Koninklijke KPN NV

F:KPN

Earnings Call Transcript 2020-Q3

[Operator]

Good day, ladies and gentlemen. Welcome to KPN's Third Quarter 2020 Earnings Conference Call. [Operator Instructions]Please note that this event is being recorded. I would now like to turn the call over to your host today, [indiscernible], Head of Investor Relations. You may begin, sir.

[Unknown Executive]

Thank you, and good afternoon, ladies and gentlemen. Thanks for joining us, and welcome to KPN's third quarter 2020 results webcast. With me on the call today are Joost Farwerck, our CEO; and Chris Figee, our CFO. Before turning to the Q3 presentation, I would like to remind you of the safe harbor statement on Page 2 of the slides that also applies to any statements made during this 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 statement. Let's now move to the core of the presentation. I'd like to hand over to our CEO, Joost Farwerck.

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

Yes. Thank you, [indiscernible], and welcome to our third quarter results presentation. Let me first take you through some of our highlights. First of all, in the quarter, we saw EBITDA growing at 1.3%, and we saw solid free cash flow growth. We also continue to deliver on cost savings, which is reflected in the results. Operationally, there were positive signs in the Consumer segment. We saw the postpaid base returning to growth and accelerating inflow of fiber customers fueling stabilizing broadband base. COVID-19 continued to impact our revenues, but lower costs partly mitigate the impact on EBITDA level.I'm proud of our employees who continue to service our customers in these challenging times. We execute on our strategy and with a solid set of results, we're now able to give a clear picture of the full year's outlook. Next, I would like to highlight a few key figures. Corrected for a number of divestments, revenues declined by 3.7% year-on-year. Growth in wholesale was offset by lower revenues from Consumer and Business, roughly 0.7% of this decline is related to COVID-19.EBITDA increased 1.3% year-on-year as the effect of lower revenues was more than offset by good cost control. And free cash flow increased more than 7% year-on-year to EUR 241 million. Chris will give you more details on our financials later in this presentation.Turning to our outlook. In the first 9 months, we are on track with the execution of our strategy while maintaining a robust financial position. We are now able to give a clear picture of our full year outlook. We expect adjusted EBITDA after leases of approximately EUR 2.320 billion, CapEx at EUR 1.1 billion, free cash flow of approximately EUR 750 million. And to be clear, this free cash flow and CapEx outlook includes all acquisition CapEx as well.We reiterate our dividend commitment, and we intend to pay a regular dividend per share of EUR 0.13 over 2020. In the first 9 months of the year, we have seen solid progress on each of our strategic pillars. As we generally do every other year, we will host a strategic update to the market in the afternoon of the 24th of November. On this day, we will provide you with an update of our strategic and financial ambitions for coming years.Fiber is the best and future-proof technology and our organic fiber build increased further in the third quarter, even though this included the summer holidays during which construction capacity is lower. Fiber activations accelerated, providing us solid activation rate of approximately 50% over the 12 months past. And we continue to add new areas where we roll out fiber. We're currently active in 90 areas, and we are reaching completion in 6 of our 25 largest cities. Fiber clearly outperforms copper on all metrics and fuels a stabilizing broadband base. Fiber ARPU is higher than copper. The churn is much lower, and the NPS is a number of points higher. Consumer fiber revenues grew nearly 8% in the third quarter, driven by a growing base and an uplift in ARPU.Fiber service revenues are bound to exceed copper service revenue declines as our rollout is ramping up further. All in all, we see a positive net present value from our fiber investments.Let's now move to the performance of the segments. Fixed Consumer revenues were somewhat lower this quarter, fully driven by a decline of legacy services, such as traditional voice and Digitenne. The trend is starting to turn for mobile service revenues, although still declining at 4.4% year-on-year, this is an improvement compared to the first half of this year.Q3 NPS stood at plus 12. Customer satisfaction is one of our main priorities. So this result is clearly disappointing, and we have a plan in place to restore customer appreciation. This decline has to do with our customers, having more questions and need for support now that the majority is working from home, which is putting pressure on our customer service center, a bit an industry trend and the change in the interface of our IPTV products, leading to questions since some customers need to get used to the new layout and features.Looking at our Consumer KPIs across the third quarter, we can see that the converged base is relatively stable, around 50% of broadband customers and more than 60% of postpaid customers. The total broadband net adds were in line with last quarter and moving towards a stabilizing retail base. The commercial success of our fiber rollout is reflected in 27,000 new fiber customers, and we're confident that this will contribute to an improving broadband base going forward.And after a long period of decline, the mobile postpaid base returned to growth and at the same time, we kept the postpaid ARPU stable at EUR 70. Travel restrictions due to COVID-19 led to lower roaming revenues, and this was partly offset by increased national out-of-bundle usage. We're happy to see the underlying trend developing favorably with improving inflow ARPU from our unlimited bundles and the effect of repricing wearing out.Now we can move to the Business segment. Business revenues declined nearly 8% year-on-year, largely impacted by COVID-19 as we saw lower roaming revenues and delayed IT projects. Also, our strategic customer migrations continue to impact service revenues in the short term. After the migrations, the new propositions provide us significant opportunities for up and cross-sell of additional cloud, security and workspace services.As soon as we obtained the new spectrum license, we switched on our 5G network and introduced distinctive 5G services for our B2B customers, as mentioned in this slide. We are currently the only operator in the Netherlands offering 5G value-added services and supporting businesses in developing new applications and optimizing their process with 5G. We are making solid progress on the migration of our Business customers to the new portfolios. However, the pace was somewhat impacted by COVID as we were often unable to enter the customer's premises. We continue to innovate on our Business product portfolio. For KPN ONE customers, we now provide a 4G backup facility, ensuring greater business continuity. And we added several cloud communication services, such as Broadcom, Microsoft Teams to our smart combination portfolio. And these are indispensable features for teamwork when working from home. Let's move to Wholesale. Correcting for the sale of NLDC, the data centers last year, revenues in Wholesale increased by almost 5%, partly supported by the sale of small assets. We added 22,000 broadband lines in our Wholesale segment. So looking at our total portfolio of Wholesale and retail, we see solid growth of broadband penetration on our network, leading to a total broadband network share of approximately 52% in the Netherlands. We also renewed another long-term MVNO contract in the quarter. All in all, another good quarter for our Wholesale division.And we believe that sustainable business is better business. We have reached some important milestones in this respect, and we also have an ambitious agenda for the years to come. Commit ourselves to the 3 sustainable development goals from the United Nations mentioned in the slides. And during the quarter, we made some nice contributions to these SDGs, as you can see over here. Our efforts in this respect do not go unnoticed, and KPN continues to be recognized by various ratings and benchmarks.Now I would like to hand over to Chris to give you more details on our financials.

[Hans Christian Figee, CFO & Member of Management Board]

Thank you, Joost. Let me summarize our group financials for the first 9 months by explaining like-for-like performance. The adjusted revenues of KPN declined by 2.9% year-on-year, partly attributable to COVID 19. The adjusted EBITDA after leases increased 1.5% year-on-year. Some lower revenues were more than offset by strong cost savings, net-net, leading to a positive result.Our EBITDA margin improved 200 basis points year-over-year to about 45%. And when we compare Q3 of this year to Q3 last year, we see a growing EBITDA. Year-to-date, free cash flow grew by 13% versus the same period last year.Our operating profit was EUR 150 million lower due to several incidentals like the book gain on the sale of NLDC in 2019. However, excluding these incidentals, operating profit would have increased by 21 -- EUR 29 million year-on-year. Similarly, net profit was EUR 144 million lower as it was boosted by the same incident of last year. Excluding these, net profit would have increased by about EUR 31 million, mainly driven by lower financing costs. When it comes to control to cost and cost control, we are continuously digitalizing and simplifying our company, leading to improved services and more efficient operations.We are well on track with our cost-savings program and realized an additional EUR 44 million savings in the third quarter. Also due to COVID, we see lower cost in areas of travel, learning and development and housing and facilities. In total this year, we've reached about EUR 115 million cost savings. In total, since the beginning of the program, we've saved EUR 256 million, and we are confident that we will exceed our EUR 350 million target by the end of the year 2021. We're about 75% of our targets after 7 out of 12 quarters have gone by.Operational free cash flow for the first 9 months of the year stood at EUR 900 million, stable at 23% of revenues. This number was somewhat lower compared to last year, fully driven by different CapEx phasing through the year. In terms of free cash flow, we've seen a strong increase this year. Our free cash flow of nearly EUR 500 million year-to-date was 13% higher year-on-year and moved to also 13% of revenues, a high free cash flow margin. This is a result of lower cash restructuring, lower cash interest, some lower investment in working capital year-to-date and lower cash taxes.We ended the quarter with a strong cash position of about EUR 800 million and expect us to grow further, whilst having paid EUR 381 million as a final spectrum payment and EUR 180 million interim dividend in the quarter. We refinanced a EUR 460 million bond in September.We are committed to being more open about our working capital position, as you can see on this page. Notable effects impacting our working capital position to date are lower trade receivables, mainly driven by lower sales levels. Trade payables are lower due to specific initiatives. Generally speaking, we see a peak of incoming invoice in December, and we see lower accruals driven by settlements, lower interest accruals and bonus payments related to 2019. Our working capital program has yielded tangible benefits, being much less of a drag on free cash flow in the first 9 months of last year. Actually, in the third quarter, working capital contributed positively to the free cash flow, although year-to-date, working capital is still a drag on our cash.The prepayment related to spectrum auction is corrected at the bottom again. It is formally a prepayment but not a working capital item. To be specific, this is the portion of the auction related to the 2,100 megahertz frequency. KPN's total liquidity was strong at the end of the third quarter. It consisted of almost EUR 800 million of cash and EUR 1.25 billion undrawn revolving credit facility. During the quarter, we issued a EUR 600 million bond at a 12-year tenure with a very low coupon of 0.875%. We initiated the issue of EUR 500 million, but so ample demand and the order book was 4.5x oversubscribed. As said, we also redeemed a EUR 460 million bond that was swapped to a fixed rate of just over 1%, lowering cash interest by EUR 5 million next year.In sum, these transactions lower our average cost of debt and increase the maturity profile of our debt book to about 6.4 years. All in all, KPN's liquidity is sufficient, abundant and covers debt maturities for the next 3 years. In terms of balance sheet, our financial position remains solid. At the end of the quarter, our net debt-to-EBITDA ratio increased slightly to 2.4x, driven by the spectrum and interim dividend payments, we expect to drop marginally during the rest of the year. Interest cover ratio improved to 9.2x and the weighted average cost of senior debt was 65 basis points lower than last year. Since we want to be open and transparent, we find important to continuously improve our disclosure. We've consistently delivered more disclosure on critical items and are on track to fulfill and complete our disclosure agenda for the year.In the strategy update planned for the end of November, we'll give more insight into the open points, one, the fiber CapEx, specifically CapEx further into fiber and non-fiber and to household steer by Consumer, specific on RFR reporting and thereby complete our disclosure agenda for the year.So then to summary, to close off this short presentation. KPN had a very healthy financial quarter of EBITDA and free cash flow, both up versus last year. We provide a more specific granular full year outlook and are on track to reach it. The encouraging signs in the Consumer segment, the mobile market showing improvement dynamics, a strong fiber uptake gradually outweighing a decline in copper base.In B2B, we continue to face revenue headwinds that are progressing with consumer migrations and product innovations. In wholesale, we see ongoing success of our fixed and mobile portfolio, indicating a successful open network policy and we remain -- we maintain a robust balance sheet and solid liquidity position.Finally, we look forward to informing you more on our ambitions for the coming years in about 1 month from now.Now back to [indiscernible] and to your questions.

[Unknown Executive]

Thanks, Chris. We can now turn to your questions. [Operator Instructions] Operator, over to you.

[Operator]

[Operator Instructions] Our first question is from Mr. Michael Bishop of Goldman Sachs.

[Michael Bishop, Equity Analyst]

Just 2 questions from me then, please. Firstly, on the FTTH build. As we think about moving into next year and beyond, could you just give us an update in terms of the discussions with respect to contracting more build capacity in the Netherlands and how they're going? And whether you're still thinking the same sort of 500,000 to 600,000 run rate is something to target in '21 and beyond?And the second question is on the mobile service revenue. You mentioned that trends were now turning. So how should we think about the mobile service revenue, again, going into next year as you potentially start to have some easier comps?

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

Yes. Thank you. First, on the fiber build. What we did is scaling up our fiber rollout production capacity to a level that we didn't do for a decade or something like that. So a lot has to do with the lock-in of construction capacity. And that's what we did. Having said that, we're scaling up in a very efficient and solid way.Last year, we did like [ 100,000 ] Fiber to the Home connections. I think this year, we will reach a level of 300,000. So 500,000 to 600,000 is a little bit stretched, to be honest, for next year. For me, it's important to scale up in a decent way to a level of 400,000 or above. And then we're on a scale that we've done before at KPN. And then we're on a scale that we do almost the same amount as the whole consolidated market this year in the Netherlands. For that, we have locked in the capacity. And it's very important for us that we do it in such a way that it is also from a pricing perspective efficient.Mobile service revenues, yes. So first of all, maybe Chris, you can take over. I am -- or we, as a company, are super focused on improving that trend, because for a long period of time, we were under pressure. I think KPN is positioning itself much better in the market, either on the higher end of the propositions with unlimited, also more in the lower-priced segment, although most of the real oil price propositions are eliminated in the market. So I'm happy with the trends, and it's for us, very important to continue.Maybe you want to add something on...

[Hans Christian Figee, CFO & Member of Management Board]

Yes. Michael, on the mobile service revenues, if you look at that one single revenue line, on a sequential basis, they have been actually fairly flat during the year on mobile service revenues. If I look at the progress into current and future quarters and I break it down base time ARPU, base weakness growth for the first time in a long time. Actually, when you look back, the numbers start to grow end of June on a monthly basis. And at this point in time, we still see continued positive base developments so far since June. When it comes to ARPU, our ARPU has been, of course, had a slight decline this year, but all around the 17, so close around to 17. Where in the summer, we expected a more negative impact from roaming, and of course, a negative impact was there, but countered by supported from out-of-bundle calling. So our ARPU with the summer kept better than we actually had hoped for.And then the 2 other elements are the leakage from repricing of our back book is turning less and less. So net inflow values become better. And secondly, we see some ARPU support from more unlimited process. I don't think our ARPU will immediately go to set to 18. But we see, in general, quite encouraging base developments and stable to possibly slightly growing ARPU going forward if we manage to hold on to an increasing share of unlimited. So for mobile service revenues, we actually see quite a good outlook.

[Operator]

Our next question is from Mr. Luigi Minerva of HSBC.

[Luigi Minerva, Senior Analyst]

Yes. The first is on your outlook for CapEx and free cash flow. I think you are presenting a very convincing picture with regards to the fiber case, the fiber upgrades. Likewise, you signaled in the presentation that you may exceed your cost savings targets. So my question is whether you can afford increasing CapEx going forward while preserving still the free cash flow generation that we will see this year. So whether there is enough room on the cost saving side to just reinvest cost savings and CapEx while preserving free cash flow generation.And the second question is on an update on the regulation side. Has the electronic communication code become part of a national law? What is the outlook you are envisaging in terms of particularly Wholesale fiber access?

[Hans Christian Figee, CFO & Member of Management Board]

Okay. Luigi, when it comes to CapEx, you have to wait for more detail till the 24th of November, but I'll give you a few snippets, right? We see highly attractive returns on fiber. We are accelerating the rollout. So going forward, CapEx allocated fiber will [ lower ] go up. On the other hand, we see non-fiber CapEx to come down. We'll save on non-fiber CapEx. And then gradually with the cost opportunity kicking in, that will also provide support to our free cash flow.Now the full -- the final numbers, bear with me, it's only 4 more weeks and we'll give you a more integral view. But the components will be around supporting EBITDA and cash generation of cost savings, slimming down non-fiber CapEx and increasing fiber CapEx, and that will lead to a final outcome. And also to point, of course, at the end of the day, after free cash flow, your dividends, the progression of our dividend that is really sacred. I won't definitely preserve that. But rest, Luigi, that is what I can tell you right now, and for rest, bear with us, in four more weeks, we'll give you the full picture.

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

Yes. And then your question on regulation. Yes. So very guidelines to be implemented mainly with respect to symmetrical access, of course, is what we focus on. Yes. So what we think is that we maintained our open wholesale policy. We allow access to passive infrastructure where possible. There is abundant investments in fiber in the Netherlands. There are at least 2 high-speed fixed connections in every home premises in the Netherlands. So that is what we think, why we don't need an ACM regulation as we used to have in the Netherlands based on the EECC. Although we understand that our regulator, of course, is working on that and we are in close contact with them. We expect ACM to open up a consultation on their policy in the coming months. There's some delay in the Netherlands. So they will implement, but the whole process of the consultation will take longer than planned for, so that will move deeply into next year. Yes. So where we come from is that we appreciate the fact that we need a regulatory framework. Currently, we're not regulated. That is due to all the discussions we had with our regulated -- regulator, excuse me. But we think that we should avoid further price regulation on our access obligation. And the current framework is working quite well. The best proof point is the market, the Dutch market. If you look at what's happening now is that we lost 4,000 consumer broadband customers, and we saw an inflow on also site of 22,000. So other service providers competing against KPN are doing good business on our network. So that's the best proof point. But we're in the middle of the process. We'll take some longer due to delay on the government side, but at the end, it's something we had to cover, of course.

[Operator]

Our next question is from Mr. Usman Ghazi of Berenberg.

[Usman Ghazi, Analyst]

My 2 questions, one on free cash flow, and the other one is on network separation, please. So on free cash flow, I guess you put out the guidance for the full year of EUR 750 million, which is implying that in Q4, the free cash flow could be down around EUR 30 million roughly year-on-year. Given that the first 9 months is up EUR 50 million year-on-year, I mean, why should we expect Q4 free cash flow to be down significantly, particularly given it's a working capital, big working capital inflow quarter? You're obviously doing well on that front. So yes, any color there would be interesting.And then the second question was, I was wondering if you could update us on just the Board or the management thoughts on how you view the advantages or disadvantages of network separation at this point in the deployment cycle of fiber?

[Hans Christian Figee, CFO & Member of Management Board]

Yes. Usman, the first question, I'll take it on our free cash flow. And your point mathematically is correct. A few points coming in when you look at our EBITDA, not our EBITDA is coming in, in cash in this period. At this point in time, you see some delta provisions. Secondly, on the interest rate side, a small point is we've got a -- issued a bond with a short first coupon so there will be some smaller interest payment in December. And finally, indeed, we do see working capital commitment in the fourth quarter that has to do with the phasing of CapEx through the year. So our CapEx is more evenly spread throughout the year than last year.We have often a spike in Q4. This year, Q4 will have the repercussions of CapEx increase in the year. And so -- and then, of course, the fiber ramp-up would also require some prepayments. So it's a combination, mainly on CapEx timing on the fiber component that will have a drag on working capital in the fourth quarter and then some smaller effects being the short risk coupon, so noncash EBITDA or EBITDA that comes in cash, but gradually over time, that ultimately lead to the fourth quarter free cash flow.

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

Yes. And on the topic of network separation, so of course, always an interesting topic in our industry. Yes, first of all, I see the value of having a clear, visible NetCo on one side and a good service provider on the other side. And that's exactly the outcome of our simplification program. We are simplifying the back end and the front end of the company at the same time, but we're moving to a far more clear, visible Netco, Servco model, and it's very interesting to run your company like that.The current value we see is to keep it integrated as one company. And by that, create the most value. Of course, I looked -- or we looked a lot to what's happening in other countries. I think in some countries, network separation was a bit artificial. Splitting up a company with -- in pricing agreements between the Netco and the Servco being artificial as well. But in the Netherlands, that part is moving to a more market pricing. It -- like I just said on the wholesale side, it's working. We're simplifying the big end of our company. We're rolling out more and more fiber, and we're simplifying the Servcos. We had Solcom, Simyo, Telfort, KPN. We took out Telfort.We're migrating the broadband base as we speak. So probably in a couple of years from now, we have a logical moment where you suddenly see a Servco and a Netco being KPN. And that's the outcome of our simplification program. I don't believe in an artificial split in the wrong moment of time.

[Operator]

Our next question is from Mr. Polo Tang of UBS.

[Polo Tang, MD & Head of Telecom Research]

I have 2 questions. The first one is really just about the fiber cost per home passed. So I think previously, you talked about roughly EUR 700 per home passed. But are you seeing the costs come down as you scale up the fiber build and commit to more volumes going forward?And the second question is really just around your Business unit. Because we've obviously seen revenue declines there accelerate to minus 7.9% in Q3 after minus 5.7% in Q2. But can you clarify how much of the step down was because of absence of roaming and how much was because of proactive measures and transformation that you were doing away from Legacy revenues? Or were there other factors? And are there any data points that you can share that would give us comfort that Business revenue declines can ease going forward and that underlying Business trends in the unit are resilient despite COVID-19?

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

Yes. Yes. Thanks, Polo, for your questions. Your first question was on, yes, the fiber rollout costs. Yes. So in the past, we worked above EUR 1,000 per house. We went down and down and down. And then we aim for something like EUR 750, which was related to the areas we picked so it really depends on the area one picks when it comes to rollout costs. On these areas, we do like EUR 700 today. When we move to other areas, could be like EUR 800 or EUR 900. So it's really -- where we roll out, others are rolling -- did roll out in rural areas, for instance. We never did that because that's like EUR 4,000 or EUR 5,000 per household.So it depends on the business model, maybe one-off fee you can ask from your customers that you move in these kind of areas. But on the current rollout, I think, Chris, we do roughly for an activated line between EUR 800 and EUR 900, but that activation is until the FTU included. So it's a Fiber to the Home, moving into a household into the cabinet with an FTU on a wall. So the only thing you need is modem. So if I look at the way we contract now, the contractor's costs are always getting cheaper because of the rollout -- the numbers we give them and the areas we select and time we give them to stay in an area like that.

[Hans Christian Figee, CFO & Member of Management Board]

Yes. The function of, I think, the naked price per home is gradually coming down. It's not a revolution, but gradually coming down. At the same time, if you move from the more dense cities to slightly more the outer suburban areas that tend to have more digging distance. So there's big more meters in the ground. That means that has the upward effect on the cost. So the clear cost per house is coming down a bit, but you sometimes have to dig a bit further if you move away from the highly populated areas to the more suburban areas. This is important, you lock in your production capacity at the right numbers, at the right price that makes it kind of predictable.Polo, when you took a second question on the Business segment, I mean roaming or COVID has a significant impact on the Business segment, mostly on roaming. Interestingly, for example, in the Consumer segment, we saw the roaming drop compensated by more out-of-bundle calling. You don't see it in Business. So I'd estimate that the EBITDA decline in Business is about 60%, driven by COVID-related revenues 40% other. And COVID is -- so [ a lot of it ] is roaming, but it's also networking, IT, hotspots and IT revenues. Now of course, the roaming at some point, it's not going to decline any further. So the year-on-year comps will start to look better in 2021.So I would estimate 60% of the EBITDA decline is COVID, 40% is not. The other 40% has to do with some ARPU pressure in mobile with underlying and a structural decline in fixed voice that is counted by increasing base numbers, but that still leads to a decline. So for a chunk of the decline year-on-year, I think the comps will start to look better next year as some of the roaming cannot drop below 0 and also the uses of hotspot WiFi locations cannot drop below further next year.

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

Yes. And when it comes to B2B, we always talk about the top line pressure in B2B and when it's going to inflect. In the future, I hope to give you more insights on how this is built up between SME, LE and real corporate customers because 50% of the EBITDA we make in B2B is SME. So -- and there, we're much further than on the corporate customers. So it is important that we give you more insights there. So we are more positive than we were on B2B or at least I am more positive than I was on the B2B outlook perhaps 2 years ago. It will not inflect soon, but part of it will, and that's the higher value part. So that is important for us to focus on and to give you more insights in.

[Operator]

Our next question is from Mr. Keval Khiroya of Deutsche Bank.

[Keval Khiroya, Research Analyst]

Two questions, please. One on the FTE reductions and one on working capital. First, on the headcount reduction. Obviously, we have seen a slowdown in the rate of cuts this year and also quite a modest cut in Q3. Would you mind giving us an update on how we should think about the pace of reductions going forward? And anything you can share about discussions with the unions as well.And then second on working capital, you've obviously done a very good job at improving the working capital outflow. Previously, you have discussed that it was to be negative as the fiber rollout ramps up. Is there anything you could share about how we should think about that going forward, whether it will still be the case as fiber continue to ramp up?

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

Yes. Thank you. On FTE reduction, yes, first of all, when COVID-19 started, we took the decision somewhere in March to stop the reorganizations and the request of advices we were going to send to our works councils for the period Q2 and Q3. So we stopped that for 6 months. And we gave it a go a couple of months ago. So we delayed in FTE reduction. We didn't delay in FTE spend. We immediately took the action to send a lot of hire personnel home. So we have a blend of like roughly 10,000 KPN people and 2,500 hired people on a daily base. And we really did a tough action on the hired staff. And now we're scaling up the reorganizations again.So on FTE, we will not meet our original plans, although things are moving up to a speed we are used to, the level we're used to. We're in good conversation with our works council and our unions. And we -- yes, we will continue there. I mean we're simplifying the organization, and we all understand our works council as well that it doesn't make any sense to stop laying off people when you simplify because that's not good for the people either. You can't hostile them in KPN. We're good for our people. We increase salaries. We took all kind of measures to make them comfortable at home. We give them additional payout per month to support them at home. So I think we -- all in all, we did a good job, and it allows us now to continue our reorganizations as well, which is, at the end, good for the company and so good for the people working in KPN.

[Hans Christian Figee, CFO & Member of Management Board]

Yes. When it comes to your working capital question, I mean the upward push on working capital from fiber definitely is there. I mean that's inherent, linked to that piece of -- that business activity, where fiber, you tend to pay more upfront for the non-fiber CapEx. So that increasing -- investing in fiber has an upward push on working capital. We've been able to mitigate some of it, both in our fiber contracting, so arranging payment terms of some of our construction companies and contracting partners and improving the working capital on the non-fiber space by invoicing earlier or paying later, changing payment terms, thinking about rolling billing solutions for our customers, et cetera. So our working capital program has been kind of all-inclusive and broad encompassing many, many features. So that has been able to mitigate some of that fiber impact. At the same time, I can't fully mitigate it because the inherent shift to fiber will create upward push on working capital.And again, we're trying to compensate in many other areas. And I'm proud of what we've achieved so far, the success of it has been pretty good, but there's still an undercurrent of the working capital increase. That is most -- you feed it when you see an increase in fiber. So as we said, also the beginning of the year, the delta in fiber, the increase in fiber commitments, actually, that drives that working capital portion. That's what we experienced this year. But again, I'm pretty proud of what we've achieved and how we've been able to counter some of that. But I can't take it [indiscernible].

[Operator]

Our next question is from Mr. Paul Sidney, Crédit Suisse.

[Paul Sidney, Research Analyst]

Just a couple of questions, please, for me. The first one, just on fiber, can I just clarify some comments you made on the fiber build in response to an earlier question. Did you say that you've done 120,000 by the end of 2019, around 300,000 likely this year, but reaching the 1 million by end of '21 perhaps looks a bit of a stretch, just so I've understood that correctly.And then second question is on the Dutch broadband market. Your retail broadband adds have stabilized, helped by fiber and wholesale continues to do very well. Do you see this now as a much healthier balance between retail and wholesale, especially post the move away from Telfort?

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

Yes. I think to start with your first second question, I think the balance is much healthier because in the past, we saw like us losing 20,000 customers, and we saw 20,000 customers coming in on the wholesale side. So that's not a good picture. The current balance looks much better. Of course, on the retail side, we aim for crossing that 0 line and grow, but it's pretty good leverage on the wholesale side. So we are successful on fiber. The fiber case works. We go above 60% penetration of a lot of areas, but that's done with our, yes, the other service providers, our wholesale customers as well. And a long time ago, I was part of the team that built the fiber case, and we always included wholesale as an important part of the business case because if you want to reach levels of 70% or 80% penetration, yes, it's best for market to do it together with the other providers. So this is a good balance.On fiber build, I didn't mention 1 million not to reach next year, but I think if you look at the line of 120,000 last year, this year, 300,000, yes, then we are going to reach that 1 million, for sure, that I promise you. But probably it's not going to be end of next year, but a quarter later, 2 quarters later. For me, that's not that important. That's just a number, and we will continue to roll out fiber, but we should do it in an efficient way, in a prudent way, keeping an eye on our financial but also operational excellence.We come from an era where fiber NPS was minus 14 because of everything we did in areas before we connected customers. So the current thing is that we execute end-to-end on the fiber value chain that's working quite good. It's a careful process. If we scale up about -- above 400,000, reach a level of 450,000 next year, we do almost 100,000 more than we ever did. So I like the idea of the 1 million in 3 years, but doing like 600,000 per year is a bit too stretched for next year. So I would aim more for 450,000.

[Hans Christian Figee, CFO & Member of Management Board]

Look, I think about we've done 73,000 homes passed in this quarter in the summer, and we'll continue to ramp up. You can see the weekly production scheme going higher and higher, and we'll continue to increase our weekly production in these weeks. So expect the quarterly production in the third quarter of at least 75,000 to possibly be a bit higher. So that means if you think about that, we'll get very close to 1 million. We may miss it by a few months. But if you look at the speed that we were for the quarter, and I think you're going to get to 80,000 to 100,000 per quarter pretty quickly. Then the median we'll reach. It may take a month or 2 longer, but that's kind of the scale of the deviation that we're talking about.And as Joost said, I think I'd rather do it in a measured way being effective and try to convert customers. That to me is the most important thing to be controlled. And then the median we'll reach, and it may take a month or 2 longer, but that's kind of what we're talking about given the scale of -- speed of the median.

[Paul Sidney, Research Analyst]

And just a quick follow-up. Once you hit the 1 million, presumably, the plan is still to just push on and keep on going?

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

Yes. So that's why I say it's -- I mean I don't wake up in the morning with 1 million in my head. Our TDO does, by the way, that's its target. But we're not going to scale up and then suddenly stop. We've been there. And it's super inefficient. So we need a machinery that is working consistently against low-cost efficiently first time right, and we want to see these kind of numbers. We want to see that the connection is first time right and that we don't have to see sent 2 or 3 field engineers.I'll give you an example, we always talk about the rollout cost per homes passed. But behind that is a service engineer, field engineer cost that in the past, we used to send field engineers 3x to a household before we connect a customer real time. So fiber rollouts, engineer and one engineer into the home to install the FTU and then at the end, an engineer to the households to activate the customer. We now designed the way of one engineer taking care of everything. So maybe this contractor costs are not going down, but they do much more for the same amount of money, and they activate customers for us as well. So that all is now in the machinery. We're improving there and scaling that up, in the first time right way and then ending above 400,000, then I feel pretty good, and we don't meet the 1 million next year, but we will meet it, like Chris said, a couple of months later.

[Operator]

Next question is from Steve Malcolm of Redburn go ahead.

[Stephen Paul Malcolm, Research Analyst]

Two questions, please. One just on B2B. I know you don't give us an EBITDA at the moment. Can you give us an idea of what the drag on group EBITDA is from the underlying declines in B2B as of the moment? And I guess what the prize is from a group perspective on stabilizing that number, that would be really helpful.And then just on the price rise, I mean, you take a price rise every June-July every year, but a slightly different year this year. So just understood -- any comments, you've got any feedback from the customer behavior around that price rise? It seems like all the KPIs were pretty solid. But whether you were seeing any sort of particularly different behavior on TV kind of spin-down, fiber, those kinds of things. It would be interesting just to understand how the price rise landed this year relative to previous years.

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

Yes. Thanks. We have to be honest, it landed much better than last year. We are -- yes, we have a new communication chief, by the way, and we really worked on the introduction of the price rise this summer. So we made it less aggressive, and we explained that we do it on a level that we do on the CLA to our own employees. So we increased the CLA to our employees. And on the same level, we increased our tariffs, because we think that all companies should increase their CLAs. So the salaries for the people because of the CPI, a little bit on the positive side, we were there for us, I should say. But at the end, we had a whole storyline buildup on, listen, this is what we do on salaries increase to our people. What we have to do -- yes, more or less the same to the increase of tariffs out in the market because of that. And it landed quite well. It landed much better than last year.So what we learned is that if you not only plan for the price increase and how to do it and introduce it technically, but also anticipate on the way you inform the media, you preparing the media for that and it's very helpful. So not much of a negative impact there. And we did it in the middle of COVID, by the way.

[Hans Christian Figee, CFO & Member of Management Board]

Yes. Steve, good question. Sorry, go ahead.

[Stephen Paul Malcolm, Research Analyst]

I mean, I guess those are lessons that you will maintain in the business for the price rise next year. So we should expect the communication to be similar, increased prices along...

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

Yes. No, absolutely. I mean we aim for a price rise every year as you know. And like I said, what I learned is that communication helps. We really hired one of the best people in the Netherlands. And yes, although we are in communication, we always can do better on communication ourselves. And that's what we did very well here. So we learned from that, and we will continue to be better on that next year.

[Hans Christian Figee, CFO & Member of Management Board]

Steve, to your first question, if you think about the EBITDA today, and you think the delta EBITDA Q3 to Q3 by Q3 '20 to Q3 '19, I mean rounded numbers, think about B2C being about EUR 5 million of the Business segment and EUR 20 million off, and the rest is made up by Wholesale and cost savings in the rest of the business. That gives you the EBITDA delta of Q3 '19 to Q3 '20. That's kind of where it is order of magnitude. So the EUR 20 million of Business segment of, I think 50% to 60% of that is COVID, the rest is underlying business pressure. So that gives you a bit of a feel for the underlying dynamics of results.Now you need to take it with a bit of a grain of salt because, of course, some of our TDO network business works for these segments. So these are not end-to-end numbers, but simply the EBITDA as reported internally, not with full cost allocation, but to give you a view for what the drag is on -- of the Business segment, which -- and COVID and non-COVID part. Hope that helps you.

[Stephen Paul Malcolm, Research Analyst]

Okay. So just to sort of try to revisit the lines, you're saying just over half the EUR 20 million quarterly in B2B is COVID. The rest is underlying. Would it be right to say that if you can stabilize that, there's a mid-tens, nearly tens of millions annual benefits of EBITDA line. Is that a fair assessment?

[Hans Christian Figee, CFO & Member of Management Board]

If you stabilize the COVID portion, you mean?

[Stephen Paul Malcolm, Research Analyst]

Well, we assume the COVID portion comes out or even reverses next year, don't know what next year look like. But we assume that [indiscernible] is one-off and just under half is underlying and you can stabilize that bit. Then the underlying improvement is what I'm trying to say is like to get to stable, would be mid-tens of millions benefit to EBITDA line. Is that fair?

[Hans Christian Figee, CFO & Member of Management Board]

I mean mathematically, you're correct. If you do that, that's right. We just -- the hard work is stabilizing it, right? I mean I'm not sure we can stabilize it over that easy but in an [indiscernible] world, you're correct, but that would be [indiscernible].

[Operator]

Next question is from Mr. Joshua Mills, Exane.

[Joshua Andrew Mills, Research Analyst]

Two from me. First was just on the Net Promoter Scores you showed us for B2C and B2B. Could you give us an idea of how the market NPS has developed over this period? I'm just trying to understand if this is a general frustration around COVID issues and that your position is still quite strong relative to peers? Or if there's a more KPN-specific issue here?And then the second question, just around your network strategy. So we spent a lot of this call discussing your own rollout. And in the past, you've also done kind of bolt-on acquisitions. Just be interested to hear your high-level thoughts on network co-investment. So have you ever thought about doing rollout alongside partners like DELTA Fiber? And if so, do you think that, that would be allowed by the regulator or there are additional conditions to think about?

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

Yes. On the NPS, like I said in my introduction, it is a bit of an industry trend that the NPS is under pressure and not surprisingly because, yes, suddenly from one day to the other, all people started to work from home. And yes, asking for a better support on whatever, TV, WiFi and also suddenly, the full family, especially in the Netherlands when the schools closed, I mean we saw the traffic better and changing after people start to work from home, and that was more or less the peak capacity on 6:00 in the evening. But when the school closed, we more or less -- that peak went up and we have a lot of capacity. So that wasn't a problem. That means that the whole family is depending on that one broadband connection, that's a lifeline of a household suddenly, and that's when people start calling, we have a product out in the market, very successful, twice sold out during COVID called Super WiFi. It's a mash base. You just plug it in and you have much better Wifi. But always people call for this kind of service. So that's what we saw.We also see it as an industry trend. The thing is that we are on NPS, we were much higher than 0. We used all years ago be below 0, and we increased a super high level of 18, I think, beginning of this year. But if you go high, you can fall deeper than the others as well. So we see it coming down over the -- all service providers in the Netherlands and in the industry. But since we were far out the highest in the market, we are falling more points than the others. And yes, it is an important target, a holy grail. The bonus payment for all employees in KPNs depends on the NPS score. So we are obliged to really focus on that. And our network strategy, we did do every once in a while to go in this deal, smaller ones. Usually, we move on a network or we share rollout plans. And after a while we consolidate. That's done on a small scale. We did one last quarter. I forgot the name of that...

[Hans Christian Figee, CFO & Member of Management Board]

[indiscernible]

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

[indiscernible] footprint, but that's all small. So yes, we're always interested in those kind of opportunities when it works out in a positive way for KPN. So if there's anything news on the horizon on that matter, and we will, of course, mention that.

[Hans Christian Figee, CFO & Member of Management Board]

Yes. I mean, Josh, I think the regulator would not necessarily be against it as long as you continue to apply an open network policy on whatever you partner with. We've got an open network policy. So as long as whoever you partner with, he's open to that. I think that I don't see any major regulatory objectives.

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

And interesting point is that every now and then we have complaints about us pushing others aside when they try to roll out fiber. And it always lead to questions from municipalities. So if you share forces with another, yes, that one is solved as well. But -- so it worked in the past, maybe it can work in the future as well.

[Joshua Andrew Mills, Research Analyst]

Great. So just one very small follow-up. On the Net Promoter Scores, are you still on the consumer side ahead of VodafoneZiggo? Or do you get below them as a result of the NPS drop this quarter?

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

Yes. So we are on plus 12 by head. I think they are around 8. But yes, I always focus more on my own performance than Ziggo's, that's my problem, probably, but I think we're above them still.

[Operator]

Next question is from Mr. Ulrich Rathe of Jefferies.

[Ulrich Rathe, Senior European Telecommunications Analyst]

I have 2 questions, please. The first one would be the personnel cost reduction, excluding any divestments, was minus 15% in the third quarter, and it was minus 9% last quarter, so it's much, much faster. I think during your prepared remarks, you talked about slowing down the hired work quite sharply. So I was wondering of that minus 15%, is it possible to get a sense of how much of that is sort of this step down in hired work due to the COVID situation? And how much is more sort of an underlying sustainable rate?And my question is -- the second question is at what point on the Dutch rules would KPN have to disclose the approach of an interested party of a party that might want to take over KPN. What are the rules that at what point the situation has escalated to a point where you have to sort of announce that or talk about it?

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

Yes. Okay. Thank you. Yes. On personnel spend, I mean, 15% is not what we do on an annual level and not what we do year after year. So that is pretty tough. So parts has to do with COVID in the first place. When we realized that we had to close all shops and send all our service centers home, we stopped field engineers for a couple of weeks to work in customer premises. We realize that we had to do something. We kept on paying also all the hired hands, I think, for a month, and that was much better than other companies did in the Netherlands.But then we took the action since we stopped the reorganizations to -- yes, to lay them off. And by that, keep a very good eye on the cost side. Also, costs related to people working like travel expenses, we really stopped, and we did cut a lot there. So -- and also reduction we were planning to do anyway. And by the way, what we also learned is that inefficiencies in our company are suddenly very visible due to COVID-19. And after this pandemic crisis is over, we will benefit from that because we will never go back to the same cost level of hired people, travel expenses, officers spend, et cetera. So part of the COVID reduction, we will probably keep for the years to come. So still, it was a good quarter on personnel spend, I would say, a little bit help by COVID in some kind of a funny way, but...

[Hans Christian Figee, CFO & Member of Management Board]

Yes. I think I'll add, if you look at -- on KPN, if you look at the staff developments, as I said before, the restructuring reorganizations have been delayed somewhat and are being picked up right now. But same time, we've installed a pretty drastic hiring freeze, have looked at the number of new hires in -- like real new hires in the group were like -- they're about 5 to 8 a month, which is quite little when you look at a 10,000 people staff levels. So in fact, installed a hiring freeze. With that, we can still shrink our FTE base somewhat because there's natural attrition that is ongoing. People are still retiring. I think we've saved a lot on, as Joost said, on hired staff, external staff. We're restructuring our shops and the way we operate our shops, so finding ways to cut back on cost. I think we're going to continue to be low and reducing on FTE spend, but again, maybe not at the same negative in pace this quarter.

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

And then your second question was when we are obliged to publish information in case of approach by PE. Yes, so we are obliged to immediately publish price-sensitive information in general, provided it's sufficiently concrete. So the necessity to publish anything in case of an approach by a party will highly depend on the concreteness of any proposal, and of course, on our consideration on, yes, on such a proposal. So yes, whenever there is price-sensitive information, we have to inform you there. Yes, there's no reason to publish anything on the rumor, I mean.

[Operator]

Our next question is from Ms. Siyi He of Citibank.

[Siyi He, Research Analyst]

I have 2, please. The first part is on your B2B top line. I understand that the business migration has been one of the biggest drags to your top line development over the past few years. And now given that the majority of the heavy lifting of customer migration almost done, I wonder if you could help us to think about what's the next step for your B2B plan. And how should we think about the trajectory going forward?And my second question is on Huawei. I understand that you're in the process of replacing Ericsson with Huawei in your antenna network. And do you consider there could be a potential risk to your current mobile network strategy, given what's happened in Europe, in general, towards Huawei equipment?And I wonder if you can just give us idea hypothetically, if Netherlands were to ban Huawei in both core and the antenna network, how do you think a potential cost to incur and whether there is continuous plan built into the current CapEx budget?

[Hans Christian Figee, CFO & Member of Management Board]

Well, on the first question on the B2B top line that, some of the revenue declines have been self-inflicted due to migrations. We've made quite some progress there, especially on the SME side. I think in the large corporate segment, some migrations are still to be done. And possibly, if you may have revenue consequences.We're carefully weighing the timing of that. We've taken into account the lessons learned from the previous migration and seeing how to manage it and how to limit the revenue implications. So we're not done there yet, but we've made quite some strong progress. What does it mean going forward?Well, look, if you look at our SME, our B2B business, SME is about 1/3 of revenues by over 60%, 70% of EBITDA in that business. There, most of the migrations are behind us. Our focus will be on cross-sell and up-sell. Already, we're seeing gradually clients taking on more than 2 products and taking up our integral product proposition. So focus will be on the SME segment, growing there through higher ARPU and mobile getting unlimited in the SME segment out, increasing our cross-sell.In the corporate segment, you'll see -- may see some remaining migrations there from revenue implications. But in the larger corporate segment, we really focus on the value, not on volume because volume there immediately goes at the expense of your margins. So that's kind of how we think about the Business segment with some migrations to be done and then focus on SME on cross-sell, up-sell, increasing it like a more-for-more strategy also with regards to unlimited and our mobile base. And in the larger corporate segment, continue to focus on value first and volume later.

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

Yes. And on the Huawei, yes, let me first say, we have a multi-vendor policy, so we use in our networks, Ericsson, Nokia, and also Huawei in some areas. We're in constant dialogue with our government on the topic of Chinese technology. We also look a lot at what's happening in other West European countries. We had a lot of contact with Deutsche Telekom, BT, et cetera, and what they are doing. We already announced our policy before our government did anything on this topic. And we said we're not -- we're going to replace our critical systems for Western technology over time. So in the life cycle of assets, that is a very important one. And you're right, we are moving Huawei in our radio access network. But last week, we announced that we will build a new 5G core network with Ericsson.We were working on a tender for a long time because in the life cycle, we need to upgrade our core network in the coming 2 years. And Huawei is in that domain as well presented, and we're going to phase them out and move Ericsson in. So when it comes to critical domains, we think it's best to move in other suppliers. When we are in the process of upgrading or rebuilding an asset. And on radio, yes, we are in constant dialogue with our government, and we think we move according the guidelines we get from our government.

[Operator]

Our next question is from Mr. Frederic Boulan of Bank of America.

[Frederic Emile Alfred Boulan, Senior Analyst]

Two questions from my side. First of all, on the free cash flow outlook. So if I understand your 1 million fiber ambition for 2021 is unchanged, if anything, you might be a few quarters late. And beyond that, you're saying that the incremental rollout could be to a degree absorbed by reductions elsewhere.So I'm trying to understand a bit what it means for your free cash flow. You've not reiterated the 2021 outlook today, which implies a step-up in cash flow in 2021. So can you detail whether the broader framework is still valid? Or is there other moving parts we should be aware of, working capital elsewhere?And then second, just to follow up on the previous question on potential PE interest, whether you can just clarify for us whether you've had discussions with any potential partners? And what do you think would be guarantee that a potential buyer would have to be on the table for an offer to be acceptable for KPN, the Board, the foundation, et cetera?

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

Yes. So to start on the PE topic, I think, like I said, there were some rumors in the market, and I have nothing to add to that. We don't react on rumors. If there's anything we have to mention to the market, we will do that in a prudent way, but we don't react on rumors. So that's for the PE topic.Now free cash flow next year. Maybe -- so we gave more than clear guidance for 2020. We're planning to give -- to provide you a regular strategy update on the 24th of November. And since we're entering 2021, and it's the final year of the plan we announced in 2018, and we have new management in place and we think it's a good moment in time to inform you further on the 24th and like usual, that will include our strategic ambitions, not for '21 only, but for the period of 2021, 2023. And we will give then a fully integrated picture of our strategy. And without going into further details today, maybe, yes, Chris, you can give some background to our thinking.

[Hans Christian Figee, CFO & Member of Management Board]

Yes. I think I mean to like -- we will say what I would do, we protect our progressive dividends. You'll see -- you may see some more allocation to fiber in different forms, see how we can do more and can we do faster. I mean, of course, we talked about the 1 million homes, but there are other opportunities as well.For example, in business parks, where you can invest in. So there's a number of fiber initiatives we'll undertake. So fiber CapEx will go up and we'll be scaling non-fiber CapEx down. And then some of that will lead to more guidance for next year. But yes, best to bear with us until the 24th of November, if you don't mind.

[Joost F.E. Farwerck, Chairman of Management Board & CEO]

Okay. That's it. Thanks for joining us today on the Q3 call. If you have any further questions, please contact the IR team at KPN. Thank you.

[Hans Christian Figee, CFO & Member of Management Board]

Thank you. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's presentation. Thank you for your participation. You may now disconnect your line. I wish you all a very good day.