Koninklijke KPN NV

F:KPN

Earnings Call Transcript 2018-Q2

[Bisera Grubesic, Head of Investor Relations]

Good afternoon, everyone. I am Bisera Grubesic, I'm the new Head of IR of KPN. For those who don't know me yet, I'm coming from TomTom, and I'm very much looking forward to getting to know you all and to working together with you. Ladies and gentlemen, welcome to KPN's Second Quarter 2018 Results Presentation. Thank you for joining us here live in the room, and thank you also for dialing in into the conference call and to our webcast.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 this presentation. In particular, today's presentation may include forward-looking statements, including the company's expectations with respect to its outlook, which were also included in the press release published this morning. All such statements are subject to safe harbor. I would now like to hand over to our CEO, Maximo Ibarra.

[Maximo Ibarra, Chairman of the Management Board & CEO]

Thanks very much, Bisera. Good afternoon, everyone. Welcome to all of you here, and welcome also to all the people that are listening over the webcast. Let me start by sharing the 3 main takeaways from the first quarter. The first one is that we see ongoing strong results from our successful focus on value and convergence in Consumer, differentiating us in a competitive mobile market. The second one is about the transformation of the Business segment that is taking shape, and we remain the leading business service provider. The third one is about the fiber. We are on track to deliver our full year outlook and the Simplification program. We have already delivered EUR 175 million of run rate savings halfway through the second wave. Over the past month, I found that one of the great things and joys of leading the KPN team is that the company has been -- always been able to innovate. And we have a dedicated and centralized data analytics team that is supporting the entire company, continuously finding ways to become more digital and to move forward as a data-driven company. Employees also embrace a more agile way of working. This already resulted in interesting partnerships, like the one with Tencent and [ Matrix ]. Furthermore, we're making the first inroads into network virtualization, which will deliver exciting opportunities. Intelligent, self-healing networks will be more reliable, while enabling us to instantly bring new services to our customers. This is clearly required in a country with one of the best digital infrastructures in the world, and our customers are demanding more and more the best quality of service, and we need to be able to develop and introduce these services extremely fast to exceed their expectations. Last year, we already shared with you the left part of the chart, illustrating our targeted household approach. Simplification efforts have been made in order to strengthen the way we address customers. A single client ID across all products and customer touch points provide great insights and customer interaction and how we can optimize our service. It's always important because when we compare the ID of our customers to a pool of aggregated and anonymized client profiles, we can identify all the specific actions that we need to implement in order to improve the customer experience and to provide opportunities for upsell and cross-sell. If we take, for instance, a customer who calls our customer service with a random question, as soon as he or she is identified by our system, our customer service agent can always pop up -- will have a pop-up message with 3 personalized actions. For example, we can offer an improved connection or we can improve the in-home WiFi experience by simply switching the modem to the 5-gigahertz side. Another example is that the systems identifies the customer as having fixed or mobile services from KPN and is nearing the end of contract for the other service with another provider. We can then offer to become a converged customer at KPN with all the benefits attached. We see that this approach is already delivering tangible results. We see lower churn, which compared to the control group is going down by 6.5%; increasing convergence penetration, same approach is plus 95%; and when it comes to the broadband adding mobile, we have improved, an increase of 40%. And the system learns from certain clients be more responsive to particular actions. The system becomes more accurate and beneficial for both KPN and all our customers. We are also optimizing the customer journey. Interruptions of customers can occur in our type of business. But by improving the customer journey when this happens, we can enhance NPS and reduce costs. One of the things we do is to optimize the customer's online experience through a more intuitive Frequently Asked Questions section. With video guidance, we promote online self-help and prevent online to off-line leakage. When we started the program 2 years ago, the majority of our customers interacting with KPN via the call center and the shops. And from the ones that started their journey online, almost 1/3 still needed to go off-line to find a solution. As a result, less than 30% of customers found the solution online. Currently, this situation has been completely reversed, and now it's nearly 75% of customers that find the solution online. It's exactly the opposite. And still, we see ways to improve this further, for instance, by facilitating customers to install software updates for their modem or set-top boxes themselves. In addition to this, we found a very simple yet elegant solution to lower call center costs. We identified that 30% of the calls related to interruptions were responsible for 80% of costs. So we found that customer service agents could -- who spend more time on solving problems perform significantly better. They send fewer engineers to customers' premises. They send replacement hardware less often, and they have a higher first-call resolution. In total, we expect to save approximately EUR 10 million from further optimizing the customer journey. Our targeted household approach results in further traction to our leading convergent proposition. Already more than 2/3 of the KPN brand SIMs are now part of the fixed mobile bundle. We have been particularly successful in cross-selling additional SIMs to broadband households. The number of SIM cards per fixed mobile household has increased by 12% in the last few years. The main benefit of our high converged customer base is their loyalty. The churn of a typical fixed mobile household with one SIM is roughly 50% lower than the average broadband-only proposition. When adding additional SIM cards to a fixed mobile household, we see the churn halves again. So it's 50% of the 50%. Increased customer loyalty leads to significantly lower marketing and retention costs as well. The Dutch mobile market remains very competitive, especially in the no-frills simplified segment of the mobile-only market. And as a result, mobile service revenues, excluding the effect of regulation, declined 3.5% year-on-year. We are firmly focused on our consumer strategy around convergence and high value. In Q2, we again sold mobile share at our no-frills brand Telfort and Simyo, but I'm pleased that the KPN brand remains resilient. The single-play broadband base was somehow weaker this quarter, impacted by migrations to our new proposition for smaller businesses and rationalization of one of our local brands. Revenues from our fixed propositions continue to grow, driven by a growing ARPU per household. In recent months, we launched new fixed propositions for both our KPN and Telfort brand. For our KPN customers, we implemented more-for-more, offering increased access speeds, and we raised price by EUR 2.50. These propositions continue to be based on a skinny bundle, which customers can combine with value-added services as they please. We also increased prices for our Telfort brand. But our convergent Telfort customers now get twice the mobile data allowance alongside one of the other benefits. Previously, they could only pick 1 of the 4 benefits. All in all, we believe these new propositions clearly demonstrate our focus on value and position us well for further growth. But now let's turn to the business. The business transformation is taking shape. As companies move away from tailor-made single-play services, KPN continues to enable the ongoing transformation towards standardized and integrated solutions. Overall, we see that our strategy of integrated solution in SME is working. Our KPN ONE product recorded solid inflow of 33,000 customers during the quarter, while our exposure to traditional services is shrinking considerably. Business revenues were in line with last year, driven by growth in professional services and IT services, partly offset by lower revenues from traditional single play. Professional services were driven by increased order intake in previous quarters. IT services was driven by security, and we also posted some nonrecurring hardware revenues. In Q4, we introduced a new proposition for self-employed and SoHo customers with less than 5 employees. This new proposition is based on the consumer proposition but offers additional B2B benefits such as dedicated customer service and a promise to be back online in 12 hours. We now see some inflow of new customers to this proposition, and as expected, we also see some cannibalization from our consumer proposition. However, we also see a margin uplift between EUR 5 and EUR 10 per user per month, adding significantly to the customer lifetime value. So while these migrations impact our headline consumer net adds, we are actually pleased that we can extract additional value from these customers. Finally in business, we continue to land significant corporate deals where we focus on combining communication and relevant IT services. We continue to strengthen our leading position in the financial services and food retail segments and see strong customer demand for our workspace solutions. Before we move to the financials, and I will give the floor to Jan Kees, I would like to inform you that we aim to provide you with an update of our strategy and ambitions during a Capital Markets Day. We intend to organize this at the end of November and expect to confirm a date soon. Invitations will be sent out in due course. For now, let me hand over to Jan Kees, who will take you through the financials. Thanks very much.

[Jan Cornelis De Jager, CFO & Member of the Management Board]

Thank you, Maximo. And good afternoon, everyone. Let me start by updating you on our Simplification efforts as we are now halfway through our second wave. As most of you know, the Simplification program is a multiyear program to modernize our IT infrastructure to tomorrow's needs. This will optimize our customer experience and business processes. Next to quality improvements, we can also significantly lower our spend levels as we are able to shut down legacy IT systems. Since the end of 2016, this has resulted in EUR 175 million of further run rate savings. So as we are halfway through the second program, we are well on track to realize our upgraded savings target of at least EUR 350 million by the end of 2019. In April, we completed the migration of Telfort business customers to our new state-of-the-art mobile business support system, the BSS. This means that we operate only one IT platform for all our mobile customers no matter whether they are a consumer or corporate customer and regardless of brand. We also completed the integration of multiple delivery systems into the RoutIT distribution platform for KPN ONE, our flagship products for SMEs. These IT integration efforts now mean our customers can change services more rapidly, stop or start services instantly and choose more services if they want, all of it done on an online app, which is what our customers want today. This results in higher customer satisfaction. Now let's turn to the financials for the second quarter. In the second quarter, the effect of the regulation on our revenues totaled EUR 29 million. Excluding this effect, our adjusted revenues would have grown by 0.5%. Growth was driven by a higher ARPU per household in Consumer and by professional and IT services in Business. This was partly offset by lower Wholesale revenues and continued price pressure in mobile across all segments. For the Business segment, we are aiming for a significant trend improvement in revenues again for full year 2018. However, revenues in Business can be more volatile than in other segments. And the tailwind on revenues from last year's acquisitions will phase out towards the end of the year. The effect of reduced MTA tariffs will only lapse after the first 2 weeks of July, so we will continue to see a small effect in Q3. The effect of roaming regulation on revenues expired as of June 15. So this was the final quarter of such an impact. But as data usage continue to grow significantly, we do expect to see an ongoing effect of roaming on traffic costs. In the second quarter, adjusted EBITDA grew by 1.3%, which is partly supported by intra-year OpEx phasing. The lower cost of goods and services were mainly related to less traffic costs from low-margin MTA revenues. Therefore, the higher EBITDA is largely due to lower IT and TI expenses. This is clearly the result of ongoing savings related to the Simplification program and continuous improvements driven by digitalization initiatives. Please bear in mind that we expect to reach an agreement with the labor unions on a new collective labor agreement in the third quarter. This agreement entails that we offer all our employees a salary increase retrospectively as of the 1st of January. This salary increase, including the expenses applicable to the first half of 2018, will be visible as a high single-digit million amount in our Q3 results. However, if we would have included the additional personnel expenses in Q2, we would still have seen EBITDA growth and some solid margin expansion. Needless to say, we are happy with the results. Now let's turn to free cash flow. Over the 6 months -- the first 6 months, free cash flow grew almost EUR 100 million compared to last year. Growth was driven by less impact from change in working capital, lower interest paid due to low [ cross-sell ] level and higher EBITDA. But note, the first half of 2018 free cash flow was partly supported by different phasing of working capital compared to the first half of 2017. Let me summarize our financial position and share our intentions with respect to our euro hybrid bond. Net debt was in line with Q1. The cash-out for our final dividend payment was offset by free cash flow growth and the sale of Telefónica Deutschland during the quarter. At the end of Q2, we owned a 6.3% stake in Telefónica Deutschland. At 2.5x, our net debt-to-EBITDA ratio remains solid. This includes 0.4x from the equity credit we received on our hybrids. And talking about our hybrids, we today announced our intention to fully redeem the EUR 1.1 billion hybrid at its first call date on the 14th September of this year, and we will do so from our existing cash balances. We feel that a realignment of the proportion of hybrid debt is appropriate given our current solid financial position and the successful execution of our strategy since the [ issuers ] in 2030. Moreover, following the disposal of our international assets, our balance sheet has shrunk considerably, allowing for less hybrid capacity. Following the redemption of the euro hybrid, we will save EUR 67 million in annual coupon payments as of September 2019. And at that point in time, we will be -- this will be used according to our standard excess cash policy: first, operational and financial flexibility; second, small in-country M&A; and third, shareholder remuneration. Let me now move through the outlook and some concluding remarks. Our outlook for the full year 2018 remains unchanged. Full year adjusted EBITDA will be in line with last year. CapEx will be roughly EUR 1.1 billion, somewhat lower than what we spent in 2017. And third, free cash flow will grow versus the level of 2017. And we also confirm our guidance for the full year regular dividend of EUR 0.12 per share, which represents an increase of 9% year-on-year. An interim dividend of EUR 0.04 per share will be paid in the coming days. So to summarize, in Consumer, we differentiate ourselves through our successful focus on value and convergence. In Business, the transformation is taking shape, and we are again recognized as the leading business service provider. And we are well on track to deliver on the Simplification program that will enable us towards an exciting new era of virtualized networks and services. Thank you all. And now we will take your questions.

[Bisera Grubesic, Head of Investor Relations]

Okay, we are ready to start with the Q&A. [Operator Instructions]

[Yin Kin Tang, Managing Director and Head of Telecom Research]

It's Polo Tang from UBS. I just have 2 questions. So the first question is really just in terms of regulation. So what are your latest thoughts in terms of the impact of Wholesale cable access, is the risk of lost Wholesale revenues and the risk of more retail competition? Second question is really just about revenue growth because, Jan Kees, you've highlighted the lapping out in terms of record revenue drag in terms of June and July. So I'm just wondering how optimistic you are in terms of the group being able to deliver positive revenue growth going forward.

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes, I will answer the first one on regulation. It's still too early to say exactly what's going to happen. What we know is that the ACM is going to notify European Commission in the next weeks. Then the European Commission will take approximately 4 weeks to provide a feedback. As I already said in different occasions, KPN has already offered ACM the possibility to have an alternative solution. We have already long-term contracts with other companies in the Netherlands, with T-Mobile and Tele2. These are really long term, and we also offer the European -- the ACM to supervise the development of the contract. So these are good contracts that have been signed on a voluntary basis, very long term. There could be a [ solicitor ] provision from the ACM. So we absolutely thought and think that this was the best solution. We will see what's going to be the final decision, and then we'll take up our conclusions.

[Jan Cornelis De Jager, CFO & Member of the Management Board]

Yes. On the revenue, well, for the midterm, we see underlyingly a lot of improvements also in Business. But as I said in my voiceover, in Business there are still some tailwinds on acquisitions, also some one-offs, for example, some hardware deals. So underlyingly, yes, we see improvements. I see -- I'm optimistic for the midterm. But on a Q-to-Q basis, it's not something that you could say now we have seen the inflection. That's why also we have been reiterating there is some volatility in Business. So keep that in mind. Adjusted for regulation impact, which will phase out, but also looking at acquisitions that will also phase out towards the end of the year, I'm -- for the midterm, I'm optimistic especially also on the margin, looking at how we are doing and performing on cost reductions. I'm very positive on how we -- I see the margin development. But on revenues, for the short term on Q-to-Q basis. Don't look too much on this Q only to see now this has been the inflection. There is always some volatility. And in the end, margin is also very important, of course, for you because where we generate cash flow from. And I see debt underlyingly, clearly, also improving. So yes, midterm revenues, every quarter underlyingly is a bit better. No, it's not yet the de-inflection quarter for business. Margin is in all segments going into the right direction.

[Daniel Morris, Research Analyst]

Daniel Morris from Barclays. I've got 2 as well, please. So first of all, Maximo, I wondered if we could get your thoughts on potential for incremental fiber deployment. You've obviously got 30% coverage already, very impressive, double coppers into every home and well-upgraded network. But I guess a few things are changing. We've obviously got cable networks pushing on to DOCSIS 3.1 1-gigabit services. And also the cost of deploying fiber, I think, is generally coming down. And maybe as you think about transformation, that's another reason to do incremental fiber. So just your thoughts on whether you could think about an acceleration in the fiber deployment. Second question, just around the price increase that you've put through. Can you give us some color on how that's landed? It's obviously a similar level on an absolute basis as last year, but has it landed better, worse or the same? And then related to the prior question, cable wholesale regulation, does that make you feel different about the ability to price in future? Or is that not a core concern?

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes, thoughts on fiber. You know very well that we have what we call the hybrid approach. Approximately, in this moment, 80% of the households are already on Fiber to the Cabinet and Fiber to the Home. We believe that when it comes to the midterm, long term, and the rollout of fiber, definitely we will go into an approach where we have to accelerate the fiber infrastructure. But not only in terms of Fiber to the Home, it's going to be in some areas upgrade of the copper. It will be in some other areas Fiber to the Home directly. And in some other areas, we will play with a hybrid wireless fiber solution. Everything we do and everything we will do will be based on a very smart approach. We have a very sophisticated data analytics team. We are now leveraging this team in order to understand exactly where to go and when to go. That's not necessarily to roll out an infrastructure everywhere just for the sake of rolling it out. But it's important to understand where the demand is, what is the return of investment, what is the best technology that you need to implement. And of course, in terms of the market approach or the marketing approach, it's also important to understand which value proposition you need to deliver. So the approach is absolutely very rational. We are also monitoring and trying to understand better through the right insights what the demand from the customer is. That's the other side of the opportunity. And based on that and so we can understand when we can cross-sell broadband to mobile, mobile to broadband. The convergence remains absolutely the priority 1A. It's future proof. It can defend and protect the revenues of the -- of KPN in the future vis-à-vis the super-high pricing pressure that we have on the mobile stand-alone. So the approach is good return on investment. It's right timing and right technology in the different geographies in the Netherlands. But definitely, we need to keep going and accelerating our investments depending on, of course, these 2 together. Then there's a question again on the cable regulation, right? This was your third question?

[Daniel Morris, Research Analyst]

On the price [indiscernible].

[Maximo Ibarra, Chairman of the Management Board & CEO]

On the price -- price related to regulation. Frankly speaking, we -- as I said, we need to wait for the decision. We need to understand what will be the right approach of the ACM the moment they could decide to go for cable regulation. I don't think that the impact is going to be a significant impact. That is my personal view. The contracts that we already in place and the companies where -- which we have agreements they have already made some investments in order to access our network. The moment we go for a cable regulation, the same players the moment they could decide to get there, they should also make other investments. This is absolutely not a very positive situation. So I think that if we going to the regulation, maybe there could be some impacts. We need to understand which these impacts could be. But my personal opinion is that, that impact is not too harsh our P&L in a significant way.

[Jan Cornelis De Jager, CFO & Member of the Management Board]

And as to the question on the price increase. Reaction of the consumer, it has been very benign, especially also because our largest competitor has implemented roughly the same price increase. And we recorded a record high consumer NPS in Q2. So we did not see significant different levels of churn as you would normally expect.

[Keval Khiroya, Research Analyst]

It's Keval Khiroya from Deutsche Bank, and 2 questions as well, please. And first, we have seen a bit of pressure on the first half on your broadband as a consumer. I understand the market was a little bit more promotional as well. How should we think about the rest of the year? Do you think the broadband momentum can improve in the market? And secondly, B2B, Jan Kees, you mentioned obviously we have had some benefit from M&A. Can you give us the revenue growth trend excluding the M&A?

[Maximo Ibarra, Chairman of the Management Board & CEO]

Can you please repeat the first one and second? I couldn't hear it well.

[Keval Khiroya, Research Analyst]

Sure. I mean, in the Consumer segment, we did see some pressure on broadband momentum on the net adds. How should we think about the broadband momentum for the rest of the year? Do you think the net adds can go back to flat or maybe even positive?

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes, yes, clear. Yes, of course, on the -- there is some pressure in the market in particular on the single-play propositions and broadband as well [ thus ]. The trend in the second quarter is slightly better than the one in the first quarter. You also need to consider that for the broadband proposition there has been some migrations from the Consumer segment to the new SoHo proposition that we launched at the end of 2017. As we already shared in the presentation, that has led to an increase in terms of margin, between EUR 5 and EUR 10, so it's a positive move. But of course, it has impacted a bit negatively the net adds of the broadband proposition on Consumer. We see a better trend in the last few weeks.

[Jan Cornelis De Jager, CFO & Member of the Management Board]

As to the tailwind of acquisitions, it's -- we didn't disclose it. I can say that it's a few percentage points. But still underlyingly, if you would exclude that, you still see underlying some improving trends driven by -- well, we have signed some -- more corporate deals over the last quarters. And they're also now starting really to generate revenues. We see growth in IT services. Some of it is acquisitions, but some of it is also doing very well on its own organically. But we still, of course, have some headwinds as well, rationalization and migration away from traditional services. As you know, new technologies like KPN ONE are in the end, in the future supported because they can allow us to upsell and cross-sell services. And we actually also find ways to monetize on that, but it takes time. And there's, of course, also in Business price pressure and regulation in -- both in -- because of competition in mobile only and because of the regulation, but all in all improving underlying trends. But if you would take away completely M&A tailwind, that would be few percentage points less, so it would be a slight decline.

[Ulrich Rathe, Senior European Telecommunications Analyst]

Ulrich Rathe from Jefferies. Two questions. The first one would be in these contracts with the [ alternets ] that you're describing that are very long term in nature, are there significant volume commitments behind it? Do they have rate clauses? Or is there -- I mean, I'm trying to essentially understand is there any way to wiggle out if there's a very attractive offer coming through because of regulation on the cable side. Or have they locked themselves into significant volumes? If you can sort of shed a light on that. Obviously, these are private contracts. They probably don't us to discuss details, but sort of just give us a sense of what's going on there. And the second question is, when you described the network strategy, you described a sort of a very almost -- I mean, if I want to take the other side of the argument, a slightly fragmented approach, right? There a clever solution for every region in a mix of different technologies. Does that not increase the marketing complexity? And does have a risk also sort of a consumer perception issues if you essentially have a solution per street and it's becoming very difficult for people to really see what they can buy from KPN rather than a nationwide offer on standardized terms with standardized performance?

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes, let me start from the -- from your second question. That is the big difference between what I call the -- a traditional telecom operator and a more sophisticated digital operator. We have the opportunity by leveraging the skills that we have the company has developed over the last years to finally go from an approach where one size fits all to an approach where we can really build tailor-made solutions. On technology, you know very well that consumers they not understand too much what you offer in terms of technology. What they portend to have is the right speed, the right capacity, the right stability, the right throughput and performance. On the marketing side, what they want is an offer that can allow them to get a seamless proposition, so a convergent one. The idea of getting street by street or city by city has 2 objectives. The first one is more for KPN in terms of investment is to be more efficient, and the second one is to have a much better marketing approach, which means that our time to market can improve. We can accelerate the migrations from corporate, in the case of Fiber to the Home, for example, so we can field networks more rapidly. At that time, when we do that, of course, we can increase the payback period, and the return on investment will be much better. The good thing of this approach is that everything but complicated. I mean, the moment you have customer insights, you have the right monitoring of the geographies, you can understand exactly how customers are behaving, then you can also run and roll out your networking in a way that you can really measure now what is the real efficient way. The combination of these 2 makes the exercise simple for the customer and much more efficient for the company. So I'm very positive about that because we start seeing results in this direction. About your first question, which is the contracts, of course, we cannot discuss the contracts and all the characteristics of the contacts with you. But what I can tell you is 2 things. The first one is that those contracts are particularly positive for our partners, are long term. And at the same time if for whatever reason they decided to switch to a potential other network in case we go forward with cable regulation, that would be particularly expensive because they have already made some investments in order to access the network. So if they have to change into another network, this will be particularly complicated.

[Frederic Emile Alfred Boulan, Senior Analyst]

It's Fred Boulan from Bank of America. First of all, just to follow up on the Business side. Trying to understand, you mentioned some one-off around hardware as well. So if we strip out everything, we're still around minus 3, minus 4, so just to try to understand where we are right now. And then within that in terms of mix, you have very strong growth in new services, pretty heavy declines in legacy. I guess they come with very different margins. So if you could explain a little bit how you see that dynamic evolving in the next few years and how we should think about EBITDA trajectory there. And then lastly, if I can just ask around expectations. So you start the year very strongly from an EBITDA perspective. I understand why you want to keep a guidance stable, considering the wage increase, for instance, you mentioned and roaming. Are you comfortable with EBITDA being at least stable? And equally around free cash flow, I think we collectively have you generating around EUR 800 million of free cash flow in your definition this year. How do you feel about that?

[Jan Cornelis De Jager, CFO & Member of the Management Board]

First all -- first of all, on the B2B revenue trend. We didn't explicitly disclose the different underlying figures. But if you look at the underlying figures, they would be small single-digits decline, but it's -- but still better than we have seeing. So the trends -- also the underlying trend is improving. And even though some of the new services have -- traditionally, you would look at them to be at lower margins, our OpEx reductions now making the company more efficient are that successful and that I would argue that I see improving margin trends also in Business going forward. So again, this is also something more like trend-wise that you would want to have a look at. But certainly going forward, I see margin improvement as we have seen also for the whole company but also happening in Business as well, driven certainly also for a big -- a significant part by rationalization and making the company more efficient. And there's still a lot of room left for this. Then for this year's EBITDA, there are several reasons why we stick to the guidance. The guidance is not flat. It's in line with -- within parameters of minus 1, plus 1, so somewhere it will land between that. And yes, it -- I have certainly more confidence today than at the beginning of the year that we will have a strong stabilization in debt in that figure. But we did not change our guidance, so I'm not also -- I'm not going to do that in this answer, of course, because we do see some OpEx phasing. As I -- and I indicated some examples. They are not big. There are some small elements, but together it's -- 1% is already -- well, it's -- are very small margins that we're talking about now. Is it 0% or 0.5%? It's small stuff for the whole year. So that's why I included those examples, and we reiterated our guidance of in-line EBITDA. Especially, I do see this OpEx phasing happening. And also for our free cash flow, we reiterate our guidance of growing free cash flow compared to the level of 2017. There's some elements that are -- they're positive in the development, for sure. But also one item in particular I want to also point out that works the other way around is that probably as a result of a successful reorganization that we have done also last year, some of the cash-out of debt reauthorization of last year is actually accounted for in this year. And that's also what I said at our Q4 figures. And that is also what will happen. So all in all the drivers on the free cash flow are very good, solid, but there's no reason for us to change the guidance as to growing free cash flow compared to 2017.

[Paul Sidney, Research Analyst]

Paul Sidney from Crédit Suisse. Just a couple of questions as well, please. Can you give a bit more detail on the overall B2B market in the Netherlands? Is it growing, stable, declining? And within that, are you now starting to take market share, given the transformation measures you've made over the last few years? And then just -- and secondly, on the consumer mobile market, there's a lot of pressure still at the bottom end in the no-frills segment. Do you think a move from 4 to 3 players will improve the competitive levels at the bottom end or worsen them?

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes. The competitive landscape in the Netherlands, I think, is not very different from other markets. There is just one important distinction that we have to make, is that we have 2 trends. One trend is the single-play markets, I mean, when customers are subscribing from -- just for broadband or are subscribing for mobile only. And the second trend is when customers are subscribing for convergent propositions. On convergent propositions, I think the Netherlands is particularly developed if compared to other markets. This is a very positive news. Our intention is to strengthen it, to make it even more compelling and to make our leadership even stronger. When it comes to the mobile only, in the Netherlands we have quite a number of players. There are mobile virtual operators. There is like quite a big number of value propositions in the market and different pricing. So the pressure is there. And when we look at KPN, for some brands, the ones that are more the budget brands, of course, we have more pressure. But the important thing is that for our flagship brand KPN, we are not seeing particularly pressure there. So it means that all our efforts, which is defending the flagship brand from competition, are absolutely giving the right results. So churn rate is stable. We don't see particular any strong cannibalizations, so things are getting better. So it's a brand that has a stable customer base. Broadband is what we already shared. We see some internal migration from Consumer to Business because of the new SoHo value proposition. It's very interesting because in the end all in all it's just adding value to the whole KPN. And then of course, our effort is to increase the convergent on both broadband and mobile, which is exactly currently happening. More than 65% of the KPN customers are already converged, and this number is increasing. So that is the best way of responding to a market that has quite high competitive pressure.Sorry?

[Paul Sidney, Research Analyst]

The question for the overall market on B2B.

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes, the overall market B2B is a bit different. B2B KPN has already quite significant market share in different segments. You know that the B2B is one market, but in the end, it has 4 segments inside: the SoHo, small-medium enterprise, large enterprise and corporate. They all have different nuances. On the small-medium enterprise, we are protecting well our customer base for the simple reason that we have already decided to migrate from legacy services to the new platform that is future proof. We are -- keep increasing the number of customers on that platform. This will give us the opportunity to cross-sell, upsell not only to communication -- other communication services but to other services as well, like security. So that is absolutely like a way and an important driver for increasing our ARPU. Large enterprise is the same, bigger customers, but we are in -- our intention is also to migrate those customers to the new platform in order to achieve exactly the same results. In the corporate segment, where we have more tailor-made solutions, we see also tangible results of our efforts in being profitable but at the same time in being able to provide new services that we have acquired recently in the market through our M&A process. And that is strengthening our leadership as well. So it's a competitive market, but our position is particularly strong. As Jan Kees said in the previous -- in his previous answer, we still have room for further rationalization, simplification of the platforms and the products, and this will lead to a potential increase of our margins. So that's why we are particularly positive about that.

[Usman Ghazi, Analyst of Telecom]

It's Usman Ghazi from Berenberg. I've got 2 questions, please. The first one is just on the balance sheet. Jan Kees, you said that you would redeem the EUR 1.1 billion hybrid bond with cash on hand. I mean, if I look at the half year, you've got around EUR 1 billion of cash, EUR 400 million of investments. So I mean, how much cash do you think KPN needs to be holding post the hybrid? Just trying to understand if you look to raise a bit more debt to give you a cash buffer or EUR 300 million of cash in this case, post hybrid, is a decent level to operate. The second question was just on the Business segment. I mean, if I look at the last 2, 3 years, I mean, acquisitions are a regular feature in the Business segment, right? Every year, you're making acquisitions. Is it right for us to try and strip out the acquisition impact? Or to think that there'll be a lapping effect in Q4 because you're probably going to go and do a few more bolt-ons in the segment over the second half or over the remaining -- over the midterm?

[Jan Cornelis De Jager, CFO & Member of the Management Board]

As to the balance sheet, yes, so there's EUR 1.1 billion in cash but also some money market funds. The total is really a bit more than EUR 1.4 billion, EUR 1.5 billion. So that's a comfortable position to do the euro hybrid. The interim dividend, we also have to pay coming days. Then -- it depends on our total cash flow profile, but we will also generate, of course, in the second half extra cash. So that's also I am done taking into account as well. Even a bit more phasing normally in the second year. So it's a good position. Typically, a few hundred million euros would be a very good cash position. It depends also on how we are financed, but still comfortable looking forward towards the next redemption of a senior bond, which is only due next year. So that gives us a very good position and a comfortable position, and it will also generate less coupon payment. As I said, the EUR 67 million will be saved from 2019 going forward. So enough cash for to do the call on euro as well as pay the dividends without any refinancing needs at the moment. Then B2B acquisitions. Well, they probably be -- this year it will be less than last year. So that's why we also have been indicating that we expect to do less B2B. We are now integrating a lot of B2B acquisitions that we have done last 2 years, and we are in that process. We have given priority to that. Of course, it will be opportunity driven. If there's a right -- as for the right price, we will have in the Netherlands smaller. If it's small and it's fitting in our strategy, then we will have to look at it. But at this moment, we are more focused towards the integration of the acquisitions that we have done. So there will be somewhat less tailwind because of new acquisitions this and next year probably.

[Luigi Minerva, Senior Analyst]

It's Luigi Minerva from HSBC. Two questions, please. The first one is on the Simplification program. And I mean, just particularly in how your progress on the digitalization feeds into the Simplification program. And I presume that the more you get advanced with the digitalization, you will get more ideas, you will discover new areas. At the same time the Simplification program needs to be delivered, and there needs to be a plan to deliver. So how does the interaction between these 2 processes work? And how do you prioritize new initiatives? And the second question is on 5G. And -- now if we think about the CapEx outlook over the next 3 years, how much 5G CapEx is in your budget? And are you comfortable that 5G can be deployed within the guided CapEx envelope?

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes. Your first question about Simplification. The good thing when -- Simplification works on 2 different product tracks. On one hand, you have digital technologies and some digital skills that can allow you to recognize areas where you can simplify your processes, your platforms in particular, the technology that you use, migration from the legacy to new platforms. This is one track. The second one is just the simplification of the processes, the moment the company becomes leaner because of the transformation of the technology. So the good thing is that the more you do, the more appetite you have and the more opportunities you see. Now in this moment, we have different areas that we are looking at carefully. One has been already mentioned, rollout of the network. That is absolutely priority 1A because we have already seen that there are big, big benefits the moment you implement that in a way that you can utilize the digital information that you have in the company and also the ability to look at the customer insights. This is an important area. And the second one, of course, is when it comes to virtualization of the network, the ability to define the capacity that you need to deliver in specific areas based on demand. This is the second area. There are many more, but all have exactly the same point in common, which is the fact that the more you do, the more opportunity you see. So back to your question. We have now a way of simplification. We are working on new waves of simplification, thanks to digital transformation. And of course, we see the possibility of improving, strengthening, accelerating our, yes, transformation simplification process. The second question about the CapEx on 5G. If we compare the -- what we will do on 5G to what has been done in the past for the 4G and 3G, the approach here is going to be different. We don't see a massive deployment of 5G investments or the geography with the approach of let's roll out first and then we'll see what are the impacts. We will have here the chance to really target investments in the territory based on the capacity that we need. This is because of dense urban areas require more capacity, so their rollout, of course, will have the priority. And also, you know that we are in this moment working on several trials with different partners, not only technology partners but also partners from other industries, in order to understand what are the real verticals and ecosystems that we could explore, thanks to 5G, like automation, smart cities, in the automotives as well. So we are trying to understand which are the ones that can deliver better services in order to also go for them with the right time to market in the future and have the right investments in the say as well.

[Luigi Minerva, Senior Analyst]

So if you think about your 15% to 16% CapEx over sales medium-term ambition, if I'm correct, that includes 5G. Can we -- or is that a downside risk to that medium-term ambition coming from 5G?

[Jan Cornelis De Jager, CFO & Member of the Management Board]

At that moment, we have said we don't know about 5G yet. So that's what we have then said. We said it will trend downwards to industry averages, which were down 15% to 17%. But I think more importantly so is that also we are very well positioned comparatively in the Netherlands for that because the 5G will only bring you the 5G benefit not only, as Maximo told, on a case-by-case basis, more case driven rather than a onetime rollout, as we have seen in 4G. But also the benefits are brought in by low latency and a dense fiber network, high bandwidth, high quality of the network, which requires a different kind of network topology with a high percentage of fiber but also with core functions and fertilized core functions very close actually to the base stations. And with our fertilized-ready metro core network with 162 cached stations and already 80% of our sites connected to fiber, we are very well positioned against competition in the Netherlands to be very efficient in 5G upgrades in the future. And that will help us certainly from a competitive perspective as well. For the rest, we will look at how, as Maximo told, 5G will develop and how we will fit in the total CapEx envelope, also using some reallocation as well.

[Jonathan Dann]

Jonathan Dann from RBC. I had sort of 3 questions, but they're very easy ones. The NPS in the Business division, it looks -- while it seems to have improved year-on-year, it seems that it's sort of improved in the second half but then worsened again. But I guess, given you've been cutting prices, I guess I'm surprised it's still stubbornly kind of mid-single-digit negative. So I guess, what are people still unhappy with? Second one, I guess, what's the motivation behind the Capital Markets Day in November at all? I guess, I imagine it's a lot of work for everybody to organize. So I guess, why -- what sort of can we expect from that day? And then a final one. I remember years ago KPN was going to sell property as part of the fiber rollout. And I suppose as the network sort of moves to the edge, do you find -- do you still have lots of empty buildings that you're going to suddenly start sort of monetizing as edge data centers or monetize as luxury apartment blocks?

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes, take the first 2. On the NPS, the underlying trend for the NPS in the business is improving. When you look at the NPS, in particular for specific quarters, sometimes, as you said, you need to see if there is a specific price in action. But that has always a short-term impact. So for that quarter specifically, the NPS can have like not necessarily an improvement vis-à-vis the quarter before. But in general, that will maybe change in the following quarter. So pricing has a very short-term impact. So we are positive that NPS will continue to improve. It will continue to improve because the service that we are delivering is improving thanks to the transformation of our platform. So the legacy -- from legacy to the new platform, that has a significant improvement in the quality of service delivered. The fact that you can cross-sell, that you can buy additional services and you can define that on your own in a very simple way, that has absolutely super high value for customers. So that's why we are positive in the underlying trend. The Capital Markets Day is just a day where we're going to update you about the strategy of KPN. The previous Capital Day for the 2016, '17, '18. Now we need to update you on 2019, '20 and '21. So the purpose is to really update on the strategy and update on our ambitions. The third one?

[Jan Cornelis De Jager, CFO & Member of the Management Board]

Yes. As to the property buildings, yes, we do have a lot of buildings, more than 1,000 technical buildings, of which in the near future most of them I expect to be -- that we can decommission them. Will that bring in a lot of money on selling them for very expensive apartments buildings? I'm afraid not because the most valuable ones in Amsterdam, Rotterdam, The Hague, Utrecht have been sold already, and we are renting them now. And the ones less valuable, we still own. I think the most important benefit though is in OpEx savings because those buildings are not only costing some money, also in rent, but especially if you have them they cost energy, maintenance and people running around there to do stuff. Always if you have a building, there's also some FTEs also involved there. So simplifying the network, moving to the edge and to the metro core locations and only have street cabinets very close by, 162 metro core locations and 4 satellite locations, will in the end especially save us a lot of maintenance cost, further energy cost and FTE cost as well in total. And that's the biggest -- and also equipment, of course, moving to more generic hardware, more software defined. That's much more important than the one-off -- well, sale price of some of the buildings.

[Siyi He, Vice President]

Siyi He from Citigroup. I have 2, please. And the first one, I just want to ask about the cost movement in the second half because you have mentioned that you see some tailwinds and headwinds on cost. And specifically, you mentioned about staff wage and the roaming impact and the OpEx phasing. I was wondering if you could quantify how much that impact would be for the second half. And also, if you can talk about what the phasing will look like for your remaining EUR 175 million cost-saving run rate is going to look like for next year, that would be good. And the second question, I just want to follow up on the CapEx question earlier. Given that you have a very rational approach to fiber and 5G, I was thinking whether the 2016 target of 15% to 17% is still valid in the medium term. And should we start to consider that CapEx is gradually coming down towards that level?

[Jan Cornelis De Jager, CFO & Member of the Management Board]

Okay, so a lot of questions.

[Maximo Ibarra, Chairman of the Management Board & CEO]

You do the first one, I go for the...

[Jan Cornelis De Jager, CFO & Member of the Management Board]

Yes. So as to the staff cost, roaming cost, et cetera, et cetera, so I already disclosed and I keep it to that, that the staff costs will be a high single-digit number in Q3; 2/3 of that is related to the first half of the year. So high single-digit million number in total; 2/3 of that is [ single ] in the first half. And of course, the rest is just in Q3 and will be that amount also in Q4. And on roaming, whilst the revenue effect has been leveled off in -- at the 15th of June, we expect people to increase the usage. First of all, you have the normal data increases that we see year-on-year. But also here there are some behavioral effects as well to be expected for people now really knowing that they can for free in the EU roam if they have a big data allowance. Also, we have the iTV app that we have. The interactive television app is now able to roam in the EU, with most of the content that we have on that app. Whilst first, it was by geographical location. It was limited to the Netherlands. Now it's -- most of the content is also available in Europe. So also on the campaign, people can now watch like normal Dutch television in France or Italy, for example. And it will also be some extra data. Although that said, to be fair, the roaming until now the impact because of much better visitor roaming and lower unit costs that we have to buy our -- to our roaming partners, the total roaming effect until now this year has been a bit more benign than we have expected ourselves. So we still have some conservatism in that because we do not know the effect for the second half. That's why we have -- want to look at it, especially this and next month. But until now, it was much -- it was more benign than we have expected. Especially because of more visitor roaming in the Netherlands, now there is more in demand now by other European tourists and because our unit price has been more favorable than expected.

[Maximo Ibarra, Chairman of the Management Board & CEO]

Yes. On the CapEx, the -- one important message is that we are not going to increase the CapEx envelope. We believe we are doing all the right things. As we already mentioned, we are working, and as you said as well, more in terms of having a very rational approach: hybrid access on one hand; virtualization of the network on the second hand. We are also working in integrating the IT platforms. At the same time, we have the possibility to look at new ways of simplification. We are already investing in order to have further simplification with digital technologies. And the other important aspect is that we are looking carefully at the CapEx mix that the company has in order to shift from areas where we still have lower return to other areas that have a much higher return.

[Bisera Grubesic, Head of Investor Relations]

We are now like to ask the final question, if there is still something that hasn't been answered.

[Usman Ghazi, Analyst of Telecom]

It's Usman from Berenberg again. It's a more general question. I mean, obviously, you've indicated you're progressing well on cost savings. There's potentially more to go for. Is there any pressure from the regulators to kind of pass on those cost savings in the form of lower wholesale prices and the rest of that is [ competed ] away so that on the wholesale side or from your corporate customers who can see that you're delivering on all these cost savings and they're coming back to you and saying, "Look, we want lower prices."

[Maximo Ibarra, Chairman of the Management Board & CEO]

No, there is in this moment no pressure on that, no indications on transferring cost savings into additional benefit for customers, even though our mission at KPN is to improve customer service continuously thanks to these cost savings. But we don't have any pressure from any externals [ further ] in this direction.

[Bisera Grubesic, Head of Investor Relations]

All right. This is the end of today's presentation. Thank you all very much for joining us today, and I'd like to wish you a great day. Thank you.