get back to a positive mobile service revenue growth in the next 12 to 18 months?

--------------------------------------------------------------------------------

Maximo Ibarra, Koninklijke KPN N.V. - Chairman of the Management Board & CEO [11]

--------------------------------------------------------------------------------

Yes. What we believe is the -- I mean, in terms of service revenues, so we're in the trajectory to stabilizing service revenues. This is our goal. We are not providing a specific outlook on when this is going to happen, but you can see the trajectory is getting exactly in this direction. Your full question was about the Fiber to the Home. You know that our planned ambition is that we will rollout more than 1 million homes in Fiber to the Home in the next 3 years, that will bring additional customers in the converged proposition. So the plan is 300k in the next 3 years. If we look at the performance of 2018, there was a growth of 100k lines, which means that in terms of run rate we're well positioned. So yes, of course, rolling out in the areas where we believe we can get the best result the earliest possible and after the 3 years adding to our customer base 300k in order to generate more service revenues in this more -- most profitable segment. Your second question was?

--------------------------------------------------------------------------------

Samuel McHugh, Exane BNP Paribas, Research Division - Analyst of Telecom Operators [12]

--------------------------------------------------------------------------------

Which is on mobile service revenue growth in kind of a no frills segment versus premium.

--------------------------------------------------------------------------------

Maximo Ibarra, Koninklijke KPN N.V. - Chairman of the Management Board & CEO [13]

--------------------------------------------------------------------------------

Yes. I mean, the -- so the goal here when it comes to mobile service revenues, and in particular in the consumer market, the goal and the target is that we're going to defend and protect as much as possible our high-end customers. So in the mix, high-end customers are more important than low-end customers. The important thing that we're doing in this moment is that how can we secure that through the right value propositions moving forward. And this is all part of the plan moving into one brand where we are going to reflect in this one brand all the different value propositions and the premium part is going to be relevant and important.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

The next question is coming from Mr. Luigi Minerva, HSBC.

--------------------------------------------------------------------------------

Luigi Minerva, HSBC, Research Division - Senior Analyst [15]

--------------------------------------------------------------------------------

Two questions. The first one is on the residential revenue, which are declining by 0.4% in Q4. I think it's the first decline since mid-2015. And I was wondering if you can give more color on what is driving it. And whether it's to be considered a one-off or whether we should extrapolate in 2019? And second question is on the simplification on -- of your brands, which was announced probably a few weeks ago. And I'm wondering what is driving the reduction of the number of brands, whether it's a part of the simplification program, or also if it's a reaction to the new market structure post consolidation?

--------------------------------------------------------------------------------

Jan Cornelis De Jager, Koninklijke KPN N.V. - CFO & Member of the Management Board [16]

--------------------------------------------------------------------------------

Yes. So as to the residential revenues, I already touched upon the DVB-T, that's our old wireless digital TV product and voice in residential, still some voice there, legacy voice that is in decline, that was driving that. At the same time, in the last few quarters -- of the last few quarters also actually throughout the year, Q4 was a little bit better. Also broadband performed a little bit weaker than in the 2 years before that. But now we see in Q4 that trend already is improving, which we also expect to continue through this year. So against a little bit the background of a little bit less net adds on broadband but especially also on DVB-T, our legacy digital TV service and voice that was the main driver after a little bit weakening of the residential revenue trend.

--------------------------------------------------------------------------------

Maximo Ibarra, Koninklijke KPN N.V. - Chairman of the Management Board & CEO [17]

--------------------------------------------------------------------------------

Yes. And just to complete, so these -- the sounds were, of course, that the market is particularly saturated. So the more we go ahead, the more we need to increase the broadband base, which by the way now we did better in the fourth quarter compared to the second and the third. And that is also reflected in our strategy, which means rolling out more future-proof technology infrastructure, so we can get additional number of customers on converged proposition. To your second question about simplification, there is just one rationale, and the rationale is that we already have in our portfolio strong brand, and this is KPN. When you segment a market, you can choose 2 ways. The first one is maybe you have some brands, which is what the KPN has been doing over the last years. And the second one is that with your strongest brand, you can have different value propositions that are addressing the most important market segments. That drives the significant outcomes. The first one is that while we can be effective vis-à-vis customers. And the second one is that we will get a significant simplification on the way we do things. So this is in line with our process of automating, simplifying, rationalizing, so making sure that our processes can be much -- I mean, as much as possible fast. We need to be absolutely real, very good in the time to market. So this is the rationale behind. Okay, we have a strong brand. We can address all market segments, the most important ones we build brand. And secondly, thanks to the simplification, we can run our operations in a more efficient way.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

The next question comes from Mr. Fred Boulan, Merrill Lynch.

--------------------------------------------------------------------------------

Frederic Emile Alfred Boulan, BofA Merrill Lynch, Research Division - Senior Analyst [19]

--------------------------------------------------------------------------------

On the fixed market, the convergent market, in terms of competitive intensity and ability to drive growth in pricing in that segment in the medium term that's an area that used to grow very steadily, so bit of an update on this. And that secondly, on the free cash flow side, if you look at Slide 15, if you could help us a little bit in terms of moving parts for '19 and '20 beyond EBITDA CapEx, et cetera. But if you look at, for instance, the other cash flow items, including the change in provision or working cap, is there anything we should be aware of. You've printed, again, plus EUR 50 million in provision both '17 and '18, working capital around 0. If we look at the next 2 years, yes, if you could flag any potential deviation on those items?

--------------------------------------------------------------------------------

Maximo Ibarra, Koninklijke KPN N.V. - Chairman of the Management Board & CEO [20]

--------------------------------------------------------------------------------

Yes. In terms of the fixed, we have now -- if we take a picture of the current convergent status of KPN, if we look at our postpaid customer base, we have a significant penetration of converged services, that means that we have been particularly good in executing convergence on our customer base [by one.] If we take the broadband customer base, then we see that approximately 46% is already convergent. So it means that we have reached the point where in order to increase these penetrations, of course, we need to start adding new services, so we can upscale up sell, but at the same time we need to increase our broadband base. And this is again reflecting the strategy we have, which is rolling out fiber, which is having a regional and local approach, which means improving all the customers' services and at the same time being able to attract more broadband converged customers in our customer base. So in a nutshell, it means that now we are preparing the foundations for the next wave of growth because that is exactly where we get, I mean, most of the future profitability. Those customers have a better ARPU, those customers have a lower churn rate and, I mean, much better customer satisfaction.

--------------------------------------------------------------------------------

Jan Cornelis De Jager, Koninklijke KPN N.V. - CFO & Member of the Management Board [21]

--------------------------------------------------------------------------------

Yes. And as to free cash flow '19 and '20, a little bit broad overview. Change in provisions mainly driven, of course, by the restructuring charges already mentioned, and then the elevated level in 2019. We take also, as I indicated a little bit from '18 as well into '19 in terms of cash because our P&L charge was higher than the cash charge in '18, because in '18, at the end of the year, we were quite successful in reducing the number of workforce, so that means that cash out will be also affected in '19, but also the accelerated restructuring in '19 will have its cash effect. Working capital, as opposite to some years a few years ago, we don't see big movements. We didn't see a big movement in '18, we also don't expect in '19 and '20 big movements in working capital there. Then, of course, EBITDA for '19, it's not much of a driver in line with. We have guided for 2020 though. Of course, after '19, we have been indicating that for the next 2 years, we expect EBITDA growth picking up materially because of also the reductions that we are implementing in '19. So from 2020 onwards, it will be a driver for free cash flow growth, EBITDA. Interest spend, there's a little bit of tailwind in '19 and a little bit more in 2020. Cash, roughly flattish, not very much a corporate tax in free cash flow. So those are the big items that drive free cash flow for '19 and 2020.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

And we continue with a question coming from Mr. Simon Coles.

--------------------------------------------------------------------------------

Simon Alexander Arulraj Coles, Barclays Bank PLC, Research Division - Research Analyst [23]

--------------------------------------------------------------------------------

My first one's on cable household. So we've, obviously, seen some new price points published earlier this year. I was just wondering if you had any comment on what you think it could mean. Whether that gives any opportunity for the potential cable wholesaler? And then my second question is just on professional services and consultancy. You've obviously shown very strong growth throughout the year in that segment. I was just wondering whether the expectations of business revenues grows to improve in the coming years. Does that assume that professional services and consultancy growth remain strong?

--------------------------------------------------------------------------------

Maximo Ibarra, Koninklijke KPN N.V. - Chairman of the Management Board & CEO [24]

--------------------------------------------------------------------------------

Yes. About the regulation, yes, exactly now we have available the price list, let me call it this way, the wholesale price list from VodafoneZiggo. As expected, we did not notice anything disruptive on that front. So we maintain our expectation that in the short, medium-term, there will not be any specific dynamics in terms of customers that will be choosing cable instead of choosing our current Wholesale proposition. In order to move into cable, customers or potential customers should also make some investments. And, as you know, we have already long-term contracts with most important -- I mean, Tele2 and T-Mobile. These are 7 years long-term contracts and commitments. So again we don't see in the short, medium term a material impact on the Wholesale part. When it comes to professional services, yes, we're very pleased about the performance of those, in particular, in the Q3 and Q4. In general, in the business market, the service revenues, excluding M&A and excluding hardware, have been improving over the quarters. And also in 2018, the performance has been better than the one of 2017. Of course, we're not yet satisfied about this performance. So we're looking at also in the next quarters over the plan to make sure that we can improve furtherly, but the focus is on inflecting the EBITDA, which is more important because that means that our value over volume strategy will be -- would be, I mean, the right one.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

The next question comes from Ms. Siyi He, Citigroup.

--------------------------------------------------------------------------------

Siyi He, Citigroup Inc, Research Division - VP [26]

--------------------------------------------------------------------------------

I have 2, please. And the first one is, at the Capital Markets Day you highlighted the restructuring costs and also the benefit it could bring to EBITDA. But judging from today's guidance, the restructuring costs are higher than expected, but you're still guiding for in line EBITDA for 2019. I was just wondering if you could help me to reconcile the both. And second question is on your mid-year guidance on free cash flow growth. And if I look at your mid-single digit CAGR, it seems to suggest that only half of the net savings are going to drop through. If we assume top line can stabilize and if B2B profitability stabilize, why don't you think you cannot see better free cash flow growth?

--------------------------------------------------------------------------------

Jan Cornelis De Jager, Koninklijke KPN N.V. - CFO & Member of the Management Board [27]

--------------------------------------------------------------------------------

So first of all, the savings in our new program that saves EUR 350 million net indirect OpEx in 3 years will be a bit phased as explained. So the -- materially, the effects will be visible starting 2020. The costs of it, especially also on cash, will be in large part be taken in 2019. That's -- there's the gap between that. Then in the -- for the -- now the short term at least, we still have some slight headwinds of revenue decline on top of that. So although, we are still very effective -- have been very effective and will be very effective in cost savings and revenue decline is -- headwinds are becoming smaller and smaller, there's still some revenue headwinds for the shorter term to overcome as well. All in all, that results in our guidance on in line EBITDA for '19. Free cash flow hit initially by an elevated level, but this is really a temporary effect in '19 and free cash flow picking up materially from 2020 onwards. And that's why we have included the compound annual growth rate for free cash flow, including the year 2019 to be mid-single digit. That you can also calculate that has to bring in 2020 and 2021 as free cash flow growth.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

The next question comes from Mr. Paul Sidney, Crédit Suisse.

--------------------------------------------------------------------------------

Paul Sidney, Crédit Suisse AG, Research Division - Research Analyst [29]

--------------------------------------------------------------------------------

Just a couple of quick questions for me. Firstly on your guidance. Is there any benefit of mobile market repair assumed in your 2019 and 2021 guidance given the -- that the 4-to-3 mobile consolidation? And secondly, just to clarify your answer to one of the question, does the recent decision to close Telfort shops focus more on the KPN brand signal a shift away from the no frill segment? Or is the idea just to replicate existing no frills offers under the KPN brand to save costs? I'm sorry, I just didn't really understand the answer to the question earlier.

--------------------------------------------------------------------------------

Maximo Ibarra, Koninklijke KPN N.V. - Chairman of the Management Board & CEO [30]

--------------------------------------------------------------------------------

Yes. I mean, in terms of the -- let me start with the second question. About the shops, by moving into one brand, that is the KPN brand, it means that we're going to face off Telfort, access-for-all, [ES] telecom in the business market, which means that everywhere we have a Telfort shop, we will make the choice of selecting the best one. And then, of course, that -- the selected shop is going to be a KPN shop. So it means that we're going to go into the best one will be selected in the cities where we are present and this is consistent with the strategy of one brand and making sure that the brand will be able to attract as much as possible high-end customers because this is the other important goal that we have. But, again, is not mobile stand alone, but is really moving into convergent proposition, that is what we believe is the key factor in this market. Mobile will be always under some competitive pressure. We have not factored any change in the plan about the fact that we could have a better, worse or more balanced competitive market because we don't have any proof point of that yet. Of course, we will take into consideration the moment it happens, but it has not happened yet. So this is why without looking at what competition is doing, our strategy is penetrating our customer base as much as we can with convergent propositions because that is the way of protecting the customer base. Mobile, similarly, that is the market that is always exposed to some competitive pressure. And as I said, the moment we will see this being more rational and better, that moment that kind of picture we will be factoring in our plans.

--------------------------------------------------------------------------------

Paul Sidney, Crédit Suisse AG, Research Division - Research Analyst [31]

--------------------------------------------------------------------------------

Sorry, just to be clear, so any improvement in the competitive landscape would be incrementally positive to how you're thinking about things over the next 3 years?

--------------------------------------------------------------------------------

Maximo Ibarra, Koninklijke KPN N.V. - Chairman of the Management Board & CEO [32]

--------------------------------------------------------------------------------

We hope so.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

The next question comes from Emmanuel Carlier, Kempen.

--------------------------------------------------------------------------------

Emmanuel Carlier, Kempen & Co. N.V., Research Division - Research Analyst [34]

--------------------------------------------------------------------------------

Three questions from my side. First of all, on Business, I was a bit surprised to see an improving trend because of the M&A effect was being phased out, but on the other hand I understand that you benefited from some additional project-based growth. So could you quantify that? And secondly, could you also let us know when you will accelerate the migration of the business customers because at the CMD, I think, you guided that the revenue trend in Business could potentially get worse first in 2019 before it would improve? Secondly, it's about the gross profit margin. How should we be thinking about that? So you -- on the one hand you're losing higher-margin legacy revenues, on the other hand, the revenues you're gaining are lower margin revenues. And so should we expect gross profit margin contraction in the coming years? And whether it's included in your guidance? And then the final question is about the fixed market. So you have no cable regulation. If I look at other markets, if we have seen one thing, then it is that it has weakened the potential to increase prices. It could still increase prices, but a lower level, I would say. Is that also mobile in your guidance?

--------------------------------------------------------------------------------

Maximo Ibarra, Koninklijke KPN N.V. - Chairman of the Management Board & CEO [35]

--------------------------------------------------------------------------------

Yes. Let me start from your question about the migration. You noted in our Capital Markets Day, the plan is really to migrate the whole more medium enterprise and also a big chunk of the large enterprise segments into the KPN ONE platform. That means that we migrate from the legacy platforms to the new one. At the moment, we have reached 43%. So it means that we are accelerating. So that is happening. You are right, the moment we move from the legacy platforms into the new ones, there is what we call an impact in terms of rationalization, which means that some fixed legacy lines are, of course, being rationalized by decline by the customer and that implies that you will get less revenues, just at the beginning from the customer, but then you will have chances to cross-sell and up-sell because then the new platform, which is like an over-the-top platform we can manage real-time customers. So that is the positive side effect of translating and migrating customers into the new platform. About your -- yes, the -- in light of this, your question about the gross margin, it is true that we have on one side, the fact that moving from some telecom service revenues into IT service revenues, that will imply that your profitability will be lower in terms of the margin. But that does not imply that your full absolute profitability will be lower. So our plan is that, of course, that we're going to penetrate those customers with more services. So in the end, in terms of service revenues and gross margin and absolute, we will be able to perform better. And another aspect is that by moving from volumes to value, we'll be able to have a better value management throughout the board. So on the segments, ME, large enterprise and corporate when it comes to renewals, when it comes to the analysis of profitability of new contracts and when it comes to the way we have to retain customers, that is exactly under scrutiny at this moment, and this is where we are going to improve. So in general, better pricing and more balanced strategy will also support us in stabilizing service revenues and being more effective when it comes to the gross operating margin. I don't remember your first question. Can you repeat that, please? Maybe you can answer that?

--------------------------------------------------------------------------------

Jan Cornelis De Jager, Koninklijke KPN N.V. - CFO & Member of the Management Board [36]

--------------------------------------------------------------------------------

Yes. So there's 2. I think remaining questions are project-related work and on the M&A effect. Actually, first the M&A effect has fully faded out at the 1st of December 2018 with the last acquisition that we did then a year ago. So there's still some in Q4, some M&A effect as well. And although, we didn't quantify, we didn't disclose the project-related work. It is there. So it has a positive effect in Q4, not uncommon in the last quarter, we have seen that in some other years as well. Underlyingly, we still see an improving revenue trend also in business, but it's a bit less apparent than looking at the sheer top line figures of Q4. So that's why we have disclosed also the M&A -- we have indicated the M&A effect. Again, this is now fully faded away. But in Q4, partly still there and the project-related work.

--------------------------------------------------------------------------------

Emmanuel Carlier, Kempen & Co. N.V., Research Division - Research Analyst [37]

--------------------------------------------------------------------------------

Yes. The last question I had was on the pricing, the fixed pricing. What you include in your guidance, because typically you see with more regulation that there's less room to raise prices?

--------------------------------------------------------------------------------

Maximo Ibarra, Koninklijke KPN N.V. - Chairman of the Management Board & CEO [38]

--------------------------------------------------------------------------------

Frankly speaking, I mean, we have modeled different scenarios. We cannot disclose exactly which is the scenario that is in this moment embedded in the plan. But, again, as I said earlier, we don't see an impact in the short, medium-term in terms of the cable regulation.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

The next question comes from Matthijs Van Leijenhorst, Kepler.

--------------------------------------------------------------------------------

Matthijs Van Leijenhorst, Kepler Cheuvreux, Research Division - Analyst [40]

--------------------------------------------------------------------------------

Most of my questions have been answered. Still one of convergence. Your strategy entails main focus on moving people into bundle as such you're trying to protect these customers but if I look at Spain for example, in terms of penetration, convergence is well developed in Spain but due to the entries of mass mobile into the market, the competitive environment has significantly increased, and also you see some of the players like Vodafone introducing low end brands. So in this context, you're moving away from your low end brand, Telfort. What is your view on this development?

--------------------------------------------------------------------------------

Maximo Ibarra, Koninklijke KPN N.V. - Chairman of the Management Board & CEO [41]

--------------------------------------------------------------------------------

Yes. I mean, moving away from brands does not mean that we're not going to cover properly all the different market segments that we have in this moment in the Netherlands. It means that we would be able to have a more consistent go-to-market strategy. Again the KPN brand will be serving all different segments. Always take into consideration the main driver of the value over volume. But when it comes to the customer base, as I said, it's extremely important that we really penetrate the mobile customer base and the broadband customer base with more convergent services, because as you said, this is really protecting our short, medium and long-term revenues. Yes, of course, there could be and there is, of course, more competition in all domains, including conversion, so that's why we decided to go into a future-proof technology. When we say that we are going to power all households in the Netherlands with the best infrastructure that we believe is the right step moving forward in order to secure that customers will be choosing KPN rather than other providers, service providers, operators with different technologies. Because for the moment, I mean, in the very short term, we have already covered most of the territory with the copper upgrade, but now moving forward in a quite fast way in covering households with fiber-to-the-home, that will be I think one of the strategic key advantages that we have in the market. Then, of course, the rest is how are we going to be able just to compete in the quad-play market. It's not only about putting together fixed mobile and TV, it will be also our ability to provide other services like security, like I mean, services linked to the multi-session. These are, as I said, a nice to have, that will become must to have. And I think that we are in the first position and we're quite advanced in developing -- in development of all these services. So it's a combination of technology, good go-to-market, excellent services that we will provide, also leveraging the good things and features that all the other brands have developed over time. And we're going to be faster than we have been used to for the simple reason that when you have one brand rather than 4, 5 brands, then, of course, when you develop, you're not developing on 5 brands or 4 brands, but you're developing on one. So our IT operations are going to be much faster. That's what I mean by time to market, by being able to manage the right go-to-market and have a best approach when it comes to customer services.

--------------------------------------------------------------------------------

Matthijs Van Leijenhorst, Kepler Cheuvreux, Research Division - Analyst [42]

--------------------------------------------------------------------------------

Okay, one follow up, please. Do you believe that you will be able to increase prices on an annual basis due to these extra services?

--------------------------------------------------------------------------------

Maximo Ibarra, Koninklijke KPN N.V. - Chairman of the Management Board & CEO [43]

--------------------------------------------------------------------------------

I think that we'll be able to increase our ARPU. I mean, we can increase revenues that we can get for household. Sure.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

And the last question for today will come from Mr. Konrad Zomer, ABN AMRO.

--------------------------------------------------------------------------------

Konrad Zomer, ABN AMRO Bank N.V., Research Division - Equity Research Analyst [45]

--------------------------------------------------------------------------------

The first question is on the restructuring costs. It's clear you will -- you would like to refrain from giving us a specific number for 2019. But can you maybe confirm that for the next 3 years i.e., the next cost savings target that your restructuring costs are likely to remain below the EUR 350 million of cost savings that you expect? And my second question is back on the Business segment again. You've given a lot of focus on the KPN ONE migration of your SME customers and your targets are quite ambitious. So I was slightly confused to see the net adds in Q4 of 29k to be at the lowest level in the last 8 quarters. Can you maybe elaborate a little bit on why that is not picking up a lot faster?

--------------------------------------------------------------------------------

Maximo Ibarra, Koninklijke KPN N.V. - Chairman of the Management Board & CEO [46]

--------------------------------------------------------------------------------

You want to answer the first one?

--------------------------------------------------------------------------------

Jan Cornelis De Jager, Koninklijke KPN N.V. - CFO & Member of the Management Board [47]

--------------------------------------------------------------------------------

Yes. First one restructuring charges, again, we really want to stick to the communication that we have done on that. So I reiterate, 2019 will be a incidentally one-off elevated level. After that, we foresee a significant drop again compared to 2019 level of restructuring charges from 2020 and 2021. And the benefit in OpEx savings and in cash flow will mainly center after including 2020 and 2021. And then they will fuel the -- certainly, they will fuel the EUR 350 million indirect, net indirect OpEx target that we have. Although the net indirect OpEx target of EUR 350 million will also be fueled by other indirect cost savings as well, including external personnel, hired contractors and suppliers that now perform services to KPN. And those last buckets, they do not add to the restructuring charges as much, of course. So that's also why our focus will be on those buckets as well.

--------------------------------------------------------------------------------

Maximo Ibarra, Koninklijke KPN N.V. - Chairman of the Management Board & CEO [48]

--------------------------------------------------------------------------------

Yes. When it comes to the 29k net asset you were mentioning, this is more a quarter facing, it is not reflecting a trend.

--------------------------------------------------------------------------------

Bisera Grubesic, Koninklijke KPN N.V. - Head of IR [49]

--------------------------------------------------------------------------------

That was the last question. Thank you, everyone, for joining us in today's webcast. If there are any further questions, please contact our Investor Relations team. Thank you very much. And operator, you can close the call.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's presentation. Thank you for participating. You may now disconnect your line. Have a nice day.