Koninklijke KPN NV

AEX:KPN

Earnings Call Transcript 2022-Q1

[Operator]

Good day, ladies and gentlemen. Welcome to KPN's First Quarter 2022 Earnings Webcast and Conference Call. Please note that this event is being recorded. [Operator Instructions]

I will now turn the call over to your host for today, Reinout van Ierschot, Head of Investor Relations. You may begin.

[Reinout van Ierschot, executive]

Thank you, and good afternoon, ladies and gentlemen. Thanks for joining us. Welcome to KPN's First Quarter 2022 Results Webcast. With me today are Joost Farwerck, our CEO; and Chris Figee, our CFO.

As usual, before turning to our presentation, I'd like to remind you of the safe harbor on Page 2 of the slides, which also applies to any statements made during this presentation. In particular, today's presentation may include forward-looking statements, including KPN'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.

Let me now hand over to our CEO, Joost Farwerck.

[Joost Farwerck, executive]

Thank you, Reinout, and welcome, everyone. Yes, we've made a good start to the year. In the first quarter, our mass-market service revenues continue to grow, supporting service revenue growth for the group as a whole. Growth was visible in all our mass-market segments. So SME continued to make a strong contribution, and we're on track to stabilize our total business segment service revenues. In Consumer, Fiber and our Fixed-Mobile portfolio are delivering revenue growth every quarter. Mobile service revenues are growing and in Fixed, the trend is stabilizing. And wholesale continued to show solid growth with revenues up 6%, supported by our successful open access policy.

We rolled out fiber to 75,000 households, or if one were to include [ Glaspoort ], the joint venture, 111,000 in the first quarter. The investments we are making to our networks and services continue to pay off. For example, Umlaut benchmarking expert recognized KPN is the best mobile network, not only in the Netherlands, but even in the world. And all in all, this quarter, we have seen encouraging service revenue developments with strong EBITDA growth and free cash flow generation.

And while we see the impact from rising costs due to inflation, these have already been -- these are reflected in our outlook. So we remain confident to deliver on the full year 2022 outlook and ambitions for 2023.

Now on the 1st of April, KPN informed the ACM about its intentions to amend wholesale access terms on our fiber network for 8 years. ACM started the consultation. And once the clear binding by ACM, this offer will secure long-term regulatory certainty for all market participants. We continue to make good progress against the strategic and financial ambitions of our strategy accelerate to grow, and we remain confident that this strategy will continue to create long-term sustainable value for all our stakeholders.

In the first quarter, like I just said, we rolled out 75,000 households. This figure is slightly lower than other quarters, mainly due to timing of project deliveries. And jointly, with that joint venture, we now cover approximately 42% of the Netherlands with fiber, and we expect to reach around 80% of Dutch households by the end of 2026. Once we reach that point, we expect CapEx to come down to a much lower and sustainable level. As we continue to roll out fiber, our growing fiber footprint will result in an improved penetration rate for retail and wholesale. And in fact, our retail fiber base is likely to surpass our copper base in this quarter, Q2.

We see all this bearing fruit in our financials. Looking at our Q1 results, we currently generate about EUR 830 million of [ annualized ] fiber service revenues, and this number is growing rapidly. In Q1, our consumer fiber revenues increased by 90% year-on-year and surpassed our copper service revenues for the first time, driven by a growing base and attractive ARPU. All in all, fiber is clearly at the heart of our strategy to create long-term value for all stakeholders.

Now let's take a look at the Consumer segment. Adjusted consumer service revenues increased 1.5% year-on-year. This was supported by an EUR 8 million one-off correction in the first quarter last year. Corrected for this one-off, adjusted current consumer revenues increased 0.3%. Since the third quarter, we've been able to show consistent service revenue growth, and this has been driven by continued mobile service revenue growth, supported by solid customer inflow and the continued success of our Fixed-Mobile convergence strategy. Also, customer satisfaction remains one of our top priority, and it has been pleasing to see our efforts pay off in that area.

Now a deeper look into our first quarter KPIs. We saw solid fiber inflow reflected by 42,000 new fiber customers offsetting copper churn. This led to 7,000 broadband net adds. The rise in net additions was partly supported by the launch of new content in our interface like Viaplay. Fixed ARPU increased 2.6% year-on-year. And combined and excluding the impact of the one-off correction I mentioned last year, this led to broadly stable fixed service revenues in the first quarter.

As you can see the service revenue trend is somewhat weaker than seen in previous quarters and next to a continued decline in legacy services and lower traffic. This is also due to a shift from growth to net revenue reporting of content packages. So a small top line impact, but not on margin generation. Nonetheless, underlying trends are improving as fiber broadband service revenues growth continues to more than offset the copper decline.

We continue to see solid trends in mobile. Our postpaid base increased by 21,000 and our postpaid ARPU was broadly stable. Combined, this all led to a 2% growth in mobile service revenues.

And now on the B2B. The overall service revenue trend in business is moving in the right direction, I would say. While there's still a slight year-on-year decline of 0.4%, this was significantly better than the previous quarters. And SME is the main driver of growth, driven by solid commercial momentum in both broadband and mobile. The performance in LCE and Tailored Solutions was in line with expectations. And as we highlighted already earlier, it will take us some more time to deliver the turnaround we expect to see in LCE, but with all the experience we have in SME, we noted that this will happen not far from now.

Business Net Promoter Score remained at a positive level of plus 4. Customers continue to value KPN for the stability, the reliability and quality of our networks and services. And in B2B, that is a great number, comparing ourselves to competition. There are the numbers begin with a minus. To improve visibility, LCE and Tailored Solution revenues have been restated a bit, with LCE service revenues now also, including the revenues from core telco product from Tailored Solutions. And the latter are now fully reflecting project-related work and bespoke services. Across the board, we are seeing improving revenue trends. And this, combined with the year-on-year improvement in NPS, means that we are confident that we will stabilize business service revenues by the end of this year.

Wholesale. In Wholesale, service revenues continued to grow solidly in the first quarter, mainly driven by further based growth in broadband and both and mobile. We added 14,000 broadband lines, 26,000 postpaid SIMs in the quarter.

Now on ACM regulation. As we have said, our open access wholesale model is as you've seen in the drivers of the fiber case and integral part of our strategy. And through our wholesale activities, we support the digitalization of the Netherlands by fostering competition and innovation. Wholesale also allows us to further optimize network utilization and investing in the long-term quality of Dutch infrastructure.

On the 1st of April, we informed ACM about our intentions to amend the fiber wholesale access tariffs. And this initiative makes our open fiber network even more attractive for wholesale customers and importantly, offers consumers a wide choice of service providers. The amended offer secures competitive conditions and tariffs for a period of 8 years. And with this, we create long-term certainty for KPN and all market participants. And this amended offers conditional on ACM's decision to declare binding. And to do so, ACM has published this draft decision two weeks ago, which has been shared with the market for consultation taking a total of 6 weeks.

With this, let me now hand over to Chris to give you more details on our financials. Chris?

[Hans Figee, executive]

Thank you, Joost. Let me now take you through our financial performance. Overall, I'm pleased with the development of our key financial metrics this quarter. Our year-on-year growth numbers this quarter are somewhat inflated due to the EUR 8 million one-off noncash correction in B2C fixed service revenues in the first quarter of last year. We exclude this one-off number in the trend of a number of metrics to illustrate a true and fair.

[Technical Difficulty]

[Operator]

Ladies and gentlemen, one moment please. Ladies and gentlemen, please hold while we solve the technical issues.

Go ahead.

[Hans Figee, executive]

I guess we got disconnected. Chris again. So let me restart from the financial pages, Page 12 of our presentation. Apologies for the disconnect.

I was saying, we're pleased with the development of our key financial metrics on this quarter. Our year-on-year growth numbers were somewhat inflated due to the EUR 8 million one-off noncash correction and B2C fixed service revenues in the first quarter last year. We exclude this one-off in a trend of a number of metrics illustrated through underlying performance. We will refer to the term underlying numbers to make the appropriate and fair comparison.

Now let me highlight a few figures -- key figures for Q1. Adjusted revenues increased 1.6% year-on-year, driven by growth in mass-market service revenues, partly offset by lower service revenue from LCE and Tailored Solutions. Corrected for the one-off last year, the adjusted underlying revenues increased 1% year-on-year. Second, adjusted EBITDA after leases increased 4.5% year-on-year for an underlying plus 3.1%. This is driven by both higher revenues and lower cost base. The EBITDA margin increased 130 basis points to 45.3%.

In the first quarter, cost savings from further simplification and digitization of the company were partly offset by inflationary effects, translating into EUR 8 million of net indirect OpEx savings, thus absorbing, for example, some of the energy cost increases. With this, we remain on track to realize about EUR 50 million of indirect cost savings in 2022.

Third, our free cash flow increased almost 70% compared to last year. This is mainly due to higher EBITDA and lower CapEx, and that was a result of inter-year phasing, partly offset by the phasing of working capital. More on the underlying cash developments later in this presentation.

Our sustainable mass-market service revenue growth has been driven by healthy trends across all segments. It also led to our group service revenues rising by 1.1% on an underlying basis compared to last year. This is an important proof point of our strategic progress towards sustainable top line growth for the group. All three mass-market segments contributed to the underlying 2.5% growth in Q1. Wholesale Service revenue was up 6% year-on-year, mainly driven by broadband and mobile and some support from several smaller incidentals. SME service revenues grew by 9.3%, driven by the success of our [ KPN EEN ] portfolio and partly also to a relatively easy comparison base.

In Consumer, our total service revenues grew by 0.3% on an underlying basis. Within the segment, mobile service revenues continued to grow and recorded a 2% increase. In Fixed, fiber service revenue growth is outstripping the decline in copper. And as Joost said, fiber service revenues now exceed those of copper. However, the growth of total consumer broadband service revenues was still offset by declining legacy services and the effects of change from gross to net revenue accounting for content packages.

Through this, all of it, we reported a small decline of fixed consumer revenues of minus 0.4%. But if we look at the two underlying numbers, we adjust for the accounting change and for the revenue recognition last year, our fixed service revenues, which have been flat in Q1 of total consumer revenues, growing about 0.8%. That's a better reflection of the underlying reality at Consumer Fixed. We feel confident that our mass-market service revenues will continue to grow during the year.

And on cash. At EUR 206 million, our free cash flow was sustainably higher than last year -- substantially higher than last year and sustainably as well, and the margin improved to almost 60% of revenues. This improvement was mainly a result of EBITDA growth, lower CapEx amid inter-year phasing and lower cash interest paid, partly offset by the phasing of working capital. All in all, we started the year well in terms of cash generation. However, it's clear that we will not see a 70% growth rate in cash every quarter.

If we strip out the CapEx delta for the last year that we see as temporary, we still see solid underlying and sustainable growth and free cash flow. So looking ahead, we expect to see some fluctuation in this number during the year, but simultaneously we remain very confident to deliver on our free cash flow target.

Finally, we ended the quarter with a strong cash position despite redeeming an over EUR 600 million senior bond with a 4.25% coupon in March, which will drive about EUR 25 million of interest ratings for 2023. We continue to have a strong and resilient balance sheet at the end of March. As a result of the bond redemption and other corporate actions we took last year, our average cost of senior debt improved by more than 40 basis points year-on-year.

In Q1, net debt declined by EUR 163 million, mainly driven by the free cash flow generation during the quarter. The leverage ratio of KPN sends a 2.2x EBITDA, comfortably below our seeding of 2.5x and we further enhanced our interest cover. Total liquidity remained robust at the end of the quarter. It consists of EUR 1.7 billion in cash and short-term investments and our undrawn revolving credit facility. This covers debt maturities for the next 3 years.

Reassured by our current financial performance and good strategic progress, there is no change to our 2022 outlook, nor the ambitions for 2023 we gave to you in January. We remain confident.

To summarize, KPN had a strong quarter start to the year, displaying the success of our strategy. We see positive developments in Consumer, SME and Wholesale. Our mass-market service revenues continued to grow healthily. B2B service revenue is expected to stabilize at the latest end of the year, but possibly already in H2, we are on the verge of sustainable top line growth for the entire group.

Our EBITDA and free cash flow margins continue to develop favorably, and we feel confident about the cash-generating ability of our group. To me, KPN demonstrates healthy margin, earnings and cash flow resilience in these turbulent times. The fiber roll out run rate has maintained a good pace and has proven attractive return profile. And of this, KPN has now put itself on the path towards sustainably growing revenues, EBITDA and free cash flow and corresponding growth in shareholder returns.

As such, we reiterate outlook for this year plus our ambitions for 2023 and have strengthened in our confidence when it comes to delivering on our strategy.

Thanks for listening. Now last turn to your questions.

[Joost Farwerck, executive]

Thank you, Chris. And please, I would like to remind you to limit yourself to 2 questions. Over to you, operator.

[Operator]

[Operator Instructions] The first question is from Mr. Keval Khiroya, Deutsche Bank.

[Keval Khiroya, analyst]

I have two questions, if I may. So firstly, you've hopefully said that the inflationary effects in the business will be absorbed. But can you update us on the magnitude and source of those inflationary impacts across wages, energy and any other areas? And secondly, I appreciate the new wholesale proposal is under consultation. But with this new proposal in mind, can you provide some color on how we should think about the short- and medium-term growth prospects for the wholesale broadband revenues?

[Hans Figee, executive]

Okay. Keval, thanks. On inflation, let me go through a few components on wage. We have a CLA agreement that we set up last year in December. That talks about a 2.7% CLA increase, annual increase, plus people growing pay scale around 1.1%. So total wage cost will grow about 3.5% to 3.7% during the year. On energy, we think the net effect is between EUR 6 million and EUR 8 million for the year procured most of our energy for the year already forward. So that actually -- in terms of inflation on the two most important components, other cost structures are reasonably fixed. So when it comes to our OpEx, I do see, of course, EUR 6 million to EUR 7 million -- and EUR 6 million to EUR 8 million of energy cost increase. That's something that we should absorb -- that we will absorb in the EBITDA.

Other areas of inflation mostly result in CapEx, not in OpEx, where you see higher prices for set-top boxes, modems, et cetera, but we think we can absorb it within the current EUR 1.2 billion budget. So for this year, the impact is relatively limited. As said, our wages are locked in and energy prices are also locked in. And the remainder of cost increases, we think we can also absorb with lower volumes of, for example, our FTE base is shrinking quite rapidly. We've lost year-on-year about 800 FTEs. Natural attrition is going up, so that should help. Productivity improvements should help absorb the inflation.

When it comes to wholesale growth prospects, yes, I would think that the lower wholesale tariffs would support higher penetration levels. What the exact number will be, I don't know. Today, we're about 14,000 new broadband net adds for the quarter. We've been around 5,000 a month for the past few months -- for the last 6 months, with some fluctuation on average has been around that. So I don't have a crystal ball to see how much our wholesale customers are going to sell more, but I think there's some upside for that number. 10% to 20% growth is not off given the new tariffs. But of course, we need to see -- it's for them to realize that.

[Operator]

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

[Luigi Minerva, analyst]

Yes. It's on B2B. Obviously, the SMEs trend was very impressive this quarter, plus 9% year-on-year. And so I was wondering how do you see this developing in the next few quarters, whether it's sustainable or we should be more prudent? And then on the overall B2B inflection point, which you indicated would be in the second half of the year, probably you're running a bit ahead of schedule, so how do you see that evolving as well?

And perhaps more broadly on the impact on your B2B business from the economic outlook. The situation is uncertain in some European countries. We are seeing signs of negative economic growth. So you see signs in the economy in the Netherlands that may derail the EBIT -- the turnaround of your B2B business. And my other question is on the CPI pass-through. So what are your expectations for July -- for June, July when you would increase prices.

[Joost Farwerck, executive]

Well, on B2B, we're happy with the developments in SME. That is in our strategy, and we worked on this for a very long time. 9% is a very strong quarter, but looking at the quarters to come, we expect good growth as well, probably not 9%, but maybe somewhere a bit above 5%. And we're doing the same thing in LCE. We started on SME because that's where 50% of the whole profit in B2B comes from. So that is priority setting and now in LCE, we're cleaning up the portfolio. We're moving to future-proof portfolio, migrating our customers there. And we're pretty confident we can turn it around. I'm not sure if it's going to happen Q1, Q2 next year, but we're on track.

And with taking into account everything we do in B2B, I'm convinced that we can make the total of B2B [ resolute ] stabilize and grow a bit end of the year, beginning of next year. So that is all in the run rate, I would say. We have in a very strong position in B2B market in the Netherlands. We are the largest player there. we see our economy growing. And of course, we also look at the future and how things develop. But until now, most of our customers are in good shape. They pay their bills. And of course, it can always become a bit worse. But where we are today, we don't see our customers moving into trouble. So I would say that our customers and KPN, we're in a pretty good shape. And we do not expect on the short-term problems there.

And CPI increase, yes, that is, by the way, an announcement we will do next week. It's not a CPI increase. It's more a price increase we do every year. We look at what we do on the CLA, and we were also looking at what's happening in -- on the CPI. So we, of course, will not follow the inflation rate of today when it comes to price increases, but we will make a step and announce that next week.

[Operator]

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

[Polo Tang, analyst]

I have two. The first question is just about the phasing of EBITDA growth through the year. So you've delivered a strong quarter with 4.5% EBITDA growth, power your guidance for more than EUR 2.4 billion of EBITDA, only implies about 2% growth in EBITDA for the full year. So are there any cost headwinds or any other factors to watch out for? How should we think about the phasing of EBITDA growth as we go through the year?

Second question is really just coming back to wholesale regulation. So you cut wholesale broadband pricing by between 10% to 30%, but do you see any risks at players, such as T-Mobile Netherlands, uses these lower wholesale rates to lower retail broadband pricing?

[Hans Figee, executive]

Yes, Polo. Let me take your questions. On the phasing of EBITDA, you're right, our growth for the year is about 2.3%. We're already ahead of that for now. That is online. They have confidence with the guidance for the year. I think you see my -- I don't have a crystal ball that's completely perfect, but I think you will not see 3.5% EBITDA growth every quarter. Next quarter will be around, I think, 2.5, 2.3-ish in line with the year. Q3 will be a bit lower due to a comparison to it last year, and Q4 will be up again. So I think if you look at the phasing over the year, Q1 was great; Q2 will be around where the year is; Q3, a bit less; and Q4 will go up again.

Your question is fair, wouldn't you then increase your guidance for the year? Not impossible, but let's first go through Q2. I mean as you said, these are -- or [ Joost said ], these are turbulent times. Let's make sure we have a little bit more visibility in the year, but we are confident with -- given what we see what our EBITDA target for the year, but you see some fluctuation in the quarters.

On your question on wholesale, what will our wholesale customers do with the lower prices? Who knows. Our current presumption is that -- I mean, look, T-Mobile increased their prices in the beginning of the year on wholesale -- on broadband. Both lines they rent from us, but also lines they rent from other service providers -- other fiber providers. So I would presume that what they call the KPN tax that, that will disappear. But for the rest, I think they're on a path to increase their margins rather than reduce the retail prices, at least that's consistent with the signal they gave in the beginning of the year when they increased their long-term 1 gig fiber pricing by over 10%, also the non-KPN line.

So fair answer is, Polo, I don't know what they're going to do. But if I look at the recent trends and the announcement they make, I think they will take out the KPN packs, possibly keep some of it to enhance their own margins, but that will be a sure way for them to use our cost savings to increase our margins and blame KPN. And secondly, I would think they would stick to a margin expansion strategy. But to be fair, you'd have to ask them that question.

[Operator]

The next question is from Ms. Nawar Cristini, MS.

[Nawar Cristini, analyst]

I have two questions, please. Firstly, I wanted to ask about the impact of inflation on your FttH rollout. How [ hedge ] are your FTTH rollout against inflation? I think in previous calls, you have stated that prices are fixed. So I was interested to hear for how long, given that the rollouts continue till 2028? Are FTTH rollout prices fixed till then? So any color on this will be particularly helpful.

And then I wanted also to ask about your guidance for 2023. Clearly, you have explained that for 2022 the inflation pressure can be absorbed. For 2023, given that you are less and less hedging energy costs, so I guess that would be the main headwind for next year is around 1% of the revenue, so it could be visible at the EBITDA level. Could you discuss mitigation points for 2023. And also, it will be really interesting to hear your own assessment of the main areas of risk through [ 2023 ] year numbers from an inflation perspective. Any other aspects that maybe we haven't discussed beyond labor costs and energy costs would be particularly helpful.

[Joost Farwerck, executive]

Yes. So on fiber, we built a plan, which goes until end of 2026, and we build these plans together with the building companies, the contractors. And on the future, you see pressure on salary costs, of course, but we also are innovating a lot together with these partners to make the whole process more efficient. So it's our ambition to keep -- to avoid cost increasing on fiber roll out. And we didn't build a plan to connect 10,000 households. We built a plan to connect 3 million, on top of the 3 million we already did. So that is a long-term agreement we made with these contractors to create value. And the portfolio, the order inflow on their side is super important for them. So we are a good conversation with our partners to keep the costs more or less stable on the fiber roll out, despite the inflation we currently see.

Yes, on the guidance, '23, Chris?

[Hans Figee, executive]

Yes. On the 2023, I mean, it's early days to confirm for '23. At this point, we're confident on 2023. I would feel that EBITDA guidance will be there, will be met. Perhaps the mix will be a bit different. So the mix may come more from revenues and less from cost savings, different pacing continues as it is, something it's not completely under control. But I see our revenue trends being very favorable. They've been more favorable in this year than we expected and the outlook for the year also quite supportive.

Next year, we will incur easily, in 2023, any price you say where they are, looking at EUR 15 million of higher energy costs, could be higher depending on where energy prices lands. We need to see where our CLA ends up for next year on labor cost. But then again, revenue trends are favorable. So it means KPN is gradually becoming a growth company rather than a cost-cutting company. And with that trend in the way our business runs, the business has evolved. I think we still will be able to -- are pretty confident on meeting our ambition for the year. The mix might be a difference.

And secondly, we've got another 9 months to go or to reduce our cost base, to reduce our labor force, to reduce energy consumption to compensate for those higher costs. So if the peak goes up, we should reduce the Q. But with that and a combination of good trends of service revenues, we're still confident on the 2023 EBITDA guidance or ambition to be precise.

[Operator]

The next question is from Mr. Usman Ghazi, Berenberg.

[Usman Ghazi, analyst]

Can you hear me?

[Joost Farwerck, executive]

Yes, very well.

[Usman Ghazi, analyst]

Great. I've 1. I've got -- just got one question, please. Just on the on fiber roll out. I mean during the quarter, there was a development in the Hague, where the city kind of stocked parallel deployments from KPN and ODF and basically divided the city up and told the operators to build in specific areas. I just wanted to understand if that is a development specific to the Hague or could this approach be followed in other cities? And if so, what would be the implications? I mean, could it result in more sharing of networks between the operators? Any thoughts on that would be interesting.

[Joost Farwerck, executive]

Yes. Usman, that is clearly an exceptional situation for the Hague only. In the Hague, we are more or less building fiber in 80% of the city. There was a lot to do on the third party rolling out fiber, ODF in certain areas. And we overbuilt these areas for two reasons. Their prices were too high for us to make use of their network. And secondly, the way they connect households is not good enough to our conditions, at least. So that gave a lot of rumor in the media. And at the end, the mayor of the city asked us to clear out. We came to an agreement, but that was really an exceptional situation for Hague. For the rest of the Netherlands, we made our plans. We're rolling out. And our plans are focusing on 80% of the Netherlands. So it's not that we're going to divide other areas with competition because we aim for 80%.

[Operator]

The next question is from Mr. Ulrich Rathe, Jefferies.

[Ulrich Rathe, analyst]

My two questions. First one would be on the competitive situation versus VodafoneZiggo. I understand they have potentially promoted a bit harder because they lost F1, but they seem to be saying, we don't know the results yet, I think, but they seem to be saying that they could see worse net this quarter than in prior quarters. And I would sort of match what you're seeing in terms of strengthening broadband in retail. My question to you is, how do you see that? Is that sort of fair share for KPN and you would expect that to continue? Or do you think there is a point at which the two major players should sort of even out a little bit because the risk, of course, is that VodafoneZiggo sort of starts wounded animal-type behavior. I was just wondering how you see that situation evolving.

My second question is a bit of a clarification on the ACM settlement. I mean ACM raised issues in the broadband market. Now you made these voluntary offers, which would settle them, but how does the cable regulation side look from that? I understand it doesn't affect you directly, but maybe indirectly for wholesale. So I'm interested to hear how you see ACM sort of handling the cable regulatory side and broadband.

[Joost Farwerck, executive]

Yes. So on regulation, we, more or less, avoid a whole discussion on regulation by the move we made. It's a voluntary offer of KPN. ACM is using our offer for consultation. So they don't have to go into the whole regulatory debate with us or cable. And I think they will leave cable alone, in short. But let's wait until the outcome of the consultation process, and we will know in, what is it, 4 weeks from now, I would say.

Yes, on VodafoneZiggo, it's always a competitive market. And of course, when we introduced [ Viaplay ] for new customers for free, that was focusing on Formula 1 watchers that was unique for Ziggo, only in the Netherlands until recently. So with -- that was something we launched successfully in the first quarter and now Ziggo came with the promotion. So it's always good to understand how we all feel in the market to put it that way, but it was a promotion. They launched it for a couple of weeks and then changed it again. So, yes, every now and then, we do a promotion, they do a promotion. But at the end, of course, I think the whole market is focusing on creating value.

[Operator]

The next question is from Mr. Konrad Zomer, ABN AMRO ODDO BHF.

[Konrad Zomer, analyst]

My two questions. The first one is on the fiber roll out in Q1. The 75,000 homes passed. Obviously, that's below your, let's say, full year target, which I seem to remember at being somewhere around 450,000 to 500,000. Are you still comfortable with that number? And maybe you can be a bit more specific as to why in Q1, it was below the average for the year, the timing of certain projects. Was that because of labor not being available through sickness? Or is that because of, I don't know, a delay in regulation from municipalities or something?

And then my second question is slightly longer term. You've referred a few times to your CapEx as a group coming down considerably post 2026. Can you share with us the order of magnitude that we should be thinking of? Is this like several hundreds of millions of euros of lower CapEx or several tens of millions of lower CapEx? Just to get a feel would be very helpful.

[Joost Farwerck, executive]

Yes, Konrad, on fiber, you're right, it was a bit low. If we want to do what we planned for, we have to do a bit above 100,000 per quarter to end up on the 450,000. It is a bit of a traditional approach that the second half is always better than the first half, which I regret, by the way. I like a smooth rhythm of roll out of 110, 115 per quarter, but that's how construction works. Last quarter -- last year, it was 120, if I'm not mistaken. So Q4, Q1, you could also say it was 110, a 100, maybe they pushed it a bit too hard in the fourth quarter. But I'm pretty confident we will meet the 450,000 and together with the joint venture [ Glaspoort ], we will go above 600,000 households. And I like a rhythm [indiscernible]. So that is our ambition to run the programs. But every now and then it comes in batches. There's weather, there's -- at the end of the summer, there's a month of holiday for construction. So for 4 weeks, no construction. So there's a bit of ups and downs. But we know we will meet the plan. So fiber we're pretty confident.

[Hans Figee, executive]

And, Konrad, on your CapEx post 2026, obviously, quite a few years out. But think about -- our CapEx today is EUR 1.2 billion, consisting of, say, EUR 450 million fiber and EUR 750 million in nonfiber. I've been talking big numbers. And our job is to make sure that post 2026, the fiber number get ratcheted down aggressively and the nonfiber number stays flat. So what the final CapEx number 2026 will be, I don't know, I mean fiber will not go to 0. There will be new builds in that time. There will be someone willing to connect. So homes [indiscernible] homes connect, homes activated. There will be some fiber [indiscernible]. But the drop in CapEx will not be 10s, it should be further a 3-digit number with the assumption and our assignment to keep the nonfiber CapEx around the EUR 750 million to EUR 800 million mark.

[Operator]

The next question is from Mr. Steve Malcolm, Redburn.

[Stephen Malcolm, analyst]

I've got a couple, which I am allowed. First of all, on mobile pricing, I think that CPI is baked into your contractual mobile pricing, which I think takes effect from October. Obviously, at current levels, that would be a very, very big price rise. So just want to hear your thinking on that and how you think about sort of front-foot promotional offers because I guess you had the risk of prices got too much customer spend down. You create churn in the marketplace. So that would be very interesting to hear. And then just coming back to wholesale, when we sort of look at the volumes, it seems quite clear that most of the push is on ODF, I guess, from T-Mobile. There's not a lot of growth in WBA/VULA. I mean do you think there's been a kind of a hiatus or strike ahead of this offer for the ACM? And if it is agreed, you think we should see an improvement in those WBA/VULA volumes, which I guess helps on the sort of revenue mix side and help us think about our medium term forecast and wholesale.

[Joost Farwerck, executive]

Yes. So on mobile pricing, more or less, CPI is included in the contracts. Of course, these are short-term contracts, so it would be not smart to do an increase of 10% or something like that in our run rate. But most of the mobile customers expect a price increase around October, if I am not mistaken. And that is more following inflation than the consumer household price increase we announced midyear.

You also had a question on assess of the Ukraine war, if I am not mistaken. I didn't hear that quite well.

[Stephen Malcolm, analyst]

No, no. So I was just -- just how you think about that at the moment, Dutch CPI is running double digit. I mean, clearly, it's been fine in the last few years because inflation has been very low, I guess, consumers have barely noticed that. I guess, as mobile customers are hit with a 10%, 11% price rise in October because your revenue short term, but it might create some churn along the way. I mean just the thoughts you have on sort of honoring that CPI link in October would be interesting to hear. And then just a question on the wholesale mix.

[Joost Farwerck, executive]

Yes, I appreciate it. So on mobile, I think it's -- first, it's important to get a better view on the longer-term CPI development before we make a decision on the October price increase until now, yes. So we'll wait for that. The flip side of that is that we also do negotiations with unions on the CLA. There we also look at what's happening on the inflation rate. Now we can help our people, but we don't do it in the run rate only. We also do one-offs for our own employees. So it's a bit also how far can you go on pricing to your customers? And what do you pay your own employees or a price increase? So that balance is also what we look for.

[Stephen Malcolm, analyst]

I guess the question is do you think you might sort of flex that CPI, that contractual CPI link, you might offer the contracts and do not have any consequences?

[Hans Figee, executive]

I guess, Steve, let's see, I think -- I mean we have the contractual right to increase the CPI. I think customers won't complain if we do less. So I think doing less is always at our own discretion. I mean we haven't made our call yet. As Joost said, we need see to what is fair, what was the inflation at that point, what's the inflation outlook at that point at our own cost and then we'll weigh that in. But I think we've got the discretion to go lower, if we wanted to.

[Stephen Malcolm, analyst]

Okay. Great. And on the wholesale [indiscernible] I guess most of the volume growth we see is in ODF, which I guess is the sort of the existing footprint, but the [indiscernible]. So I guess, are you seeing wholesale offers going to hold back ahead of this agreement, you think? And if it is settled, should we expect to see a more balanced growth in the ODF in the VULA base, which I guess would help ARPU, would help revenue of that?

[Hans Figee, executive]

Well I think -- I mean, look, on ODF, certainly, I mean it becomes more attractive to others to rent lines from us and ODF also prices are going down. We think the VULA pricing brings -- the VULA products kind of in the same ballpark as ODF in terms of attractiveness, in terms of what your margin-making ability for third-party customers. We don't see them acting as of yet, but also mean the news is out for the last two weeks, it would be too early. But it's fair to assume that VULA now becomes a more attractive product to our wholesale customers than it was before.

So to [ Keval's ] point, do you see penetration going up? Yes, we see opportunities there, could be ODF, but there are also definitely opportunity in the VULA space.

[Stephen Malcolm, analyst]

Okay. But I guess an improving sort of VULA, ODF mix should help overall wholesale ARPU growing to the VULA pricing...

[Hans Figee, executive]

Yes. VULA is an active product. So it just helps [ ARPU ] wholesale.

[Joost Farwerck, executive]

And then -- and I would say I mean, ODF is all fiber and active broadband is more future fiber, and what we think is that the market is moving to higher speeds. And so the customers start moving to 500 meg or 1 gig or 2 gig or 10 gig that is against a lower price point, but still a very good ARPU improvement.

[Operator]

The next question is from Mr. Andrew Lee, Goldman Sachs.

[Andrew Lee, analyst]

I had two questions. One was on B2B and the read across from what we've seen in SME. And the second question is just on, again, on your ability to monetize your digital infrastructure and basically raise pricing. On the B2B side, I guess we've all been slightly surprised by the degree of rebound you've seen in SME, as you sorted out your tariffs, synthesized your offerings in some cases.

So the question is, how much read across is there between what you've been able to achieve in SME, going from decline to growth to that, that we're going to see in large corporate. I get that you're guiding on overall B2B, but can you just give us an insight into the read across you see from SME to what you can achieve in large corporate. And any kind of sense on the timing of when the migrations are fully complete, that would be really useful.

And then just secondly, I appreciate that you have inflation-linked pricing on Wholesale and Consumer mobile. We met with one of your peers yesterday who also highlighted look, if inflation is going to be continuing for some time, then maybe there's scope to formalize price rises elsewhere across the customer base. And so I was just thinking about your B2B revenues and contracts as well as your Consumer Fixed. [Technical Difficulty].

[Joost Farwerck, executive]

Andrew, you still there?

[Operator]

Mr. Lee, your line is connected, but we cannot hear you.

[Joost Farwerck, executive]

Yes. So I will start answering the questions. And while Andrew is reconnecting. Is the line still active operator?

[Operator]

His line is still active, yes.

[Joost Farwerck, executive]

Okay. Andrew, I trust you can hear us. Otherwise, you can always touch base with IR after the call.

Well, if you look at that slide, the team is presenting on your screen, and it's all about the run rate and how we run it, right? And that's why we were pretty confident that we can turn around the whole SME thing. If you look at what we did a year ago, [ 132 ] moved up to [ 136 ]. So it's really that run rate step by step by step, improving [ 144 ] today. If we keep it stable, we already know that we will do much better than Q2 last year. So yes, that's how we look at things. We built an environment called KPN ONE, in that our customers can click themselves for [ worksheets ], for mobile, for connections and security solutions and it all works out quite good. So we expect that run rate to improve in the line presented here, probably not every quarter will be as good, but growth is in there for sure. So that's why we are so confident on SME.

We do the same trick on LCE what's presented there below. We're a bit behind there. So we follow that run rate. We migrated, I think, now 85% of the customer base to what's called KPN Compleet and KPN Smart combinations. I just named, sorry for that. But same trick, different approach and different solutions, but more or less same idea. And improving that run rate step by step will also lead to growth. And so that's how we do it. It's really -- yes, that's telco running the run rate. The trend is your friend, I would say.

And then there was a question on infrastructure, which I will hand over to Chris.

[Hans Figee, executive]

I think it was the question on pricing, where we formalized price increases to board and just have a formal CPI-linked contract to all your customer, all prices. We'd love to have that. I mean I think 75% to 80% of our business has some degree of an inflation link, either very contractual for there's a reference to. So that could be there. At the same time, part of the business segment still experience some price pressure. If you look at where is the most challenging thing in the LCE segment is, look at the revenue decline, half of it is our own migration, the other half is some pricing pressure in the market. So we'd love to do that. I'd say that we need to be mindful of where the market is in the competitive dynamics there. But given the fact that about 75% to 80% of our business already has an inflation link, I think, to a large extent, we're already there.

[Operator]

The last question is from Mr. Joshua Mills, BNP Paribas Exane.

[Joshua Mills, analyst]

My first is actually another one on pricing, and the second one was related to the CLAs. So yesterday, it's very interesting, Telenet were talking about their own market research into where they see the opportunity to put prices up and where they believe there's a cliff in terms of customer acceptance. And their point was that when Net Promoter Scores are good. Yes, you can sustain some price increases, but anything above 5%, you see a real drop-off in Net Promoter Scores. So I'd be interested in knowing, firstly, how your own research into the customer base has panned -- played out? And how that's maybe changed year-on-year? Obviously, the [indiscernible] is getting better, but we do see some evidence that price sensitivities may be going up. So thoughts there would be helpful.

And the second question is just a bit more insight into how the CLA agreements work? I think last year, they were done in July. Is it July this year, that the CLAs will be discussed again? And is inflation an explicit part of the framework for the discussion or simply a reference point that your employees look to when they're negotiating wages?

[Hans Figee, executive]

Look, just on pricing, interesting piece of research by Telenet. I mean, look, we're pleased with the NPS developments of KPN. I mean business has continued to go up quite aggressively or attractively to a good number. Interestingly, in our side, we had a significant increase in number of calls and number of client interactions due to Viaplay. And we kept our NPS high. Whether it has a link between pricing and NPS, that's I don't know. It means, I don't have that evidence, but it's an interesting point to make.

Secondly, I think that probably customer resistance to price increase is not a static thing as dynamic. It depends on where you are in a cycle, where they come to customers perceive what is fair and unfair pricing. But it's a fair point that Telenet has made it. You need to wait till next week until for us to give a little bit more comment on what we want to do with pricing. So I hope you can bear to wait 1 more weekend than you know. But the Telenet insight is not strange -- what they say is not strange to us, to put that way.

On CLA, what comes in there, we look -- the inflation is -- our CLA is a discussion on many parts, right? There is, of course, the monetary compensation to employers and to employees. There is training, there's education, there is time off, there is sabbatical, and how we deal with the elderly population. So often it's the combination of various measures you do as an employer to deal with the employees, and the wage increase is not the only component. It's an important component, but there are many more factors driving it.

So look, inflation going up. It will certainly be a topic in the next discussion on the CLA. It will definitely have an upward push towards [ G&A ] next year, but it's not the only thing that comes. There is training, education, sabbaticals, dealing with elderly people, elderly workers is also an important part of this competition. So it's not a one-on-one transition.

[Joost Farwerck, executive]

And I would say our people are highly motivated, and we're not -- I mean, like we said, it's -- we do a lot in CLA, but we also do a lot to support our people in one-offs, because CLA increase of 2.7%, that's in the annual salaries, then there is a 1.1% on top of that to grow in scale. But for instance, we gave all our employees EUR 50 per month additionally, to work from home. There's the bonus payout we do. So there's a lot we do for our own people, and we can't look that much into the future. But we'll see what happens to the CLA accounts for the whole year, by the way, not until mid of the year. And sometimes we negotiate the mid of the year, sometimes we wait a bit longer. I think this time, we will wait a bit longer because we want to know where this inflation ratio goes and how the economy is developing.

[Joshua Mills, analyst]

Great. And maybe just one very quick clarification. Can you just remind us what the fixed line price increases have been over the last couple of years? It's for our reference.

[Joost Farwerck, executive]

[indiscernible] of 2.5%.

[Reinout van Ierschot, executive]

Thank you very much. That wraps up the Q1 call. If there's any further questions, please contact the Investor Relations team.

[Joost Farwerck, executive]

And sorry for the interruption, does not fit a company like KPN to switch off in the middle of the call, but sometimes it happens. Thank you.

[Hans Figee, executive]

Thank you.

[Operator]

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