Koninklijke KPN NV

AEX:KPN

Earnings Call Transcript 2024-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to KPN's First Quarter Earnings Webcast and Conference Call. Please note, this event is being recorded. [Operator Instructions] I'll now turn the call over to your host today, Reinout van Ierschot, Head of Investor Relations. Please go ahead.

[Reinout van Ierschot, executive]

Yes. Good afternoon, everyone. Thank you for joining us. Welcome to KPN's First Quarter 2024 Results Webcast. With me today are Joost Farwerck, our CEO; and Hans Figee, our CFO.

As usual, before turning to our presentation, I would like to remind you of the same 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 KPNs 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. Let's start with some of the highlights of the first quarter. Our group service revenues increased by 3.6%, 4% corrected for divestments. Within the mix, we continue to see positive developments in consumer, driven by both fixed and mobile. Business service revenues continued to grow with SME as the main contributor and as expected, growth in wholesale leveled off a bit, but this was mainly due to lower regulated tariffs. And together with joint venture Glaspoort, we had almost 160,000 households to our fiber footprint.

We delivered EBITDA growth while free cash flow was a bit lower due to phasing of working capital. Last month, our regulator approved the Youfone acquisition that is important for us as this enables us a more effective base management strategy. And finally, our outlook, we have raised our full year guidance for EBITDA and free cash flow, reflecting the Youfone acquisition. And the other items in our outlook are reiterated, including our ambitions for 2027 as disclosed during our Capital Markets Day.

As usual, Chris will give you more details on our financials later. Our Connect, Activate & Grow strategy is supported by 3 key pillars. One, we continue to invest in our leading networks; two, we continue to grow and protect our customer base; and three, we further modernize and simplify our operating model. And together, these strategic priorities support our vision to grow our service revenues and adjusted EBITDA by 3% and our free cash flow by 7% per annum on average in the coming years, and this is simply our 337 framework.

Let me now walk you through the business detail. In the first quarter, we added 130,000 households to our fiber footprint. This number includes 21,000 households from acquisitions. And together with Glaspoort, we now cover almost 60% of the Netherlands with fiber, and we are well on track to reach 80% of the Dutch households by the end of '26. After reaching that point, the CapEx will come down to a much lower sustainable level.

Our fiber business case continues to deliver results. Year-on-year fiber service revenue growth has accelerated to 13%, and we currently generate more than EUR 1 billion of NII fiber revenues driven by a solid base inflow and attractive outlook.

Let's now look at the Consumer segment further. Our Consumer segment started the year well with the acceleration of our fixed service revenues and continued strong momentum in mobile. Customer satisfaction remains one of our top priorities, and I'm happy to see that we can really outperform against competition on Net Promoter Score.

[Technical Difficulty] moving to our first quarter KPIs. We saw another quarter of broadband-based growth. We realized 5,000 organic broadband net adds and our fixed ARPU grew 2.7% year-on-year. And we continue to see solid trends in mobile. Our postpaid base increased by 30,000 driven by the commercial success of our new speed tiering proposition and our postpaid ARPU grew more than 5%. And combined, this led to a solid 8% growth in mobile service revenues.

As mentioned, last month, we received green light for the acquisition of Youfone's Dutch activities. And I'm happy with this deal as it strengthens our position in the no-frills mobile segment. It enables us to play a more effective base management strategy by positioning the Youfone brand alongside our flanker brands such as Simyo and XS4ALL and of course, next to our main brand, KPN. And with this approach to our offerings, we remain relevant to all customers in all life phases.

The closing date was 4th of April. And from that date, we added approximately 540,000 postpaid subscribers and 55,000 broadband subscribers to our customer base.

Let's now move to B2B. Adjusted Business service revenues grew 3.2% year-over-year or 4.4% corrected for the divestments of 2 smaller entities. Growth was mainly driven by continued strong growth in fee and business Net Promoter Score was in line with last year, and we also here see that we remain the Dutch market leader. SME continues to be the main growth engine in B2B, driven by solid commercial momentum, especially in cloud and workspace. And due to our future-proof propositions, we expect to deliver continued growth in SME going forward.

Underlying LCE service revenues increased slightly, mainly driven by the continued strong performance in IoT. Internet of Things has been a very successful part of our LCE business over the last years and now representing EUR 100 million of annualized revenues with good contribution margins.

Nonetheless, LCE still requires some works to deliver sustainable growth. And lastly, the Tailored Solutions business was solid again, and this business remains subject to the timing of projects and related hardware sales, but the performance is moving to a much more profitable level.

And then Wholesale. In Wholesale, service revenues increased 0.8% in the first quarter. As expected, the gross strength level off compared to previous quarters due to a decrease in low-margin interconnect revenues because of lower regulated tariffs in these provisional voice business.

Broadband service revenues increased 6% year-on-year, driven by a higher base compared to last year. Mobile service revenues increased 2.6% year-on-year in wholesale, driven by growing mobile base and increased data volumes.

Now let me hand over to Chris to give you more details on our financials.

[Hans Figee, executive]

Thank you, Joost. Let me now take you through our financial performance. I'll start by summarizing some key figures. First of all, adjusted revenues increased 3.3% in the first quarter with growth visible across all segments, especially in Consumer. Second, our adjusted EBITDA after leases grew by 3.6% year-on-year, driven by higher service revenues, but also due to the phasing of some headwinds and tailwinds. Net-net, our underlying EBITDA growth is broadly in line with our reported EBITDA growth.

Our EBITDA margin increased 16 basis points to 44% despite wage indexation and higher lease costs. So overall, we had a solid start to the year and are confident in our ability to reach our EBITDA target to expect some fluctuation [indiscernible] during the quarters ahead. Third, free cash flow decreased 6% or EUR 10 million compared to Q1 last year. It will pick up in Q2. We will give you more detail on the underlying cash developments later in this presentation.

Group service revenues increased 3.6% year-on-year or 4% corrected for divestments in the B2B space and is thereby in line growth in previous quarters. Our Consumer service revenues increased by 4.5% year-on-year, driven by consistent strong growth in mobile and further improvement in base. Across Consumer, we see solid base development, especially in mobile. Business service revenues grew by 3.2% year-on-year or 4.4% corrected for divestments, mainly driven by the strong continued performance in SME.

Wholesale revenues were up 0.8% year-on-year, driven by both broadband and mobile and negatively affected by some changes in regulated tariffs. Our operational free cash flow increased by 6%, in line with our guidance, of mid-single-digit growth was mainly driven by EBITDA growth. The store operating free cash flow is not yet fully trickled down to free cash flow and delta [ phase ] of last year is mainly explained by a different phasing of working capital during the year.

For the other free cash flow items, the impact of higher lease payments is fully offset by temporary lower taxes. At EUR 154 million, our free cash flow margin was 11% of revenues. All in all, in line with 2023, we expect to see free cash to be back-end loaded, reflecting many improvements related to working capital.

So looking ahead, we expect a gradual improvement in this number throughout the year. Finally, we ended the quarter with a strong cash position. We continued to have a strong balance sheet at the end of March with a leverage ratio of 2.3x, comfortably below our self-imposed ceiling of 2.5x. Also, our interest covers remain strong.

Our exposure to floating rates is less than 15% and the average cost of senior debt is 4%. Credit rating agencies acknowledged our strong balance sheet and market position, which is evidenced by solid rating and a stable outlook. Total liquidity remained robust and consists of about EUR 2.3 billion in cash and short-term investments, including the undrawn revolving credit facilities.

This provides ample flexibility, for example, the final cash payment of Youfone acquisition and pursue opportunities as they may arise and of course, also to acquire spectrum in the upcoming 3.5 gigahertz auction expected to take place in this [indiscernible]. Early February, we issued a new senior bond and put out a tender on part of our outstanding sterling notes due 2026 and 2029. With the successful placement in combination with the tender, we increased the average maturity of our outstanding debt and lowered the average cost of debt as well.

Let's move to our outlook for 2024 and ambitions for 2027. Given the solid underlying additional performance and momentum and the closing of the Youfone transaction, we raised our full year '24 outlook for EBITDA and free cash flow. We now expect an adjusted EBITDA after leases of approximately EUR 2.5 billion and a free cash flow of over EUR 890 million. Other outlook items have been reiterated. Group service revenue growth is settled approximately 3%, mainly driven by continued growth in Consumer and B2B, and CapEx will remain stable at the level of about EUR 1.2 billion.

Finally, on the entire plan period until 2027, it remains our ambition to grow our service revenues and adjusted EBITDA by 3% and free cash flow by 7% on average per annum, as reflecting our 337 [ peer ] model. So wrapping up with the key takeaways. We have solid start to the year with consistent group service revenue growth tricking down into EBITDA growth. We have yet another quarter with solid commercial renting, especially consumer, mobile and SME.

Our fiber rollout program remains solid pace as an improved and attractive return profile. And we've raised EBITDA and free cash flow full year '24 outlook. Our other outlook items, including our ambitions for 2027 as disclosed during the CMD are reiterated. And finally, we almost finalized the share buyback program of EUR 200 million in 2024, effectively again, distributing all of our free cash flow to our shareholders. Thanks for listening. Now I turn to your questions.

[Reinout van Ierschot, executive]

Yes. Thanks, Chris. As usual, we will now open the floor for questions. As a reminder, please limit your questions to 2 please.

[Operator]

[Operator Instructions] Our very first question is coming from Keval Khiroya calling from Deutsche Bank.

[Keval Khiroya, analyst]

And I've got 2 questions, please. So firstly, Chris, can you give us your latest thoughts on EBITDA phasing for the rest of the year. I presume Q2 EBITDA should be quite strong given the residual impact of the price rise and you've been kicking in as well? And then secondly, we've seen there's a good price increase. Is it right to think about CPI and CLA as still being the reference points for your broadband price increase? And is there room for front book price increase as well?

[Hans Figee, executive]

Keval, [indiscernible] very good. Yes, we obviously increased our guidance for the year. I think Q2 looks actually quite strong. We always have a few -- also more spiking items in our EBITDA, so ones that are in our planning, but are to the discrete customer deals or monetizations. And they will show up in Q2. So in Q2, we'll see quite high EBITDA growth, underlying to be up 3% plus like this quarter, but the headline number will be higher in Q2.

In Q3, a bit more muted because compared to year-on-year comparison in Q4 up again. So there's some volatility in the numbers, but I expect, as I said, Q1 is a 3.5% to 3.7% actual growth excluding divestments in Q1. Q2 will be substantially higher. Q3 will be lower and Q4 up again. So that's kind of the phasing, but I expect certainly a solid Q2 for what we see right now.

[Joost Farwerck, executive]

Yes. And on the price increases, your question, yes, of course, last year, we had a fuel price increase following CPI developments. In mobile, consumer, we one-on-one [ follow ] CPI later in the year, 1st of October, if I'm not mistaken. In midyear, we will do the broadband price increase that will be a call we will make in the coming quarter, this quarter.

And we have a look at CPI, CLA, but of course, we expect less of an increase than we did last year. So it's also very important that with our new strategy where we focus on the base and loyalty of customers that we can explain why we do a price increase. So we're always focused on price increases and do the best in there, but it's also important that we can explain it and therefore, we use CPI and CLA development as a good argument.

And in B2B, we try to pull up contracts and do the utmost as well. So it's a bit of a -- in different phases, we do price increases. And every year, we do that. And the first important moment there is [indiscernible] this year in broadband Consumer.

[Keval Khiroya, analyst]

And so just to follow up, I'm not sure if you're able to say at this stage, but do you think there is room for a front book price increase on broadband as well, as well as the back book, which, obviously, you usually do?

[Joost Farwerck, executive]

Well, we can do what we want, but like I said, it's very important that we can explain to the market and our existing customers why we do price increases. So that's exactly the call we're going to make this quarter.

[Operator]

Our next question is coming from Andrew Lee calling from Goldman Sachs.

[Andrew Lee, analyst]

Just 2 questions. First one was on wholesale broadband competition. So your wholesale broadband base fell a little this quarter. So I am just wondering if you could give a bit more insight into what is going on there, who you're losing to and why you think that is?

And then I think -- just wouldn't mind just asking -- just following up on Keval's question on the consumer fixed side. So I understand that obviously, you need to explain to your customer base why you're raising prices. But at the same time, incumbents in strong markets across the sector, a leading price is higher.

And with reference to Ziggo raising prices more than you, why do you feel it's not just as important as the CLA rises to really show strength and leadership and prices just to make sure the market remains rational given some fairly aggressive behavior by Ziggo over the last 18 months?

[Hans Figee, executive]

Andrew, let me take up the first question on wholesale broadband. Obviously broadband, if we take one step back, broadband service revenues are still growing quite nicely. I think they will go back -- could not be to Q2 and figure back in Q3 and Q4. So good to also have that in line with what the [indiscernible] of reserve revenue growth over the year.

Then on broadband, in particular, I mean the market has been quite intensive into the competition. And I think we see that some of our smaller broadband customers find a little bit more difficult to compete with that. Broadband competition has increased a bit, but that's not very notable, it's mostly with the smaller broadband customers who find it difficult to compete with these more intense competition in the market and they [indiscernible] copper. Obviously, we're taking steps to support them here to make sure they have the room to compete. But that's the main drivers of the delta and broadband growth [indiscernible].

For KPN as a whole, we see total network penetration develop. So across wholesale, across consumer and across business markets, when we look at our total network penetration is still increasing. So it also feels there's a bit of a shift between different segments going on in the background.

[Joost Farwerck, executive]

Yes. And then again on price increases. Last year, we did 6.4% in the broadband consumer, 8.4% on mobile. And the competition was more or less in the same area, a bit higher. Odido has announced at the beginning of this year, something like 5.5%. Ziggo announced a 2.5% increase in the front book. So we have to find the balance between the utmost on price increases and a nice number to land on and explain to our customers again. So we will announce the price increase if we do one end of this quarter.

[Operator]

We'll now move to Polo Tang of UBS.

[Polo Tang, analyst]

I have 2. The first one is just on fiber. Can you talk to what you're seeing in terms of fiber build from competitors? And then how do you think about your own build rate for fiber? And then related to that, when you guided for EUR 1.2 billion of CapEx for 2024, was this guidance up to EUR 1.2 billion versus the rounded figures? From memory you guided towards EUR 1.2 billion last year, but ended up spending about EUR 1.25 billion.

My second question is really just on competitive dynamics. So can you talk through in a bit more detail in terms of what you're seeing in terms of competitive dynamics for both broadband and mobile, specifically, where are you seeing from the likes of Delta Fiber and ODF? And do you expect the VodafoneZiggo to get more promotional when they start showing Champions League rights in August?

[Hans Figee, executive]

Yes. Polo, it's Chris. On the fiber build, I think we have actually delivered quite a fair amount of [indiscernible] past this year. If we look at the first quarter, we're looking at EUR 159 million, including [ CapEx, ] I think EUR 140 million inorganic [indiscernible] homes passed. We're focused on more homes connect. We've got organically 90,000 homes connect including [ acquisition ] around 100.

So I think about 100,000 connect homes out of which 90 is organic. And we're just continuing with that pace of building out.

What do we see competitors doing? It feels that certainly delta is rounding of existing building SMEs. So I don't think they're going to start with new streams of here. So round of what they have and then focus, I think, on increasing penetration on their networks, which I think is a sensible strategy to do as well.

[indiscernible] still grow? I'm not sure whether they will meet the higher 2 million that they've initially announced, but then this is for them. But I wouldn't be surprised if that goes not to the [indiscernible] what we're seeing is the build competition gradually become a bit less than that. You also see that when you talk to construction companies, and the availability of construction capacity. So we relate to this deal that KPN continues to build and continues to plow along.

We have a plan that we will fulfill and complete, it feels that the -- our main alternative builders, whether the smaller ones to larger ones are gradually into either the [indiscernible] not adding new building streams or rounding of what they have. When it comes to CapEx, rounded to EUR 1.2 billion. Obviously, in the end, CapEx is a function and the ultimate goal of free cash flow. So the free cash flow will be for sure EUR 890 million. That's the goal that we have. We will be being around -- around EUR 1.2 billion, but round this to EUR 1.2 billion for sure. But the key criteria when the goal is, of course, meet our free cash flow of at least EUR 890 million for the year.

[Joost Farwerck, executive]

Yes. And to add on that, on fiber, there's a big difference in how KPN is rolling out fiber footprints and the other initiatives mentioned by Chris. We are very strong in moving homes passed through also homes connect about 60%. And by migrating our own customers increased in the first wave about 30% homes activated, while we see any other footprint that there's -- they mainly struggle to get home passed really to homes connected.

So I think we're building a infrastructure of a much higher value than the others are doing. On the competitive dynamics in the Dutch market, it's a highly competitive market. On one hand, mobile is relatively healthy. The whole mobile market is growing. That's very good. We see KPN growing as front-runner as Vodafone is growing, Odido is growing. We see a strong inflow of KPN Unlimited, supported by that speed tiering.

So customers now decide on what kind of downloads they want by their unlimited proposition. We see a very healthy inflow on net. So there's a good strong growth in our base, both on revenues per customer and in the base itself. So that's good for future revenues. And also, therefore, very happy that we consolidated Youfone to really position no-frills segment in a complete different way than we run the KPN portfolio or the KPN base.

On fixed, the market is quite challenging, driven by our fiber rollout we were steering up the market. So that's leading to competitive prices on the Ziggo side, also Odido and the Delta are doing deep promotional offers. Every now and then, market is cooling down as well. So I think the important announcement we did and also Odido is making sense in that direction is that we want to focus on our base and on loyalty and not on the acquisition side only.

So we tried to cool down that market a bit. And having said that, at the [indiscernible] I think we did great last year by growing 30,000. I think we will drive growth in the broadband base further this year. But when it comes to competition, it's mainly happening in broadband. And I expect that to continue until we've done the 80% rollout.

[Hans Figee, executive]

And I'll continue, perhaps to note that we look at our fiber sales, obviously, the gross adds in fiber are a combination of new, new clients and trying to be migrate from copper to fiber migrates. If you strip out those migrations, they look at the real net new customers, so new fiber customers. In the last, I think, 12 to 24 months, every month is between 4,000 and 7,000, pretty stable. Never one less than 4, never more than 7, around 5 or 6 more months whenever real net new clients.

And we've also seen it in the first quarter of this year and something similar in the last quarter. So when you look at fiber, there's a steady inflow of real new customers, which is amplified and add to as the company to fiber migration. And that is almost independent, but less affected by the competitive dynamics.

The competitive dynamics affect our copper base where churn goes up and down. So you see this steady inflow of new fiber net adds of between 4,000 and 7,000 months, a 5% on average, really month after month after month, you add copper customers to migrate to fiber and the fluctuation really is in the copper churn of our copper customers who respond to competitive pricing.

And now when our broadband base is now 61% fiber, increased by 2% to 3% per quarter, that dynamic should -- every quarter should improve gradually. I mean that's the plan. But I think it's most important to note that the fiber inflow of real new, new clients is very savvy.

[Polo Tang, analyst]

Champions League impact? Do you expect that to have any effect on KPN?

[Operator]

So the next question is coming from Maurice Patrick of Barclays.

[Maurice Patrick, analyst]

Maurice from Barclays. If I could ask a little bit more about the wholesale loss. If I understand the negative that had in wholesale. If I understand some of your comments in the previous question, you seem to be indicating that some of your resellers effectively are struggling due to the retail dynamics. Are you losing wholesale subs in fiber areas and legacy copper areas?

I'm curious whether the shift of losing wholesalers in both the new fiber areas where maybe your 5,000, 6,000 new clients maybe is cannibalizing your copper base or whether it's in the legacy areas where you don't have the fiber.

And just a second question, just more broadly, could you give some more color on the Youfone acquisition? And specifically, I think if I'm not wrong, when you announced the transaction, it sounded like the competition authorities were going to have a good look at it. And in the end, it was approved without any remedies on conditional. Just sort of your insights in terms of your conversations with the competitive authorities, what their concerns were and how you managed to relay those concerns.

[Hans Figee, executive]

Maybe I will follow on the rebound of product section safety. Let's see, obviously, it's mandatory that Dutch teams have to be broadcast and would be available for the entire countries. Now obviously, our people don't have [indiscernible] making it very far into the European football championship, but there's always hope.

But I mean that if Dutch teams will be visible and have to be broadcasted by anyone. And secondly, our only indicated that Ziggo Sport will be open, we are a customer of Ziggo Sport, where we remain [ self ]. So let's see, but we think that there might be an impact, but we feel it has be manageable certainly, as the Dutch teams will be visible by anyone. That's the law.

[Joost Farwerck, executive]

Yes. By the way, we have been reselling Ziggo Sport over the last years for a typical niche content that's not available via KPN directly and main part of European football matches will be visible in all the channels.

[Hans Figee, executive]

And when it comes to wholesale, it really -- it's turning copper, right? So what you see is that in the contenders' market and copper base is churn. That's what churn happens, that new inflow goes into fiber and you find that these smaller resellers have a difficulty to getting new lines. So they have like elevated level of churns based on the competitive dynamics.

And traditionally, you grow by fiber, but I have difficulty to growing with fiber. So fiber in wholesale is certainly still growing by fiber wholesale base and the churn is taking place in copper, and you'll find in the current environment that the smaller resellers have difficulty competing with fiber. You're not losing fiber, but traditionally, you lose some copper and you win on fiber and the fiber wins are more difficult for them in today's pricing environment.

[indiscernible] that we are taking steps to help them here and there. When it comes to Youfone and the acquisition, how easy it looked, I think they want to be assessed primarily the impact on the retail market; and secondly, the impact on the wholesale market. So what is -- does the acquisition of Youfone by KPN constitute an undue concentration on the retail market at undue consequences for consumer retail pricing?

And then secondly, the other question you asked is if KNP buys Youfone, does that change KPN's perspective towards MVNOs? And will you be less forthcoming and best support of the MVNOs because with Simyo and Youfone, you are only now a bigger chunk of no frills. So will you be different towards different MVNOs. And we both -- we think the impact on the retail market is incredible, is manageable.

And also our policy towards wholesale mobile MVNO business does not change because of the acquisition of Youfone. So I think they're looking to that, they modeled it. They asked us questions, we did Q&A, and I think they concluded at the end of the acquisition of Youfone by KPN would not materially change the market dynamics in both mobile retail and mobile wholesale. So that's why the whole thing went through without any remedies.

[Joost Farwerck, executive]

Well, we took 9 months, which is quite long. So we are in the process of evaluating this regulator because the questions they have and [ managed ] by Chris, we were able to answer them pretty straightforward. So I understand that things sometimes move to Phase II, but 9 months is long. So I think it's very important to evaluate with our regulator [indiscernible].

[Operator]

Our next question will be from Luigi Minerva calling from HSBC.

[Luigi Minerva, analyst]

Yes, my 2 questions. The first one is on operational leverage. Now if I look at your outlook, obviously, 3% service revenue growth, 3% EBITDA growth. It's great in European telcos to see an incumbent that grows. But if one was to play devil's advocate, you could argue that there is no operational leverage. So I was wondering what tools do you have to boost a bit more operational leverage and what differences you see between 2024, where I think the 5.5% salary increase is probably difficult to match with broadband price increase and 2025 where perhaps you see a more rosy outlook?

And the second question is on regulation. I mean the white paper from DG Connect has been widely praised by and other incumbents is currently under consultation until the end of June. And the key driving principle in the white paper seems to be deregulation. Now I think the Netherlands is a step ahead of other markets, I think of your agreement with the ACM on wholesale fiber access till 2030. Still, if you think about the white paper, do you see upside for the Netherlands?

[Hans Figee, executive]

Yes. On operating leverage, you have to like that whatever you do, there's obvious challenge, I mean with 3.5% service revenue and EBITDA growth, I would expect the way to cure, but you obviously find the critical point. The main -- there are 2 factors, one of the most important for us is the Glaspoort charging. So we have a JV with APT called [ Glaspoort ] as you know.

And the lines we read through them, we are a wholesale customer for them. They [indiscernible], of course, are charged to EBITDA, and we own 50% and so we get 50% back as minority interest below the line. So if you were to adjust for that, our EBITDA growth would probably be about 5% above the service revenue growth. It's simply the fact that the wholesale charges by [ Glaspoort ] to KPN are in our COGS, cost of goods sold, and the only ship of that has actually been low-line in the minority interest towards net income.

So if you adjust for that, there's underlying operating leverage, is it to our liking? No, I would like it to be higher. The main driver is cost development. And there, we -- there's obviously some light at the end of the tunnel. When you look at our cost base, the inflationary peak last year still has an echo like some implication for this year. CLA is 5.5%, it's getting less and less. So for example, energy costs last year were a massive spike on energy cost. This year, energy costs are flat, might be [indiscernible] opportunities as the market say we are to be slightly lower.

And next year, they will certainly be lower. So the energy spike took a year to wash out flat this year or lower next year. On CLA increase, it's 5.5% this year, it's 3% next year. So that's fading out. On other areas last year and anything you looked at was affected by inflation, the rate inflation, you can see back on TTI, mostly platform costs and licenses, but relatively well ring-fenced.

So when I look at our cost base, I think the indirect cost pressure from inflation is gradually fading out. '25 -- '24 isn't like a transition year in which you can see the impact still echoing in the numbers, but is fading out in '25. And what to do against it is reduce costs, reduce the cost drivers. So that's what we're working on. I think the FTE decline this year, you have to look at the total workforce, internal and external staff is about 250, like 2% less than last year.

Obviously, we want that to be higher, and we will accelerate that in the coming years, not this year because there's still also hiring staff. We're hiring specialist mechanics to include or accelerate our homes connect program. So -- but it's a cost program that uses AI, robotization, automization, digitization. We will start shipping down more offices and next year [indiscernible] energy when we think we're found these things to fit in.

So long story short, operating leverage is higher than you think, but marked by the [ Glaspoort's ] allocation of costs. And secondly, going into 2025, you'll see it showing up as the cost pressures gradually start to [indiscernible]. With that, I'll leave Joost to give some regulatory wisdom on...

[Joost Farwerck, executive]

Yes. Well -- and adding to that, you're right. A bit of operational leverage should kick in. So if we do everything we plan for, then we probably will perform a bit better on the EBITDA side. We have a very clear vision on how we want to move this company to a new operating model kind of supported by AI work streams to really redesign the company. So all in all, like Chris said, on top of the run rate and everything that happens there, really pushing down costs and really redesign the operating model of KPN could be an important program to benefit from the coming years.

Yes, on regulation, yes, the Netherlands is a bit of an exception because KPN is formally not regulated on the fixed broadband side, on the Internet, I must say. Recently, our regulator, investigated the retail markets for Internet, again, and the conclusion is that it's very competitive and they don't have to interfere.

We have KPN open wholesale access model as the framework in the Netherlands for, I believe, until 2030. So that's all quite good. When it comes to regulation, I think mainly from a competition point of view, things could improve further. And taking the Youfone acquisition as an example, we always consider that as a pretty straightforward consolidation, pretty -- something we were able to explain in a pretty efficient way, although it takes 9 months, and we think that especially on competition side, it would be nice if we could easily by smaller operators here and there in the Netherlands. But all in all, the Netherlands is a bit of an exception in the European landscape when it comes to regulation.

[Operator]

Our next question will be coming from Nuno Vaz of Bernstein.

[Nuno Gontardo Vaz, analyst]

Two questions from my side. One is on the B2C postpaid ARPU growth, which from what I see is very similar to the one from last quarter. Given that the CPI indexation was only 2 months last quarter, did you assume that this quarter, you'd see a bit more growth. So just wondering if there's any one-offs there, what might explain a little bit the lack of growth?

And then second question, just focusing on CPI indexation. First part is whether you did CPI indexation for the wholesale broadband lines at the start of the year? It's my understanding you would have the right to do so. And if that might explain a bit the negative net adds on wholesale broadband? And second, on the B2C side on CPI indexation, what is the flexibility for you to increase back book prices higher than average CPI without changing consumer contracts? My understanding is you could not be able -- you could not do so, but it will be helpful to have some color on that.

[Hans Figee, executive]

Nuno, there's kind of 3 questions into 2, but that's okay, you're forgiven for that. I will give you the question 1a to 1b on the indexation. On ARPU mobile, we actually [indiscernible] if you open the hood and look what's going underneath, they look committed and noncommitted ARPU. So it's a bit contracted ARPU. On that contracted ARPU, we can see the price rise really sink in almost one for one.

So on the committed ARPU part of the ARPU price actually goes up with the indexation that we pursue, and you'll see that going up over time. On the noncommitted side, we see a little bit more -- a little pressure. I want some chance for us to fix insured revenue like small additions on insurance. And secondly, we have unlimited customer base of force. And we have MB sharing those kind of measures take out a bit on the top-ups and the out-of-bundle calling.

So you see top ups out of bundles reduced a bit as a function of the more sales of unlimited and the MB sharing that we do. So I think there's a [indiscernible] on committed ARPUs. Our inflation indexation things in actually very nicely. There's hardly any leakage. Secondly, the more -- for more program, we have leads to higher ARPUs, higher unlimited and higher download speed. So the speed tiering program starts to have actually quite a positive impact. That leads to growth and committed ARPU and you pay for it with less pop-ups in noncommitted ARPU and very less insured revenues, but on the latter, you make very low margin.

So I think ARPU will be developed actually to [indiscernible] actually, the margin on ARPU is getting a bit better because we see growth in the margin component of the ARPU. On wholesale broadband, we hardly pushed through any price increase last year. There is an indexation framework that we agreed with the ACM. It was just at a very funny moment or depending how we look at it at the moment at which the inflation was picked and like the ticket at which month the inflation was set, it was actually at a very low number.

So wholesale price inflation was actually relatively small last year. I expect to be higher this year and will be supportive towards also broadband revenues in the second half of the year. So that's in the second half of the year, so you'll see support. Actually, last year, that's a very funny coincidence the way the CPI was cealculated and the moment, it was picked [indiscernible] on the moment that it was at the lowest point. So that will be a few support for wholesale revenues in the second half of the year.

[Joost Farwerck, executive]

Yes. To your final question on B2C CPI increases. Yes, you're right. We can increase prices. If we do that above the CPI mid-year, then customers are allowed to move out of contracts, customers in the front book that is, so [indiscernible] call, do we go for a price increase of, what is it, 3.8% for kind of [ 1% ] CPI increase? Or do we want to do more? We also changed the clause 1.5 years ago. So all the customers we move into new context now, we lock in for 2 years instead of 1 year. So that's also an important thing to take into account when we make a decision like this that from customers in the base now are locked in for 2 years. So that's important when we look at the base and how to optimize the value.

[Operator]

We now move to Nawar Cristini from Morgan Stanley.

[Nawar Cristini, analyst]

I have 2 questions, please. The first one is a follow-up on the competition environment and also relating to your volume expectations. So the Q1 service revenue growth were very strong, which is great to see. About the 3% service revenue target you've got over the next year rely to a certain extent on the continuous delivery on volume growth. Obviously, it's early days, but I was keen to hear how the competitive environment and the volume dynamics in particular are developing versus your own expectations so far since you have provided the capital markets targets.

And secondly, a question on the fiber build landscape. We continue to see across a number of European markets, a rising appetite for fiber M&A and partnerships. The partnerships and M&A we saw so far in the Dutch market have been mainly contained to small players. Do you believe that for now, this activity will continue to be focused on the smaller asset space? Or do you also foresee a scenario where the action could move also to larger filter? And in this scenario, would you consider inorganic actions to address the noncovered 20% of the country?

[Joost Farwerck, executive]

Well, I'll start and then Chris will probably follow. So when it comes to competitive environment and fiber, like Chris was explaining, our customer inflow on the fiber side is working really well. That's very important. 60% of the KPN base is on fiber, and the more customers we get on fiber, the more sticky the base is and the more easy it becomes for us to grow the base.

So our strategy is working. It's a bit time consuming. It's capital intensive, but the plans we launched 4 years ago are really working. And quarter-by-quarter, we are meeting these plans and doing a little bit better. So I'm convinced that we should continue the way we currently operate and push that fiber rollout in the Dutch -- in the country.

And then we will be very successful and perhaps later on, the base will grow faster than we're doing today. So our strategy is working. It's based on the fiber rollout and migrating our customers in the first way to fiber. So we will continue that. When it comes to fiber build, yes, of course, we're always interested in a buy or build discussion, small or larger opportunities we all investigate. We've done some smaller acquisitions last quarters. Network last year, prices -- some smaller networks last quarter. So we are always interested in that.

We're also interested in larger builders, but of course, still comes at the end to a price and value of the network the others are building. And like I already mentioned, we're rolling out homes passed and the whole market is reporting on homes passed, the reality so about homes connects. Are you really connecting households or just rolling out fiber to streets because KPN has moved in 100% of all the streets in the Netherlands.

We already -- I mean, for us, it's very important that we connect households when we roll out the real fiber thing and connecting 60% to 70% of the households in our homes passed is the least we should do to really migrate our customer base and other customers to the fiber network. So first of all, yes, the price is one thing and also the quality of the network. And that's why we keep on building ourselves because we're confident that, that's an excellent network we're doing.

[Hans Figee, executive]

First of all, like we make was a buy decision, right? And in the make versus buy decision, you need to have -- we are very confident of our financial framework, the returns that we make is we don't want to dilute the returns. So it's a very clear financial framework in which we evaluate all these transactions, big or small and second as said, it's important to look at what the network actually constituted homes passed or also homes connect because in the end, that's what it's all about.

So that all features it. I think on the competitive environment, to me, mobile is actually better than what we expected [indiscernible] that we expect to do with CMV. Broadband is still quite competitive. But I think our fiber business is holding up well. And I'm also particularly pleased with the performance in SME business where we continue to report high growth for longer than we ever in this. So the SME business still continuing to grow and that looks at to continue with that.

[Operator]

We will be now moving to our next question, which is going to be coming from Joshua Mills of BNP Paribas Exane.

[Joshua Mills, analyst]

I've got one on the wholesale business and another on the Youfone. So on the wholesale business, I think at MB, you were talking about a 1% to 1.5% revenue growth target over the 3 years. And within that [indiscernible] the moving parts where some inflation linkage on pricing some upsell to the fiber [indiscernible] and then on the negative side, I would assume maybe flat to negative volumes and then the ongoing shift of customers from the ODF product, which I believe is a bit cheaper.

So I want to check, is that still the playbook for you to get to the 1% to 1.5% revenue growth on wholesale? And how much of a headwind do you expect volume losses to be? Is it expected that this will stabilize [indiscernible]? And then the second question on the Youfone. Can you just give us a bit of color about what the recent net add trends have been in that business? And if you're able to maybe comment on where the revenue and EBITDA growth settled in [ 2023 ]?

[Hans Figee, executive]

Yes, on the wholesale side, if the -- I think 1.5% to 2% is what the revenue growth in wholesale should be, but after absorbing some regulatory headwinds, MTA tariffs have been [ slashed ] over time. So I think the assumption on also is no negative net adds over time, it's flattish to small growth in net adds over time. So you see growth in mobile flattish to small growth in fixed with a shift from copper to fiber and fiber [indiscernible] because we're moving to -- we're increasing share of total technologies [indiscernible] technology where you offer the full product, which is a good part.

So there's an ARPU increase in there, set up by MTA tariffs -- interconnect tariffs gradually going down over time. Now obviously, next quarter, things will change also because Youfone will be shifting from wholesale to retail, we'll give you full clarity in the Q2 numbers. But on a like-for-like basis, 1.5% to 2% growth in wholesale after having absorbed regulatory tariff decreased.

And we look at the out Youfone performance, what we saw is in line with strong growth in mobile net adds and flattish in broadband, reflecting that some of the smaller players had a difficulty to make the broadband work as a smaller broadband reseller, looking at [indiscernible] Youfone had about 50,000 broadband net adds. And obviously, under the KPN flag in the APN context, having the situation for you from growth and will change definitely benefiting from KPN organization, KPN scale. And obviously, there's no risk of this to the wholesale fees that are charged to Youfone will no longer matter.

So I think Youfone and KPN will have an opportunity to regain momentum in broadband over time but in line with the market growth in mobile subs and flattish on broadband subs. Turning in the latter, I think we should definitely be able to turn around in the KPN environment.

[Joshua Mills, analyst]

And going forward, would you be willing to give maybe a bit more disclosure, say, next quarter on the split between the KPN main brands and then the sub brand customers in the net adds [indiscernible] we might expect that net adds to accelerate in postpaid, I suppose, that will be coming from lower quality customers or lower value customers, I should say. Is that something you're going to give us more detail on the future?

[Joost Farwerck, executive]

Yes. Well, probably. I mean, we know Youfone for a long time because they always used our network, so where we -- the interaction with the company was always on an excellent level. Very strong in mobile, like Chris said, a very strong player on the mobile side. And we'll keep Youfone on a distance, of course, leveraging on the broadband side, the KPN machinery.

But from a model point of view, I think it's very important to keep the brand alive and keep the very efficient organization like this. So I think we can be transparent on what Youfone will do in the future. But the team is currently sitting together with Youfone and let's see how we are going to disclose on you Youfone in Q2. That's what we have to work out.

[Operator]

Ladies and gentlemen, we have time for only one more question. And the last question will be coming from Georgios Ierodiaconou of Citi.

[Georgios Ierodiaconou, analyst]

Just a couple of follow-ups on topics we discussed earlier. The first one is on wholesale broadband base. And I think Chris, you mentioned that it's been some of the smaller operators that are [indiscernible] our strategy. And I'm just curious whether you've already seen any impact from Odido's other wholesale partnerships in the market and whether some of the traffic migrations are going to other fiber networks. So whether that's not come to yet?

And then the second question is around some of the pricing [indiscernible] used to make particularly on the promotional side. What we saw in previous years is output price increases were reinvested promotionally by other players. You mentioned earlier that both you and Odido are making moves that suggest you are more focused on your broadband base. Do you mind commenting a bit on the behavior of Ziggo? Do you think now that it's smaller price increases, maybe there'll be less promotional also or whether you've already seen any sense of that?

[Hans Figee, executive]

Georgios, on the first one, on the wholesale broadband competition [indiscernible] flattening of growth in growth is more the decline in smaller players. So basically what happened in the [indiscernible] on copper and have little chance -- a little success in growing -- growing on fiber, and that we see what we can help in there.

On wholesale broadband competition, we do not see any active migration. So basically, we don't see anyone where multiple [indiscernible] actively migrate wholesale customers away from KPN to other lines. And we don't expect it either because once [indiscernible] you touch them, the risk of churn is way to high. So we see that happen -- that we don't see it happening.

It might be that the gross adds may be a second going forward as they have alternatives to go to because of gross adds, but migrations -- active migration from KPN [indiscernible] is actually not a place, not a stable at this point in time. So it's really the net effect of, I think, smaller players affected by the competitive intensity having ability to compensate with gross adds. And then if any broadband competition, it's less new inflow, but especially not additional outflow or active migration. That is not a play at this point.

[Joost Farwerck, executive]

Yes, your question on our [indiscernible] from Ziggo. Yes, of course, we have to understand that we really are putting pressure on the company with our fiber strategy. And that's also a bit that I need a new kind of strategy to be honest. They have been pretty platforms discounts in the market. Compared to us and other players, they went deeper. So it's important that we cool things down a bit in the Netherlands at least for now, that is.

So -- and that's why I like our household 3.0 strategy that much. It's a signal to the market that we want to cherish our base. To give you an example, for all existing customers, we have a renewal package ready in yet. You only have to click to get it. And it's all about the improvement of quality and download speed. So -- but that's also for KPN a bit of a change. It's easy to communicate, but it's also something we really have to implement as a company. And it also should signal that it's not only about acquiring customers or losing a lot of customers on the churn side, but it's also about cherishing your base. So if we do that, probably we will cool down the market to be better.

[Reinout van Ierschot, executive]

All right. yes. Thank you, everyone. As usual, we will offer -- yes, okay, everybody ready. That concludes today's conference call. If you have any further questions, please reach out to the IR.

Thank you.

[Joost Farwerck, executive]

Thank you.

[Operator]

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