Koninklijke KPN N.V. (KPN) Earnings Call Transcript & Summary

Hello, and welcome to the Deutsche Bank Depository Receipts Virtual Investor Conference, dbVIC. My name is Zafar Aziz from the Deutsche Bank team. I'm pleased to announce that our next presentation will be from KPN from the Netherlands. Before I introduce the speaker, a few points to note. Please submit your questions in the questions box at the right of the slides. Also, all of today's presentations will be recorded and can be accessed by the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Annia Ballesteros Mendoza, Senior Investor Relations Officer; and Michael Schenk, Investor Relations Officer of KPN, which trades on the Euronext Amsterdam under the symbol KPN and in the U.S. on the OTC Market as KKPNY. Welcome, Annia and Michael.

Hi, everyone. My name is Annia Ballesteros, Senior Investor Relations Officer of KPN. And with me is my colleague, Michael Schenk, who will join me at the end of this presentation for the Q&A session. Thank you for joining us. Today, I will present KPN's equity story, starting walking you briefly through the macro perspective on the European telco sector and with the -- and the KPN's share performance. After that -- I'm sorry, these slides went through. After that, I will dive into KPN's updated strategy. To start with, in this slide, you can see KPN's in green and the European telco sector in light blue, performance year-to-date. Here, you can see that sector dynamics have started to positively change compared to what the industry looked like in the past 10 years. But what is driving the sector performance? First of all, is in regulation. In the past year, there has been quite some noise in this area with a long-awaited approval of M&A in Spain, for example, which at the end, only consider mild remedies. Other relevant topic has been the new appointments in the European Commission with the profiles that hopefully will support a new telecom act to target a state-of-art infrastructure, regulatory reforms and ways to attract more capital to fund this. And this all with the aim to support sector consolidation. High capital intensity has been historically a drag in the sector. However, as from this year, the long-awaited promise of lowering CapEx level has become a credible story. CapEx is reaching its peak, and more and more incumbents are achieving their own fiber targets. Such is the case of Telefonica, who will set a [ precedent ] of the sector as soon as 2025 when they will achieve 100% of fiber coverage in Spain. In general, the sector should expect cash flow to rebound as CapEx decreases. Finally, emerging pricing power. Over the past year, most investors have been skeptical on European telcos having pricing power due to historical lack of revenue growth despite strong traffic growth over the years. During 2023, telcos began raising prices and [ despite ] these increases has been primarily linked to rising inflation. The increases have been mainly based on a more-for-more dynamic, resulting on an improved NPS. As shown on Slide 3, KPN has significantly outperformed the sector over the past year. Here, I highlight 5 main reasons on the back of this. First, we established a stable regulatory framework for fiber until 2030, ensuring long-term clarity in the Dutch market. Secondly, unlikely many other telcos, KPN is a pure Dutch play in a healthy 3-player market as consolidation in mobile already took place in the Netherlands some time ago. Thirdly, earlier this year, it was removed the overhang from América Móvil on our shares. These unfolded the KPN share price potential. Today, we are trading over 10% versus March when the América Móvil [ bond ] reached its maturity. Next to that, we have shown consistent and solid operational performance with top line growth for more than 2 years now. We are continuing delivering on our targets and outperforming competition based on the quality of our network. And finally, as you can see in the slide, the fifth reason is KPN's strong and supportive shareholder remuneration policy, which I will present in more detail later on. Now, let me focus on these last 2 topics in a good bridge to the following slide, which shows the recently updated KPN strategy. In our journey as a telco, we need to evolve. We need to connect our customers to a digital future, activate those connections and continue to drive sustainable growth. This strategy will guide KPN journey of the next years, and it is translated into 3 ambitions that we'll aim to achieve by 2027. First, we aim to reinforce our position as #1 internet company in the Netherlands, leading mobile revenue share growth and be the preferred partner for digital services and innovations. Second, through effective network management, modernization and simplification, we will ensure the best digital experiences for our customers. And finally, our people-centric culture will foster sustainability growth -- sustainable growth. And our commitment to ESG will make us a force for good in the Dutch society. All of these being the backbone to achieve our financial ambitions towards 2027, which I will share in more detail also at the end of this deck. In essence, we will shape the future where KPN stands at the forefront of innovation, connectivity and sustainability. This is what I can say, ESG is at the heart of what we do and is heavily linked to our strategy. We are a proud ESG leader in the Dutch society, being a key area of our differentiation. However, of course, this imposes a heavy duty on us. We believe that sustainable business is a better business, and we are truly committed to creating long-term sustainable value for all our stakeholders. As you can see in this slide, we focus on our efforts in 3 areas, which are clearly linked to the 7 UN SDGs. We are a responsible corporate entity. We will strengthen our commitment with diversity and inclusion in all respects, and we will continue to be a front-runner in achieving net zero emissions and circularity. Now let me give you a bit more color on where are we standing and our aspirations in terms of connect, activate and grow. To start with, connect. Fiber is clearly at the heart of the strategy to create long-term value for our -- for all our stakeholders. We have achieved success in the past 3 years. And together with Glaspoort, our joint venture, we jointly cover more than 60% of the Dutch households. This has also resulted in a continuously higher share of broadband fiber versus copper, as you can see in the slide. We have significantly scaled up our fiber rollout, and we have increased our production to more than 550,000 homes passed per year. With this, we continue to lead the Dutch fiber market. Commercially, we have seen an uptick in the market share growth in the fiber areas, while the fiber broadband service revenue growth is a digital -- double-digit pace year-on-year. With around 2 million households remaining according to our target, our fiber rollout has entered into the final phase. Capacity for the next years has been already secured, and we are on track to reach our target to approximately 80% fiber homes by the end of 2026. This will deliver a sustainable and long-term competitive advantage for KPN. But the journey doesn't end up with connecting homes. Activate those households is as relevant. As shown in Slide 6, we aim to deliver the best digital experience to our customers over our world-leading always-on networks. The investments we are making in our mobile network and services are really paying off. The Ookla and Umlaut benchmarks have recognized KPN as the best mobile network in the Netherlands and in the world. Alongside this, we have also been regarded as best only one broadband provider by the Dutch Consumer Association and the best Fixed Internet Provider by Tweakers. This is a great sign of appreciation for all our products and services. And this goes hand in hand with our customer satisfaction, which remains one of our top priorities. We have proudly attained industry-leading Net Promoter Scores, both in consumer and enterprise segment, demonstrating our commitment to customers across all segments. Now, finally and perhaps the most relevant part for this audience, let me talk about growth. Since 2022, we have consistently grown our group service revenues. This is a clear proof point of success of our prior and current strategy. Within the mix, all 3 segments: consumer, enterprise and wholesale, have delivered growth for the 5 quarters in a row despite the competitive environment. Top line growth has been successfully translated into attractive industry margins being KPN, for example, significantly above the incumbent average EBITDA margin of around 35%. Going forward, we expect to continue seeing sustainable growth in group service revenues. Let's now turn to our ambitions for the coming years, where we have set clearly goals. On average, our group service revenues will grow around 3% per year, where we are targeting continued growth in consumer mobile and further improvement in consumer fixed service revenues, while B2B is expected to continue to grow with a clear [ inflection ] in the large corporate enterprises and [ tailored ] solutions while continuing solid growth performance in the small and medium enterprises segment. Our direct costs are impacted mainly by third-party access costs such as Glaspoort, service revenue mix and inflationary effects. By modernizing our operating model, which will enhance our customer experience, accelerate KPN's time to market and contribute to the next wave of cost efficiencies; we will be able to deliver a lower indirect cost at the end of the strategic period. It is important to mention that some of these savings will be back-end loaded, but will sure support our EBITDA growth. With this plan, we will -- we aim to achieve an acceleration in adjusted EBITDA growth towards approximately 3% CAGR until 2027, supported by sustainable service revenue growth and continued cost control. Our return on capital is solid and it's industry-leading. We intend to keep improving our ROCE, underpinned by our investments, cost savings and expanding growth profile. We foresee to achieve a ROCE of around 15% by 2027. All in all, KPN is a healthy company with a strong balance sheet and generating strong margins with a track record of consistently delivering operationally and creating value. In terms of CapEx, this is expected to remain broadly stable at EUR 1.2 billion until 2026, despite the upward inflationary effects. In 2027, after we have finalized our fiber rollout program, we foresee a material step-down in our CapEx, dropping below EUR 1 billion, as you can see in the slide. Within our CapEx envelope, we see a stable mix between fiber CapEx and nonfiber CapEx in the period of 2024 until 2026. After the fiber program is ended, we plan to return our business at a CapEx-to-sale ratio of around 15% to 16%, which will enable us to materially increase our free cash flow margins whilst staying fully invested. On the free cash flow front, we estimate it will gradually grow in line with EBITDA with another tax step-up to absorb in 2026, which implies a low single-digit CAGR until that year. And when the fiber project is finalized, our capital intensity will drop back to normal levels. As from 2027, we expect a material inflection in our free cash flow, which then will increase to above EUR 1 billion, representing a CAGR of around 7% over the entire period 2024 until 2027. Let me talk now about the shareholder return policy. As I have mentioned a few times today, our financial framework is aimed at long-term value creation for all stakeholders. Therefore, we are committed to returning excess cash to our shareholders. Going forward, our cash margins and strong financial position will enable us to continue delivering attractive shareholder returns with growing dividends, supplemented by share buybacks. For 2024, we have communicated an uplift of 13% to EUR 0.17 dividend per share and a 7% dividend per share CAGR thereafter. The remainder of our free cash flow will be paid out by -- via share buybacks, meaning that over the entire strategic period, we expect to deliver cumulative buybacks up to EUR 1 billion. This means we will effectively distribute 100% of our free cash flow that we generate to our shareholders. And cumulative, our growing dividends and planned buybacks will allow us to return around EUR 3.8 billion in total or about 30% of our current market cap to our shareholders until 2027. Thus, in a nutshell, we will focus on a 337 model to reach a return on capital employed of 15% by the end of the strategic period in 2027. And this will support our long-term value creation story. So to round up, KPN's purpose is clear. We will continue to go out to connect the Netherlands to a sustainable future. Over the coming years, we will focus on execution to secure our long-term competitiveness. And how? We will continue to connect our customers to the digital future, we will continue and we will strengthen our focus on activate those connections, customers and our own organization; and we will continue driving sustainable growth. The evolution towards connect, activate and grow also underlines a shift in focus from rolling out fiber to connecting customers on this network and activating them to unlock the value potential of our networks. Overall, KPN is a high-quality telco, operating in a very attractive market structure with below average leverage and a shareholder-friendly approach. So that is it for me now. Thank you very much for listening. And now let's turn to your questions. I will invite my colleague, Michael Schenk, to take your questions.

I will -- I see some questions incoming, so I will start reading them. Can you explain the key drivers behind your free cash flow generation? And how you plan to sustain it? Michael?

Yes, to answer this question. So on the short term, looking at the free cash flow generation, the -- actually, the growth in sales and EBITDA is a big driver here. So what we said is the 337 framework holding 3% revenue and EBITDA growth and 7% free cash flow growth over the next few years. And the main driver on the free cash flow growth actually on the short term is just simply the EBITDA growth. Then looking at the long term, and as Annia also discussed, in 2027, our CapEx will materially step down. So the fiber rollout will be completed for 80% of the Holland -- of the Netherlands, and this will impact our free cash flow quite significantly on a positive way.

Yes. Thank you, Michael. We have another question stating, what are your growth categories for 2025? As we have mentioned and we described our strategic plan, we have not gone out publicly with the exact drivers. However, we are committed to a CAGR of 3% growth in the full period. So we are continuing to push the 3 segments to grow. We are going to have a strong focus on our cost savings as well in order to achieve also bottom line growth of 3% as we see in the full plan. Yes, we are continuing innovating to support volume growth. We also see that inflation is going down. So price increases are not going to drive the main bulk of the top line, but volume will compensate with it. Another question that we have, how did you account for the financial impact of your investments in 5G and other emerging technologies?

Yes. So in Holland, actually, we had recently a 3.5 gigahertz for 5G spectrum auction. And so how do we -- so the financial impact of this, actually, we don't take it into account in our free cash flow, just in our cash position. Looking at our leverage and our cash position, KPN is quite in a healthy state. So this was quite easy to observe for us. Then the investments in 5G, for instance, upgrading our mobile tower network; is just absorbed within our CapEx envelope of EUR 1.2 billion currently and EUR 1 billion afterwards. So this perfectly fits in the current investment envelope.

Another question we have is, can you disclose your strategies for managing working capital, particularly in terms of inventory and receivables? Well, working capital is a key driver for -- to deliver our free cash flow. And as you -- and as I mentioned before, free cash flow target is quite aggressive, but it's also back-end loaded. We have a special team taking care of variables that implies working capital. And we have seen recently, also starting from last year, that improvement in this area has been done. So yes, that is the plan that we are continuing to see improvements in receivables. So we are not concerned about any credit issues with the customers. And it is already embedded in our strategic plan that it will continue to improve in order to provide -- or to allow us to reach the full free cash flow target. And finally, we have last question, can you speak to your market share in the Netherlands and how you acquire new clients?

Yes. So to answer this question, first, let's take a look at the consumer side of our business. If you look at our -- the broadband market in Holland, there's 2 large parties. So it's KPN and VodafoneZiggo, equally having like 35% to 40% market share, so in the broadband consumer market. In mobile, I think there's 3 large MNOs, Odido, VodafoneZiggo and KPN, having quite similar market shares, roughly similar. And in consumer, I think KPN's strategy to acquire new clients is mostly also offering superior service, right? So we are really focused on keeping our current customer base happy. We also tend to do the 2-year contracts in broadband instead of the previously issued 1-year contracts. And sometimes, we proactively provide some promotions to our current base. We think this is the superior strategy compared to just purely front-book promotions in the markets. And in this way, we try to not only acquire new customers with this proposition, but also keep our current base happy. I think that's important to stretch. Then turning to our business, customers. So looking at the business market, actually, we restructured the whole way of our business B2B portfolio. It is actually -- looking at our SME department or small and medium enterprises, we did the whole restructuring there to make it more modular and to migrate our customers to really future-proof portfolios here, where they can just pick the amount of services they want and just easily can click it in or out of their current services they take from us. This, you can actually see back in the current growth in -- yes, in our SME, so like 10% growth year-on-year each quarter, doing quite healthy. And the market shares there are actually, I think, in favor of KPN, both in mobile and in fixed and actually growing at our sides. Then the large corporate enterprises, so the mobile market is quite competitive there. Odido as a sort of a young company, the challenger brand there, is really trying to gain market share. While only fixed or the broadband side of the business, KPN and also VodafoneZiggo, like traditionally it has quite a large share there, and those are quite stable.

Thank you. Thank you very much, everybody, to join us today. And yes, if you have further questions, please reach out to the IR KPN team. Have a nice day.