Koninklijke KPN NV

F:KPN

Earnings Call Analysis

Sustained Service Revenue and Dividend Assurance

In Q3, we experienced solid financial performance, highlighted by increased service revenue growth leading to higher EBITDA. We paid an interim dividend of EUR 0.052 per share and foresee a year-end weighted EBITDA and free cash flow, affirming our full year '23 outlook. Our CapEx is on target, focusing on connecting over 600,000 homes annually. Despite mobile price hikes from October affecting our net promoter score, we anticipate benefiting from these increases in Q4. Market dynamics show a shift, with less promotional activity, yet we aim for value over volume. We maintain our policy of returning all free cash flow to shareholders through dividends and buybacks, undeterred by potential spectrum auction delays.

Q3 Performance and Strategic Advances

The company reported a quarter of solid financial achievements and strategic progress. Group service revenues grew by 3.8%, with all segments contributing positively. Business services, particularly strong in small and medium-sized enterprises (SMEs), improved due to a focus on high-margin activities. Consumer mobile services showed robust growth and in the fixed segment, revenues turned upwards, driven by group broadband and recent price increases. The ongoing fiber rollout added over 260,000 households, reinforcing the company's infrastructure presence and future revenue potential. This underlines the company's commitment to delivering sustainable growth and positive results aligned with its current strategic direction.

Fiber Focus and Capital Expenditures

Reflecting strategic priorities, there was a notable increase in fiber-driven and customer-focused capital expenditures (CapEx). An additional EUR 80 million was directed towards fiber rollout compared to the previous year, demonstrating the push towards high-speed connectivity as a growth lever. CapEx dynamics were aligned with expectations, although this caused free cash flow to fall behind the previous year's levels due to phased timings. However, the company stays on track to meet the full-year free cash flow target of EUR 870 million. The management highlighted a balanced approach by investing in fiber while also safeguarding free cash flow.

Balance Sheet and Dividend Payouts

The company maintains a strong balance sheet with a leverage ratio of 2.4x net debt to EBITDA, below their 2.5x ceiling, indicating prudent financial management. The average cost of senior debt increased, reflecting market conditions, but remains manageable with strong interest coverage. Despite the net debt increase due to strategic acquisitions and CapEx phasing, the total liquidity position remains robust, with significant cash reserves and undrawn credit facilities. This positions the company well for future investments and potential spectrum acquisitions. The company also paid an interim dividend in August, reaffirming its commitment to shareholder returns.

Forward-Looking Statements and Market Dynamics

Looking ahead, the company fully expects to achieve the stated full-year outlook for EBITDA and free cash flow. Market dynamics show that the October price increases in the consumer mobile segment have been successfully implemented, with the entire market following suit, which should contribute positively to the fourth-quarter results. And despite some short-term impact on the net promoter score due to the price increases, the company expects stable promoter scores moving forward, supported by differentiation in customer service and superior technology offerings like 5G.

Tax Strategy and Future Guidance

Amid potential changes in tax regulations, the company anticipates a shift in its shareholder remuneration mix towards dividends, away from share buybacks. This is to mitigate the impact of increased withholding taxes. The current effective tax rate stands at 23% with cash taxes around 8%, with expectations of increased cash taxes in future years as net operating losses are utilized. However, the company is well-positioned to manage these impacts and will provide further guidance at the upcoming Capital Markets Day.

Operational Efficiency and Customer Acquisition

The company has effectively managed operational aspects such as churn, which decreased in the current period, contributing to revenue growth in the consumer fixed services segment. The focus on operational efficiency and enhancing the quality of service offerings is expected to continue driving positive service revenue growth through the next quarters, providing a stable foundation for consumer service revenue generation.

Strategic Transitions and Expectations

In alignment with long-term strategy, the company successfully deactivated 25% of the copper network in the Netherlands and is on course to accelerate fiber rollout, expecting further declines in copper broadband in a controlled and planned manner. The strategic shift towards fiber is a calculated move designed to gradually replace the legacy copper infrastructure while driving revenue growth through higher-value fiber connections.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, ladies and gentlemen. Welcome to KPN's Third Quarter 2023 Earnings 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 today. Welcome to KPN's Third Quarter 2023 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 regarding 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. Welcome, everyone. We will give you a brief update on our third quarter results. We continue to deliver positive results with our current strategy. Group service revenues continue to grow sustainably with all segments contributing. B2B is being fueled by strong SME growth again. In consumer, fixed service revenues inflected this quarter, while mobile service revenues continue to grow. Both broadband and postpaid reported ongoing positive base inflow reaching 70,000 broadband and 30,000 postpaid net adds. This quarter, we added 261,000 fiber households together with our joint venture [indiscernible] and this also includes more than 120,000 households from our recent acquisition of Primevest. While our cost base continues to be impacted by energy, wage indexations and other inflationary headwinds, we delivered solid adjusted EBITDA growth compared to last year. Our year-to-date free cash flow was mainly impacted by intra-year CapEx phasing, but we remain fully on track to deliver on all outlook items for 2022 -- 2023.

Chris will give you more details on our financials later. First, I'll take you through some business details. As we are now more than halfway through our ambitious fiber build plans to reach 80% fiber coverage of Dutch households by 2026. It's time to share our plans for the future. And therefore, we look forward to providing you with a strategy update for the coming years at our Capital Markets Day that will be hosted on Tuesday, the seventh of November at our headquarters in Rotterdam. We look forward to welcoming you there or online for the webcast. As I mentioned, we added more than 260,000 households to our fiber footprint. And so we now cover 55% of the Netherlands with fiber. Our fiber business case continues to deliver results. We've generated EUR 1 billion fiber service revenues in B2C in the last 12 months. And the double-digit growth rate is driven by a solid basing flow and an attractive ARPU. All in all, the fiber remains at the heart of our strategy to create long-term value for all stakeholders. Let's now take a look at our consumer segment. Adjusted consumer service revenues increased for the second quarter in a row. Mobile service revenues kept its growth at 5%. And for the mobile portfolio, the 8.4% price adjustment has been implemented in October. Our fixed business inflected in the third quarter, supported by ongoing solid broadband-based developments and a 6.4% increase for July. Our customers remain a top priority. This quarter, our Net Promoter Score declined to 30%. Given the inflation levels seen over the last year, the price increases we implemented are also higher than customers were used to. And this was one of the main reasons for the drop in NPS last quarter. We continue to strive to provide the best connectivity and customer experience. This is a focus point for us, and I'm convinced we will gradually move up NPS back to its usual level. In the meantime, we're still doing better than other providers in the market, and we were once again recognized as the best Internet and Mobile provider in the Netherlands through another award by tweakers. Let's take a deeper look into our third quarter consumer KPIs. Our focus on base management and commercial execution is paying off as we saw another quarter of broadband base growth.

In the third quarter, we realized 70,000 net adds of broadband users and our fixed ARPU grew 2.6%. Postpaid base increased by 33,000, while the postpaid ARPU increased 2.8% year-on-year. Resulting in sustained mobile service revenue growth of 5%. So that's a good quarter on the consumer. Let's now move to B2B. In B2B, we saw continued strong revenue growth in the business segments. B2B adjusted service revenues grew by 4.2% year-on-year, fueled by SME. SME is doing very well. Business Net Promoter Score continues to improve and was plus 6% in Q3. In this respect, we remain a Dutch market leader as customers continue to value KPN for the stability, reliability and quality of our networks and services. Like I said, SME continues to be the main growth engine in B2B, driven by solid commercial performance in both mobile and broadband and our cross-sell strategy to ICT services all on the KPN ONE platform. The LC turnaround remains a priority. In the third quarter, we saw our revenue slightly declining again after 3 quarters of small growth. The decline was mainly driven by reduced mobile and fixed traffic, lower roaming related revenues and ongoing competitive dynamics in the mobile markets. So it's a difference of EUR 3 million, but we clearly see employees being managed by larger companies not to miss huge handsets abroad so especially lower roaming revenues is impacting the LCE EBIT. So this could remains a focus item for us. And lastly, the Tailored Solutions business remains subject to the timing of projects. Third quarter was solid. And we also see that the performance is gradually moving to a more profitable level in this area. So to conclude on business, LCE inflection is a focus point for the B2B management team and while at the same time, continuing to deliver SME growth and keep on improving profitability in Tailored Solutions.

Then in Wholesale service revenues increased by 5.4%, with strong growth in both mobile and broadband compared to last year. The Wholesale Broadband base grew by 14,000 continuing the growth of the last quarter. So in total, Consumer and Wholesale together, we activated 31,000 new broadband connections on our network this quarter. The number of postpaid sims declined, but this was fully driven by a cleanup of 32,000 2G. So legacy machine-to-machine SIMs and one single wholesale customer. Let me now hand over to Chris to give you more details on our financials.

[Hans Figee, executive]

Thank you, Joost. Let me take you through our financial performance. And let me start by summarizing some key figures for the third quarter. First, adjusted revenues for the third quarter increased 2.2% year-on-year. Strong service revenue growth across all segments outpaced lower non-service revenues. Second, we saw growth in the third quarter on adjusted EBITDA after leases at 1.8% in the plus, despite in cost headwinds from wage inflation, higher energy costs and other inflationary effects. So far, our quarterly EBITDA delivery has behaved fully in line this year with the pattern as we indicated at the beginning of the year. And finally, free cash flow decreased by 18% in the first 9 months of the year compared to last year mainly due to inter-year CapEx rating and higher cash taxes. I will offer more detail on underlying cash developments later in the presentation. Group service revenue growth accelerated to 3.8% underpinned by growth in all segments. Business Service revenues grew by 4.2%, mainly driven by the ongoing strong SME performance. Roughly 2/3 of the SME service revenue growth in the third quarter was driven by higher-margin access and connectivity revenues and 1/3 was related to lower margin ICT revenues, which, of course, increases share of wallet customer stickiness as well. Wholesale showed solid growth again with service revenues up 5.4% year-on-year. And in Consumer Mobile service revenues continued to grow strongly and fixed service revenues finally went to Growth Motors, supported by group broadband-based developments and our price increase. So fixed service revenues are in the plus for this quarter and will remain so into the next quarter. We have generated EUR 562 million in free cash flow so far this year, making our cash margin of around 14% of revenues. The decline so far for the last year is mainly explained by different phasing of fiber-related CapEx and higher cash taxes. In line with our outlook of EUR 870 million that we stick to, free cash flow growth will be weighted towards Q4 reflecting a timing of CapEx phasing also relative to last year and the improvement in working capital. Finally, we ended the quarter with a cash position of almost EUR 580 million, absorbing the interim dividend payments over '23 in August. We continue to have a strong and resilient balance sheet at the end of September. As a result of higher floating rates and debt issuance, the average cost of senior debt increased by 87 basis points year-on-year to 4.1%. And yet our exposure to floating rates was further reduced to only 15%. Leverage, we made at 2.4x net debt to EBITDA, which is below our self-imposed ceiling of 2.5x. We expect a lower leverage level by the end of the year. Interest cover remained strong at 12.3x. Net debt increased by EUR 254 million compared to last year, mainly driven by a different phasing of free cash flow generation and the acquisition of Primevest. And our total liquidity remains robust consisting of about EUR 1.6 billion in cash and short-term investments and our undrawn revolving credit facility. This includes a EUR 600 million senior bond issued in July, which further strengthened our liquidity position and increase the average maturity of KPN's outstanding debt. This provides ample flexibility to pursue bolt-on growth investments as they may arise and to acquire spectrum in the next coming up 3 big auction expected to take place somewhere next year. Let us turn to our outlook and ambitions for next 2023. As Joe said, we are on track to deliver on our 2023 outlook that we provided you in January for the metrics you see on screen. On the first of August, we paid an interim dividend in respect of '23 of EUR 0.052 per share. So to summarize, we generated solid financial revenues and results in Q3 with accelerating group service revenue growth tricking down into EBITDA growth. Group service revenues are growing sustainably with all segments continuing to contribute with another quarter of positive net adds in broadband and mobile and consumer, especially on broadband, are based in the higher at the beginning of the year and a base also higher than last year this time around. Our fiber rollout program remains at a solid pace and has a proven attractive return profile. Finally, as expected and planned for, our EBITDA and free cash generation will be back-end loaded this year. Looking ahead, the sustainable service revenue growth run rate, the measures we've put in place in this quarter's results provide us with confidence to achieve our ambitions in Q4. Therefore, we confidently reiterate our full year '23 outlook both for EBITDA and on free cash flow. Thanks for listening to the short presentation. Lets turn to your questions.

[Reinout van Ierschot, executive]

Thank you, Chris. [Operator Instructions] Operator, over to you.

[Operator]

[Operator Instructions] Our first question comes from the line of Polo Tang from UBS.

[Polo Tang, analyst]

I have 2. The first one is really just about CapEx because it's running at plus 11% year-to-date at EUR 900 million. And if I look at the average Q4 CapEx the past 5 years, it's been around about EUR 340 million. I know that you've reiterated your guidance for CapEx to be flat at EUR 1.2 billion for this year. But can you talk through whether it makes sense to accelerate the pace of your fiber build in order to gain a first mover advantage versus peers and therefore, reduce the risk of fiber overbuild? That's the first question.

And second question, is the Dutch government has proposed a tax on share buybacks as well as a 2 percentage point increase in terms of the corporate tax rate. So does this impact how you think about the mix of shareholder returns? And also, how should we think about the level of your group tax rate going forward? Are there any factors that could mitigate a rising tax rate for the group?

[Hans Figee, executive]

Polo, let me take both of these questions. First of all, on CapEx, there's a bit of color. Our CapEx is net up year-to-date by EUR 90 million. The increase is fully driven by fiber and by customer-driven CapEx on nonfiber CapEx actually below last year. So the dynamics are in what I feel in line with our strategic direction, accelerating on fiber and more consumer-related CapEx, CPE in line with our commercial strategy. Last year, we had a significant peak in CapEx. Remember, last year, Q4, we went to EUR 391 million CapEx in Q4. That is part of the intra-year CapEx rating that we talk about that's affecting our free cash flow. So one subtle message is that because of this CapEx phasing, our free cash flow is running behind last year, we will get back on track on to our target for the full year. Secondly, could we accelerate fiber CapEx to some extent. At the same time, it's also it's a matter of also deploying it effectively and making sure we can also convert the homes passed into paying customers. So we are ramping up on fiber CapEx. As you say, compared to last year with EUR 80 million up, fiber takes an increasingly larger share of our total CapEx. I think we're pushing it to the limits. Could we do somewhat more? Yes, but at the same time, we're also very cognizant of we need to protect our free cash flow. So in that balance between free cash flow management, CapEx optimization and what you can effectively do, we think the acceleration that we're doing this year is a fully balanced approach. On your second question on taxes. Well, the government regulation has to be passed by the first chamber by the Senate. Let's see how that evolves. For us, it means that, in any case, we are looking at a potential increase in withholding taxes on share buybacks if we don't act, I think we talked about it before -- even in the absence of new regulation, there's a pretty complicated withholding tax framework. We mean that going forward, I mean, we'll talk more about it at the Capital Markets Day, but in our policy to pay out our full free cash flow to shareholders. We likely see a mix shifting a little bit more towards dividends and away from buybacks is to deal this tax effect and that's already happening. And then whenever the Senate approves or order to approve government regulation that may actually reinforce that, that stance because we don't want to pay on due taxes. And on taxes itself, our effective tax rate today is about 23% with cash taxes around 8%. The increase in tax rate does not hit us at this point. Actually, it increases the value of your net operating losses a bit more. [indiscernible] got NOLs is good. To us, it's more a function of how quickly we go through our NOLs. And you will see already this year, about a EUR 60 million increase in taxes this year. There will also be an increase in cash taxes next year, which we'll talk more about the C&D and gradually burn through our operating losses into like '26, '27. So the increase in corporate tax rate doesn't really hurt us at this point. It's more something beyond '26, '27 when the operating losses have all been absorbed.

[Operator]

The next question comes from the line of Joshua Mills from BNP Paribas Exane.

[Joshua Mills, analyst]

Two for me. The first one is just a clarification, Chris, on what you were saying there around the CapEx envelope. Were you saying you're comfortable with the acceleration you're seeing in 2023 in order to hit your 2023 rollout target? Or is it you're saying that you're happy with the acceleration and the current level of CapEx you have in place in order to hit your medium-term guidance, which I know you will be looking about the CMV, but obviously, the coverage target is already out there. So we want to make sure that your whether you think this year or this level for future years. And then the second question would just be if you could give any commentary around initial customer reaction to the mobile price increase, which you announced and launched in early October, and any broader comments on the competitive environment will be welcomed.

[Hans Figee, executive]

Yes. Josh, on fiber, look, for this year, we are on track to deliver organically well over 500,000 [indiscernible] with excluding our Primevest acquisition and well over 300 to 340-ish in terms of homes connected. So that's kind of a run rate that we feel comfortable with and that's by far the highest fiber roller in terms of HC, but also in terms of HC, which I think is becoming an increasingly important metric. And what I was saying about fiber is that we stick to a CapEx envelope of EUR 1.2 billion, plus or minus like a few percentage points of management bandwidth that you will always have. So it's going to be 1,200 plus a bit, but not a whole lot, but that's for practical purposes. We stick to that commitment. But you see that in an envelope, fiber consumes a larger and larger chunk of your CapEx. So basically, what I'm saying is we're confident and comfortable with the current rollout pace that we want to continue. You'll see gradually shifting more towards AC over HP, so homes connect rather than homes passed over time. And secondly, you see fiber taking up a significant chunk and gradually increasing chunk of our total CapEx with our CapEx envelope still being centered around the EUR 1.2 billion.

[Joost Farwerck, executive]

Yes. So CapEx fully on speed and rolling out more than 600,000 houses per year is a lot. So the challenge is more how to connect customers than the rollout itself. Your second question was on mobile pricing, yes. So as the first of October, we increased prices. By the way, the whole market increased prices.

So that is -- on the one hand, the good thing about Dutch market is that we all try to create value and we see clear increase of prices also coming from [indiscernible] market is a bit aggressive where we now and then as well with all kind of discounts in the market. But all in all, our price increase landed well. Having said that, it's a bit impacting net promoter score because the announcement was already done in the third quarter. But of course, we expect to benefit from the increase as from the fourth quarter this year.

[Operator]

The next question comes from the line of Georgios Lerodiaconou from Citi.

[Georgios Ierodiaconou, analyst]

I have both around market dynamics. Firstly, on the promoter scores. And I noted on Page 8, you show that there was a small decline in your Net Promoter Scores. I'm curious from the answer you gave, if you expect that the price increases in mobile have already been reflected in the third quarter? Do you expect further deterioration in the fourth quarter? And what I'm trying to understand is how you're thinking about whether you feel the need to improve the Net Promoter Score in the coming quarters and maybe be a bit more cautious on the price increases going forward or whether you just monitor the gap between you and the other brands and that may still give you some room to continue. And the second question is more probably on market dynamics. It doesn't look like we're seeing the same promotions as we did last year despite the fact that you guys seem to be winning market share. Just curious to your comments from you whether you believe that's fair, whether you see some reactions in other channels and whether these last 2 quarters of very strong broadband net sustainable.

[Joost Farwerck, executive]

Yes. So first of all, Net Promoter Score, we consider this a very important KPI, although it's not a holy grail for the company, right? I mean it's super important. It indicates where we are, and we are outperforming against competition big time. There is one very big competitor in the Netherlands, even below 0. So us being about 18% was always a very big difference representing the quality of the service we deliver to our customers.

So when we do a minus 6 in 1 quarter, that's a very important signal for the whole company and we have more interactions with top management on this subject but it's a balancing act. One has to do. It's -- I mean, our Simyo brand is doing 43 currently as we speak. So there's a lot to do in Net Promoter Score on pricing. So if you really want to lift up the whole KPN company to a level of 40%. We should do price decrease instead of increase. So that's what I mean. It's not the holy grill. Of course, we want to create value. So it's a balancing act. We increased prices, not on the level as competition did, but much higher than previous years. So we expected Net Promoter Score to decline. Last year, we also increased prices on mobile as the first of October, but Net Promoter Score improved from the third to the fourth quarter. So I don't expect a further decline on Net Promoter Score taking into account the usual run rate of all this. But it's like I said, the balancing act and we also want to differentiate on the way we serve our customers, the way we connect fiber and the quality of 5G in the Netherlands. So that's where we are and we will work on the Net Promoter Score, but we're also creating value when it comes to ARPU. And promotions in the market, we were not impacted that much, I must say, but it's also, of course, a reaction on the inflow on the KPN side. So currently, I expect the fourth quarter to head up a bit again. We have that Black Friday thing coming up. We already announced that we will not join that one for weeks. So we are a bit prudent here ourselves. And also there, it's more a bit of a balancing act between net debt growth and the value we try to create with base. So perhaps the fourth quarter will not be that great when it comes to net adds, but that's then a decision of us not being too aggressive on the promotional side because it's all about the value creation we do with the whole base and not only with net adds.

[Operator]

The next question comes from the line of Keval Khiroya from Deutsche Bank.

[Keval Khiroya, analyst]

And I've got 2 questions, please. So firstly, just going back to pricing. As you've talked about the Dutch market has seen healthy back book price increases, but your fund book prices haven't really increased. Do you think front book prices do need to go up at some point? Or can that book increase still sufficiently stick without? And then secondly, the regulatory review of Youfone is ongoing. Do you -- are you still confident that deal being approved? And how should we think about the time line for that as well?

[Joost Farwerck, executive]

Yes. Well, on the Youfone parts, we think there's no reason not to approve it. So -- but of course, we have to wait and see it. At the end, it's ACM to approve this and we can't speak for them. So but we can't really come up with a good reason why this should be hampered by ACM but we will see. And currently, we're in the process of answering all their questions. So that will take some time. I don't expect this thing to conclude in the fourth quarter, probably will slip a bit to next year.

But yes, we have to speed up our government a bit on that one. Yes, and the whole theme on back book against front book, that is a relative theme for us also when it comes to -- on the coming years and how to run our base. And it's our intention to focus more on the base and not only on the inflow of customers and to create value on the total base. And by that makes the difference between back book and front book less than it was yesterday. So that's a challenge. But I must say the front book is not that large anymore as it used to be. So the difference is less than it was in the past.

[Operator]

Our next question comes from the line of Konrad Zomer from ABN AMRO, ODDO BHF.

[Konrad Zomer, analyst]

I've got one on the G spectrum motion. It keeps getting delayed and delayed and it may not happen in Q1 next year. It might happen in Q2. Is that given your leverage of 2.4x, does it have any impact on how you think about the size of the buyback that you might announce for next year?

[Hans Figee, executive]

Look, we have got a policy to pay out all our free cash flow to shareholders in a mix of dividends and buybacks. So in essence, and we have -- obviously, we plan for a certain spectrum auction, but we stick to our policy of basically we're doing all our cash to shareholders to an essence. As long as we are able to fund the spectrum of our balance sheet, which we're pretty comfortable that we can do that, we will continue to follow our policy. So in essence, I don't think the spectrum market as such has a major impact on our buyback not next year, so at least because basically, we stick to our policy, return on our free cash flow to shareholders.

[Konrad Zomer, analyst]

Yes. But if you already know, let's say, in January, February, what the end result of the auction might be, then it might give you another view on the size of your free cash flow that you still have available for buyback.

[Hans Figee, executive]

Well, yes, we run a system like total our free cash flow excluding spectrum auction. So as long as we know what our free cash flow is, we know what our share rule of return will be. And secondly, look, it's clear that like it is unlikely that by Q1, by January when we announce our annual results, it's very unlikely for the auction to be behind this. So I think the most -- the best expectation is that we project our free cash flow for next year, return that to shareholders in a dividend and buyback mix, which is slightly more tilted towards dividends. And if and when the auction happens, we can revisit what our balance sheet looks like but that then very much depends on the auction. So I think given the timing of things and given our typical payout policy, assume an unchanged policy for now.

[Konrad Zomer, analyst]

Right, right. Okay. Maybe just one quick follow-up. You had a EUR 25 million pension contribution in Q4 last year. Do you expect to make another pension contribution this year?

[Hans Figee, executive]

Konrad, allow me to take your question and broadly then talk a bit about free cash flow to tell you what's going on in free cash flow last year. This year, our free cash flow is obviously a little bit behind last year. We expect, however, and are confident to meet our free cash flow targets. If you look at what's happening year-to-date, EBITDA is kind of flattish. It's up a tiny bit, but it back roughly flat. We spent somewhat more CapEx at this point due to inter-year phasing. And then on the other drivers, we had lower interest, higher taxes and some deterioration of working capital, and that one is mostly due to higher trade payables. That's a function of the CapEx spike we had last year in Q4 last year, we had a CapEx increase. And obviously, you pay your bills, your invoices in Q1 and Q2 this year. And we had a gradual decline in inventories. That caused a negative working capital delta this year. So that explains the free cash flow gap year-to-date. Then if you turn into Q4, you'll see EBITDA growth, right? We stick to our guidance for the year. We see a bit of upside, not asset, but it's a bit of upside. So EBITDA itself will start contributing to cash.

I see in Q4 a slightly larger portion I call cash earnings, if you take the delta and provisions in our cash flows sum up. I think the cash portion of earnings also go up. So I mean more EBITDA will trickle down into cash. You'll see less CapEx in Q4 than last year. And on working capital, the increase in trade payables will run down when you move into Q4, inventories will start to be running down because we ordered inventories in Q1 and Q2 and did not order anything in Q3 and Q4. So we started running down in inventories. And we've launched an acceleration program also on trade receivables. And those measures we started in the summer, will start kicking in Q4 as well. So that basically is like not an answer to your question, but I'm just telling you that what I'd like to do on how our free cash flow develops. And on to your question, we don't expect another pension contribution, which will also -- because we've done that last year in the U.S. pension fund is effectively closed. So that means it also helped in the year-on-year comparison on cash. So apologies for abusing your question to give you the free cash flow story, but I didn't want to let the opportunity go on....

[Operator]

The next question comes from the line of [indiscernible] from Bank of America.

[Unknown Analyst]

Just 2 topics to touch on as well. The first 1 would be actually, that Dutch inflation has come down quite significantly, I think, and was even flat in September. Can you maybe talk a little bit about the implications that has on your wage negotiations and scope for future price increases? Maybe are you shifting more and towards upselling or more for more rather than inflation adjustments into next year? And then a second quick topic was just on the Primevest acquisition that is now in your fiber number this quarter. Can you maybe talk a little bit about the experience you have integrating the network into your wider group, maybe on the technological or sales perspective and based on those learnings and on the integration phase, what does that imply for future appetite for any further 5 acquisition?

[Joost Farwerck, executive]

Well, on the Primevest part, it's good to see that all third-party fiber networks are built according the KPN architecture to put it that way. We started with fiber a long time ago on a slow rollout speed, and we move to PON recently but more or less all fiber footprints in the Netherlands are not that difficult to connect to our networks, but it asks the rollout of a backhaul to our point of presence to make sure that we can all use the same active layer, but that's all a bit technical. So to really connect the Primevest level network on our active layer and on our consumer service level instead of as a wholesale interconnect interface, we rollout backhauls ourselves. And then we start selling in the KPN way on the Primevest network. And that will be launched perhaps this quarter so soon. So it's pretty okay and easy for us to connect such a prepared network to the KPN fiber footprint.

[Unknown Analyst]

And on your -- on the inflation increase maybe...

[Hans Figee, executive]

Oh yes, inflation is indeed is coming down. Let's see where it ends up is notably the energy coming down. The core inflation is still [indiscernible] high. What it means for wage negotiations, early to say we have not started those. We -- in this will look at inflation, both headline and core inflation never play role. Also, we have to take note of other wage settlements that are still in the 5% to 7% area in the Netherlands, but no doubt will play a role in these bargaining situations. So it's early to say what will be the outcome, but it will be a function of the actual inflation and what is common practice. And as I said, data points are headline inflation, core inflation and what happened elsewhere. What does it mean for price increases next year? Honestly, that's kind of too early to say. Obviously, I'd love to be less dependent on price increases and more on volume increases and more for more sales. That is what we're doing. I mean, for example, in broadband, about 50% of fiber new sales is one gig and 40% of all broadband still 1 gig. In consumer, about 40% of all our new sales in unlimited. So that push is actually continuing. We've launched a 4-gig proposition. So underlying strategy always is to pursue more for more and that clients cover higher data bundles and higher speeds. That is an underlying support ARPU. And that could be accelerated based on our price increase.

But fair to say this, let's see where next year, how things develop before you make that call. It will be a function of what the wage increase outcome is. It will be a function of where inflation is where I think in our society that co-inflation will play an increasingly important role rather than just headline inflation.

[Operator]

Our last question comes from the line of Usman Ghazi from Berenberg.

[Usman Ghazi, analyst]

I just had a question on the consumer segment, where I can see that both the legacy revenue declines as well as the decline in the copper revenues moderated this quarter. And I just wanted to understand if this is kind of a structural expense that we should be looking out for or whether this is just a quarterly blip?

[Hans Figee, executive]

No, look, this feels like it's pretty good. I mean on the legacy -- look, the legacy revenues are in structural decline. There is a core that will probably not go away. So the decline of a portion becomes smaller and smaller, and that will be core of legacy revenue that will probably stay for longer. So the decline in the decline, so to speak, -- the improvement in the second derivatives for those technicians among us is actually a positive and not completely unexpected. And when it comes to broadband service revenues, obviously, price increases have helped here a bit. Also, churn went down. So that means that -- for example, on consumer fixed service revenues, they were up this quarter. It feels that it will be up again next quarter. So I actually be I wouldn't be surprised even next quarter, Q4, when you look at total service revenue growth, that consumer service revenue growth is very close to business service revenue growth or even a bit higher. If I look at the underlying trends in mobile, underlying trends in fixed. So it means as I said, on broadband, we expect another positive growth number in fixed service revenues in the second quarter and I wouldn't see why it wouldn't spill over into Q1. And thereafter, of course, visibility becomes a bit less, but overall, that feels pretty supported by the P and the Q to speak and then also supported for total consumer service revenues, which looks quite good in Q4, for example, comparing to the business markets.

[Joost Farwerck, executive]

Yes. Copper broadband in decline is following exactly the line of our strategy. So we deactivated 25% of the Netherlands on copper. And we will continue by switching off copper and speeding up the fiber rollout. So we expect copper broadband to decline further, but exactly in line with our plans.

[Usman Ghazi, analyst]

Can I perhaps just maybe ask one more. On the business segment, in the LCE segment, obviously, there's a bit of weakness this quarter. Again, I mean, does this kind of reflect the macro situation? Or is it something else?

[Joost Farwerck, executive]

Yes. Well, in B2B, it's mainly traffic and specifically roaming traffic. Last year, we saw a spike, a huge increase of roaming traffic. I think it was a bit after the COVID wave. And that didn't happen this year. So when you see 2 things less than last year because of no coated reaction. And also, what we see is that larger companies are more prudent on the usage of mobile phones as we are, by the way, so stricter usage in other countries and more usage of WiFi. So this is the trend we keep an eye on. At the end yes, a difference of 3 million, something like that. So -- but yes, that's the main difference.

[Reinout van Ierschot, executive]

Okay. Thank you very much, everyone. This concludes our call. We hope to see you at our Capital Markets Day on the seventh of November headquarters in Rotterdam or otherwise via webcast. If you haven't registered yet, please contact the KPN Investor Relation team. Thank you very much.

[Joost Farwerck, executive]

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 lines. Have a nice day.