Koninklijke KPN NV

F:KPN

Earnings Call Transcript 2022-Q4

[Operator]

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

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

[Reinout van Ierschot, executive]

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

As usual, before turning to our presentation, I'd like to remind you of the safe harbor on Page 2 of the slides, which also applies to any statements made during this presentation. In particular, today's presentation may include forward-looking statements, including KPN's expectations with respect to its outlook and ambitions, which were also included in the press release published this morning. All such statements are subject to the safe harbor.

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

[Joost Farwerck, executive]

Thank you, Reinout, and welcome, everyone. Let me start with some highlights from the fourth quarter and the full year results. We are pleased to have delivered on our 2022 outlook. Throughout the year, we have consistently grown our group service revenues. Very important and clear proof point of the success of our strategy. Within the mix, our business service revenues grew for the third quarter in a row and have now reached the point of inflection. Consumer fiber and mobile service revenues showed continued growth partially offsetting the competitive dynamics in the broadband market. And in wholesale, we see the ongoing success of our open network policy leading to continued growth, whilst our cost base was affected by higher energy prices and one-off allowances to our staff, we were able to protect our margins. And as a result of careful cost of cash management, we delivered solid EBITDA and free cash flow growth.

Together with the joint venture at Glaspoort, we added a record number of households to our fiber footprint during 2022. We were again awarded the best mobile network, both in the Netherlands and in the world. And we were also recognized as the best all-in-one broadband provider in the Netherlands, both on fiber and on copper.

Our return on capital employed continues to move in the right direction. The confidence in our strategy and the successful execution enables us to pay a progressive dividend and to return additional capital to our shareholders. Last year, we completed the EUR 300 million share buyback and this year in 2023, we will again execute a share buyback program of EUR 300 million, effectively distributing all of our free cash flow to our shareholders.

As usual, Chris will give you more details on our financials and walk you through our outlook for this year. First, I'll take you through a couple of business details. Like I said, we delivered on our 2022 outlook. EBITDA came in above EUR 2.4 billion. CapEx was stable around EUR 1.2 billion. Free cash flow was strong at EUR 862 million, slightly ahead of the upgraded outlook we gave at the half year results. We reiterate our dividend commitment and we will pay a regular dividend per share of EUR 14.3 over 2022. Yes. We've made good progress with our accelerated growth strategy over the last 2 years, and we're now entering the third year of this plan.

In the years after, we will, of course, further focus on the key pillars of our strategy. The first one, leverage and expand our superior networks; second, grow and strengthen our customer base and thirdly, continue to simplify and streamline our operating model and we intend to update the market before year-end with our 2024, 2026 strategy and ambitions.

Let's now look at the first pillar of this strategy, our best-in-class networks. Last year, KPN's own fiber rollout reached 348,000 homes passed. And if you add Glaspoort to this, it was over 0.5 million homes in the Netherlands. Together, we now cover almost half of the Netherlands, and we aim to reach roughly 80% of Dutch households by the end of 2026. And after reaching that point, CapEx will come down to a much lower sustainable level.

So far, we delivered a solid set of new fiber connections, and we are further optimizing the way we roll out and connect households. On top of the traditional reported house passed numbers, we have additional household capacity households covered with fiber through street presence, which we can also use in our commercial approach. According to this definition, the number of fiber homes passed is EUR 3.7 million at the end of 2022.

As you all know by now, our fiber business case is centered around market share gains, ARPU uplift and lower maintenance cost of the Fiberco. And as we continue to roll out fiber, our growing fiber footprint will result in an improved penetration rate for retail and wholesale.

In fact, Today, our retail fiber base surpassed our copper base that happened in Q2 last year. So, now with [ ace ] we have more broadband customers on fiber than on copper, important. And this effort is visible in the financials. Looking at our Q4 results, we currently generate almost EUR 1 billion of annualized fiber service revenues and that number is growing rapidly. In Q4, our Consumer fiber revenues increased by 14% year-on-year, driven by a growing base and an attractive ARPU. All in all, Fiber, as you know, is at the heart of our strategy to create long-term value for all our stakeholders.

And the investments we make in our mobile network and services are paying off as well. The Ookla and Umlaut benchmark recently recognized KPN as the best mobile network in the Netherlands and the world. And alongside this, we were also rewarded as best all-in-one broadband provider by the Dutch Consumer Association, and we were awarded as best fixed Internet provider by Tweakers. So these are all good signs of appreciation for our products and services.

Let's now move to the Consumer segment. Adjusted consumer service revenues decreased by 0.3% year-on-year in the fourth quarter. On the one hand, we see consistent mobile service revenue growth, driven by solid base developments and growing ARPU. And on the other hand, in a challenging competitive environment, our fixed service revenues are impacted by declines mainly from KPN's legacy portfolio. Broadband service revenues grew slightly as fiber broadband revenues continue to grow strongly, offsetting the decline in copper.

Looking at customer satisfaction, NPS remains one of our top priority, and KPN continues to lead in the Dutch market despite the rising cost of living, impacting general customer sentiment. So if we take a deeper look at our fourth quarter KPIs. Our operational performance on fiber remains strong. We activated 50,000 fiber households last quarter. Despite the solid commercial momentum, our total broadband net adds showed a small decline on the back of increased competition in the broadband market. Our fixed ARPU remained broadly stable at EUR 53 and combined, our fixed service revenues decreased 2.3% year-on-year, impacted by a structural decline in legacy, a shift in accounted for content packages and lower traditional voice traffic.

We continue to see solid trends in mobile. Our postpaid base increased by 90,000 and our postpaid ARPU grew 2% and combined, this led to a strong 4.7% growth in mobile service revenues. Let's now move to the B2B segment. In 2022, we delivered an important milestone for our company. We realized our ambition to turn around our business segments as we saw service revenue grow for the 3 quarters in a row. Business NPS remains positive, although slightly down sequentially, and this was also partly due to the volatile economic environment. The operational transformation and progress of our business segment continues to advance as we have migrated a significant part of our customers to our future proof propositions such as KPN ONE SME and KPN Smart Combinations in LCE. This helps our customers make our business truly digital, drive cross and up sell opportunities as reflected in the improved trends we saw across the board.

SME remains the main engine of B2B growth, driven by solid commercial momentum in both broadband and mobile. Also, LCE continues to move in the right direction. The migration of our customers to the smart combinations portfolio is close to completion, and we expect to deliver that sustainable inflection this year. And the business we call Tailored Solutions continued to perform in line with expectations. This segments caters to large customers, often with an individualized approach. Customers here are generally partners for life. And I'm pleased that we have taken important steps to improve profitability through a strong focus on standardization, value and sustainable customer relationships.

In wholesale, service revenues were again solid and increased 2.5% in the fourth quarter. In 2022, we added 84,000 postpaid SIMs and 27,000 broadband lines. Now turning to sustainability. We are already for a couple of years, fully committed to creating sustainable long-term value for our stakeholders. Therefore, we are proud that KPN was once again recognized as a global climate leader according to the Carbon Disclosure Project CDP.

In December, we signed an agreement with Eneco for the purchase of wind energy from 2027 from a new, to-be built wind farm at sea near the Dutch Coast, as from 2027, more than half of our electricity will come from this farm at lower costs. And this is aligned with KPN's ambitious sustainability targets. And helps to derisk our long-term energy price exposure.

So details in short, now let me hand over to Chris to give you more details on our financials.

[Hans Figee, executive]

Thank you, Joost. As Joost mentioned earlier in the presentation, we delivered on our guidance for the year. We'll put forward guidance for 2023 that we also solidly underwrite. So let me start by summarizing some key figures.

First, the adjusted revenues increased 0.5% in Q4, supported by sustainable group service revenue growth. Second, adjusted EBITDA after leases increased by 2.4% in Q4, driven by service revenue growth and lower costs. Our EBITDA margin came out at above 45%. And Third, free cash flow increased almost 10% compared to 2021 and exceed our target due to higher EBITDA and less taxes paid. Our free cash flow margin of revenues improved by 130 basis points.

Finally, our continued focus on shareholder value creation is paying off as is evidenced by another solid improvement in return on capital employed to 13.1%, up over 200 basis points year-on-year. Adjusted group revenues were up 1.4% year-on-year. And within the mix, consumer revenues were flat as growth in mobile service revenues and fiber revenues was offset by declining legacy in copper business. Business revenues increased more than 2%, largely driven by SME, with further improvement in the other business revenues towards sustainable service revenue growth as well. And wholesale revenues grew by almost 4%.

Other revenues were mostly supported by lower intercompany charges and revenues related to our fiber rollout. Group service revenues increased by 1.5% when compared to last year. underpinned by strong growth in our business segment. Business Service revenues grew by 3%, driven again by continued strong performance in SME or trending LCE is gradually improving and behaves according to our long-term plan towards inflection next year, sustainable and full inflection next year.

Wholesale Service revenues grew 2.5% year-on-year and consumer our service revenues were broadly flat, but the trend improved a bit compared to previous quarter. Mobile service revenues continued to grow. In fixed, we reported a decline as the growth in fiber was offset by declining legacy services, less voice traffic and the accounting effect for content packages. Importantly, broadband only service revenue as a consumer that has fixed service without legacies, fiber and copper together, we're effectively displaying a small but positive growth as fiber growth outstripped to copper service revenue decline.

For 2023, we continue to expect some headwinds, but the trend is expected to improve, supported by implementing price adjustments and commercial improvements. Moreover, from Q2 onwards, we'll see the lapping of the accounting effect that held back the reported broadband service revenue growth in 2022. Adjusted EBITDA grew 2.4% compared to last year, driven by service revenue growth and lower indirect costs, partially offset by EUR 54 million higher indirect costs. Factors for the increase were the impact of higher non-service revenues, to the handsets and hardware sales. Third-party excess cost as Glaspoort and a change in service revenue mix in B2B.

Through these revenue and direct cost developments, our contribution margin grew by over EUR 50 million. Add to that our lower indirect OpEx, and we get to a substantial increase in EBITDA of over EUR 50 million. Our personnel expenses decreased by EUR 35 million. This reflects efficiency and productivity improvements from digitalization as well as natural attrition. Digitization also helped to lower IT/TI expenses, partly offset by other OpEx, which rose mostly on higher energy costs.

In total, our indirect cost savings for the year were EUR 38 million as ongoing efficiencies were partly offset by industry-wide inflationary pressures on energy and labor costs, but bottom line, a cost reduction remained. With respect to 2023, our cost base will be impacted by weight indexation and higher energy costs. The estimated growth impact on personnel cost of the new CLA is about EUR 45 million. Regarding our total energy spending and considering the 20% of energy, we are still to consume on the spot market, we expect that total energy bill to be EUR 50 million to EUR 55 million higher in 2023.

And obviously, [ passive income ] can be move a moving towards this number, depending on how prices on the spot market has developed during the year. But the up and downside relative to our estimate is relatively limited. At EUR 862 million, our free cash flow was around 10% higher than last year, and the cash margin of revenues moved to 16.2%. This improvement was mainly a result of EBITDA growth and less the cash taxes paid as you were able to realize and use some of the liquidation losses related to A+.

Next to that, Note that a change in provisions includes a voluntary pension contribution of EUR 23 million related to a DB plan of Getronics U.S. As a result of the tax tailwind in 2022, and using the opportunity provided by the increase in U.S. interest rates, we decided to make an additional contribution to this pension plan. And this will again lead to lower contribution going forward and brings a plan a whole lot closer to full funding and eventual buyout. This investment will support free cash flow development in the coming years, and we believe our free cash flow margin should be able to hover around 16% of revenues in the coming years.

KPN remains focused on creating long-term value, which is evidenced by the strong return on capital employed. Our ROCE improved 210 basis points year-on-year to 13.1%, mainly due to increased operational efficiency on a stable capital base. We ended the year with a strong and resilient balance sheet. The average cost of senior debt increased by 83 basis points, mainly due to higher interest rates on floating debt. At year-end, with a leverage ratio of 2.3x, comfortably below our seeding of 2.5x. Also, our interest coverage remains strong.

Year-on-year, net debt increased by EUR 130 million, driven by various non-free cash flow items since our dividend and share buyback were mostly covered by free cash flow. Total liquidity remains very robust at the end of the year. consisting of EUR 1.5 billion in cash and short-term investments and our fully undrawn revolving credit facility.

Let's now turn to our outlook and ambitions for 2023. For the year, '23, there are well-documented headwinds, particularly around inflation, with wage indexation and rising energy costs likely to affect our cost savings run rate. We are implementing measures to mitigate this impact as much as possible and remain on track strategically and operationally and still deliver slight growth this year.

We expect adjusted EBITDA after leases to come in around EUR 2.410 billion, slight growth compared to 2022, despite the significant step-up in personnel and energy costs. EBITDA growth is expected to be skewed towards the second half of 2023. CapEx will remain stable at a peak level of EUR 1.2 billion, and we expect free cash flow of around EUR 870 million, which represents a slight increase compared to 2022 but importantly, it means that despite the tougher economic climate and inflation, we're able to meet the 2023 target to set during the 2020 Capital Markets Day.

Inside, there's some large movements in free cash flow items, such as EUR 100 million higher cash taxes and further improvement in working capital. But all in all, the effective improvement in free cash flow is likely to be very close to the effective increase in EBITDA. In line with our progressive dividend policy, we expect to pay a regular dividend of EUR 0.15 per share over 2023. This is up almost 5% compared to the EUR 0.143 for '22 and again, at the upper end of the 3% to 5% target range.

Our financial framework is aimed at long-term value creation for all stakeholders. In this respect, we are committed to return excess cash to our shareholders. Our improved cash margins and strong financial position enables to grow shareholder returns for 2023 through a growing dividend and new share buyback program. Over the past 2 years, we've bought back EUR 500 million worth of shares in total. For 2023, we intend to execute a share buyback program of another EUR 300 million. This means that we, again, will effectively distribute the free cash flow we generate to our shareholders or alternatively stated that all distributions are fully covered by generated cash.

To summarize, I'm proud to be delivered on our upgraded 2022 guidance. showing an improving top line trends, growing EBITDA and rising free cash flow. Going forward, we expect to see sustainable growth in group service revenues. And although we faced volatile market conditions, the measures we have implemented, provided with confidence in our ability to maintain a growing EBITDA and growing free cash flow.

Today, KPN continues to demonstrate healthy margin, earnings and cash flow resilience. We feel confident about the cash generating ability of our group. Our fiber rollout program has maintained a solid pace and has a proven attractive return profile. And we remain committed to returning excess cash to our shareholders and are confident that our progressive dividend policy can be complemented by structural incremental capital returns going forward.

Thank you for listening to our story. Now let's turn to your questions.

[Reinout van Ierschot, executive]

Thank you, Joost, and Chris. As usual, I'd like to ask you to limit your questions to 2. Operator, over to you, please.

[Operator]

Ladies and gentlemen, we will start the question-and-answer session now. [Operator Instructions] This question is from Andrew Lee at Goldman Sachs.

[Andrew Lee, analyst]

I had a question on LCE and then a cost base question. So just on the LCE inflection, you reflected the growth in Q4, but you continuously referred to your inflection to sustainable growth being a 2023 thing during your presentation today. Can you just kind of clarify really what you mean by that? Does that mean LCE declines again in early 2023. And maybe if you could lay out your visibility here and why LCE would not kick on to mid-single-digit growth like SME has?

And then just question on costs. The negative leasing inflation headwinds. Could you give us some detail on the scale of that headwind? And what the relationship really is between local market inflation and lease cost inflation, just so we can understand a bit better going forward.

[Joost Farwerck, executive]

Okay. Anthony, I will cover the LCE question, and Chris will take over on cost base. Yes, I fully agree with you, by the way. So we planned for the real inflection point in LCE in the second quarter this year. In Q4, we already went up to, I believe, 0.4%. So that's very good. So the original planned inflection point is mid-2023. But I agree, I don't see any reason to really go down again. So of course, the challenge is a bit out, it's a bit -- business goes in batches every now and then. And so the real confirmation we got from the company is Q2, but of course, we are pushing really hard to make the 0.4% higher instead of lower. So I recognize what you are saying. On cost?

[Hans Figee, executive]

Yes, on cost. On the headwinds from lease inflation, think about EUR 10 million to EUR 20 million of headwinds. We of course, got different lease contracts. We've got different owners of our towers. And even in the insight there is not just one but an amalgamation of contracts. Most of them have a link towards domestic inflation. It's not a one-size-fits-all answer, but often they are linked to Dutch CPI which for us means we expect to be EUR 10 million to EUR 20 million cost headwind next year, but that is already embedded and included in the EBITDA guidance.

[Operator]

Your next question comes from Polo Tang from UBS.

[Polo Tang, analyst]

I have 2. The first one is just about the pricing and competitive environment. So T-Mobile Netherlands raised prices by 8.6% in January. What's your impression as to how these price rises have landed? Has there been any signs of increased trend in mobile? And have you detected any changes in terms of competitive dynamics for the market? Second question is really just around your fiber build because you've added about 94,000 homes passed fiber homes passed in Q4. How should we think about the pace of this build for 2023 and 2024. So is 90,000 to 100,000 homes a quarter or a normal run rate? Or is there scope to accelerate this? And what are you seeing in terms of competitive fiber build?

[Joost Farwerck, executive]

Yes. Polo, on pricing, yes, we are in a competitive environment. Having said that, we saw strong price increases all over and indeed, T-Mobile 8.6% on mobile. We, in October, did 5.8%. So that is, I believe, also why NPS in Q4, all overall operators is a bit under pressure. So that's a balancing act. But all in all, the market understands, especially how we explain price increases because we related also to the way we increased the CLA to our own people. So I think we handled that well. But still, we see discounts out in the market. Every now and then broadband market is a bit moving.

Last quarter [indiscernible] was somewhat under pressure and then we see discounts on their side. Sometimes we react I strongly believe that we are running here a longer-term strategy. It's very important to create value on the longer term, roll out fiber, differentiate ourselves by delivering quality, higher speeds, more content. We recently introduced a new TV interface, mixing linear TV with over-the-top for end users and also allowing us to introduce over-the-top overnight.

So having said that, I think it's important for KPN to run our own plan and not follow all these discounts in the market. Fiber rollout, yes. So we also are responsible for allocating the build capacity to Glaspoort, at least the majority of that. So we look at things combined. But of course, the KPN rollout is very important for us as well, solidly.

So last year, 550,000. I think this year, we should at least do 600,000, but the jury is out. There's a lot of capacity shortage in the market. We really, like I just said, run this for the longer term. So we committed ourselves to our partners for '23, but also for '24 and '25. We're really planning '24 and '25 now. That's our way to move. There's competition from Delta, ODF and other small players. The difference between us and them is that when we roll out homes passed, we main -- currently connects 70% of the households as well, while the others are mainly rolling out house passed. So there's also a big difference in the quality of the fiber networks we're building.

So it's super important for KPN to just push the fiber machinery as hard as we can.

[Operator]

Next question comes from the line of Joshua Mills from BNB Paribas Exane.

[Joshua Mills, analyst]

Just another one for me on pricing. So I think you explained well the 3.5% fixed price rise in July then you had the 6% price rise back in October. And can you just give some color on what your thought process around each of those prices was? And whether anything had changed in terms of customer perception, your ability to offer exiting from the bundles, which felt you were more comfortable doing a bigger pipeline in mobile and fixed. And the reason I'm asking is just trying to get a sense of your thought process as we approach the next round of fixed line price rises, which I guess is typically during the middle of this year.

[Joost Farwerck, executive]

Well, maybe you want to add something. But on pricing, of course, we look at increases 75% of our businesses in subscriptions. So it's important all over the segments to see how the price increase will work out in the year to come.

Like I just said, we are -- we look at the inflation, but also at other drivers. Yes, if we do 6% in the CLA, there's a big chance that we will do more on price increase on Internet broadband than we did last year. But we'll decide on that beginning of Q2. And so that's a balancing act. It's also our ambition to move customers to higher value subscriptions. So by moving them from 500 meg to 1 gig, for instance. So we've just introduced a new lineup on the Internet. We took out 50 meg proposition that no longer exists. So the minimum you buy at KPN is 100 meg, but we really are moving our customers to 500 meg then a gig, and on the mobile side, we move them to unlimited. So the combination of price increases, but also driving up the value of the subscription, the proposition is the important game to play and that combined with a growing base, works out quite well, especially in mobile, and we want to do the same trick in broadband.

[Hans Figee, executive]

Yes. I mean, in mobile, of course, we've got contractual arrangement to be able to push through CPI in the price range it contains. So this we did a CPI increase in mobile and the mechanics were that 5.8% at the calculation at the time. So there's some time lag. Although in mobile, we said it's going to be 5.8% with a cap of EUR 2. So it's never going to be more than EUR 2 a month. Managing our reputation impact on customers somewhat.

But in mobile, it's a pretty mechanical exercise and then we can decide on our own discretion to provide some cap on it. And on broadband, with more art than science, we've got our own policy to follow. As Joost said, we manage your front book to back book distance even as reputation, you make sure there's value for money. And of course, to give important clue on the inflation to deal with it in that sense. Our CLA increase also is a good indicator of how we think what's fair and explainable to our customers when it comes to broadband.

[Joshua Mills, analyst]

Maybe just one quick follow-up. A number of operators in different markets are trying to now includes CPI increases on contractual obligations in both fixed and mobile bundles. Is there any reason why you wouldn't try in the future include a CPI linkage in your fixed line as well as mobile?

[Joost Farwerck, executive]

In newer contracts, we introduced that, that's right. But like Chris said, we run a big back book and the front book. So I'll take some time before you really can consider the -- well, 80% of the base in that contract environment. But you're right, we introduced that.

[Operator]

Next question comes from the line of Luigi Minerva from HSBC.

[Luigi Minerva, analyst]

I have 2. The first one is on your energy bill indication. So that's very helpful. You mentioned EUR 50 million to EUR 55 million more in 2023. And I was wondering if you can give us more details and what are the assumptions behind these expectations particularly how -- what proportion is hedged at what terms? What proportion is still exposed to the spot price?

And the second question is on competition dynamics. There is always often contamination between the dynamics in consumer and SMEs. Obviously, you're doing very strongly with SMEs but as you said, the broadband market has seen intense competition this year. So I'm wondering if you see any risk of contamination that may affect your SMEs performance in the coming quarters.

[Hans Figee, executive]

Okay, Luigi, on Energy. Let me start the story in 2022, then '23 and also have a first sneak peek at least some crystal ball gazing for 2024. In '22 our energy consumption was about 480 gigawatt hours, and we lowered it to 455 last year at an average price of about EUR 77 per megawatt hour. So that's relatively cheap. For '23, we're 80% brought forward, and we start buying these contracts forward since long, started those 2 years ago. 80% have been bought forward, 20% we buy on the spot market. We always do that. We can't do more because we think we can reduce our energy consumption even further. So the 455 will go down to 435 or even 425 in terms of the actual consumption during the year.

We bought so far at around EUR 150, EUR 160 on average per gigawatt hour 3 forward contracts. The EUR 50 million to EUR 55 million total price bill increase assumes around 435 gigawatt hours of usage at an average price of around EUR 180. So that means if we continue to buy at the current spot market, there is a bit of upside there. So that's good news. There's a bit of upside to 2023. It's not massive, but 20% to be still bought with guidance using 180 per megawatt hour current price around 164, is a bit of a tailwind for 2023.

For 2024, we've bought by, I think, 38% forward and we were planning to -- let's plan for the same amount of 2023. If you look at the forward price for '24, they are also around EUR 165-ish at this point in time. So the good news, if this all continues, that means that we will not have another energy bill increase in 2024, at least if today's markets persist.

So that means '23, EUR 50 million to EUR 55 million more sum upside elaborate a bit more what that does to our guidance or business. For '24, if current markets persist and the market doesn't go berserk again, that means we'll no longer have another energy uplift, we will stay at this higher spend level going forward, which should help our EBITDA in 2024, given the fact that there will be some price amendment in midyear. So on energy, a bit of a tailwind for this year.

I think I said, lease costs are also a bit higher. So the energy band tailwind is a bit used to offset higher lease cost that it all feeds into the current EBITDA guidance. But from energy, there's a bit of upside.

[Joost Farwerck, executive]

Yes. On the SME performance, we really have a separate platform to serve our SME customers. It's the KPN ONE platform. It works quite well. It's a different environment than broadband for consumers because it's a combination of workspace, mobile business proposals, security solutions. And until now, I do not see real risks of SME customers moving to consumer propositions. Of course, there's an overlap in what we call SoHo and Consumer. But that's based on more or less the same portfolio. So if you look at our SoHo customers, we also did a price increase on mobile 5.8% and 3.5% from the Internet. And -- it's a look alike of what we do in consumer segments. So on SME, I expect that one to be separated from that segment.

[Luigi Minerva, analyst]

And just to clarify, the SoHo are reported part of SMEs? Or are they part of residential segment?

[Joost Farwerck, executive]

Well, SoHo, it depends on what we sell, mainly consumer products, and then we report the consumer lines in consumer segment. So like I said, there's an overlap. So you refer to the SME and the risk of SME customers making use of Consumer propositions. Well, that's more a segment we call SoHo and that we already consider for main part retail propositions.

[Operator]

The next question comes from the line of Stephen Malcolm from Redburn.

[Stephen Malcolm, analyst]

A couple first on the mix of Consumer and Business service revenues in '23. And secondly, just on the free cash flow bridge from '22 to '23, if that's okay. Firstly, just when I look at consensus for '23, I mean, consensus has Consumer revenues growing at 1.8% and Business at 1.2%. But that's kind of flipped on what we've seen in the second half of 2022. So the question is, do you think that makes sense. Do you think you can sort of take Consumer revenue growth back up to sort of nearly 2%? Or should we expect that the owners to fall more heavily on business, which is clearly doing very well at the moment to get to the numbers that you expect on the service revenue side in '23. And then just on free cash flow, can you help us bridge the 60 to 70, I mean EBITDA broadly flat, CapEx broadly flat. It looks like a lot of the strain will probably fall on working capital. And maybe just reassure us that you're not sort of taking short-term measures, whether it be through with vendor financing, handset financing that may -- you may need to unwind and may cost more money going forward as interest rates rise and the cost of those sorts of measures begin to weigh on cash flow and earnings.

[Hans Figee, executive]

Yes. In terms of revenues, you're right. So indeed, if you look at the last quarter, momentum really was on the -- on Business markets, more than Consumer markets. It's a bit crystal ball gazing. I do see me, I think your point, the risk or derisk is, I think, the -- I would guess that relative to consensus, Business markets will do will be better and compensate for possible data risk to consumer to the competitive environment, which will help us meet the underlying growth.

If you look at our own contingent risk planning, that's exactly what's in there. So I think your observation is pretty valid. But that means that the service revenues as such are well protected. When it comes to free cash flow guidance, the first reassuring point is trusted, we're not going to do funny financing out there. We have a small vendor financing program with massive unused capacity and also in handset financing. We've got -- I've got it in there for use as a safety valve, but don't intend to really upscale it.

You need to understand 2023 cash flows, you have to look at 2022, right? We delivered EUR 862 million cash flows. But in that, we spent about EUR 25 million in a one-off contribution to a U.S. pension fund. I thought it was a pretty good idea because rates went up in the U.S., we were able to terminate that fund at peak rates, which will save us EUR 7 million structurally pension contributions in the coming years. So a one-off investment of EUR 25 million to save 7 million will already give you like EUR 30 million on the year-on-year comps.

Secondly, in 2022, we already implemented a shortening of the time lines of SME. So from a legal perspective, we're supposed to be SME companies earlier that law goes into place in 2023 was in the original plan we brought forward in 2022. So those are 2 negative headwinds that are all in the 2022 number. That means the underlying cash-generating creation of the business is actually quite strong.

And then on working capital, you can see working capital was flat in the year. That is also because we built up some inventory due to questions on supply chains also as a preparation of a new TV product, we build up quite a stock of Android TV set-top boxes that we're using now. So you'll see a bit of running down in inventories that we've built up during 2022. We see opportunities to improve working capital or what we call our product plus cycle. So we have a product plus strategy, but we sometimes have some giveaways to broadband that purchase type can be shortened. And everywhere I look in working capital, I see opportunities, for example, to invoice some of our large corporate customers earlier, we focused a lot on shortening payment terms. We've done that, but I think there's also work to be dollar invoicing them earlier.

We're in sourcing our in-cast activities, we see an opportunity there. So a big chunk of 2023 is also like smarter ways of working around working capital. In that, we should be able to pay the higher taxes that we're ahead. And then of course, that to be all fair. We are about to call the hybrid bond in March, which we'll officially announce refinance it with a euro perpetual, and those cash flows are no longer being our free cash flow reported. So that's a reporting tailwind that we have to be clear about. But it's a combination of, I think, solid cash flow in 2022, which actually was held back by one-offs that we deliberately invested that will come back in 2023. We'll have a number of working capital optimization that are really around the business area, not around financing, and those 2 should help us pay the higher tax bill.

[Stephen Malcolm, analyst]

Sorry, Chris, I should know this, but can you just remind me of the hybrid tailwind in '23?

[Hans Figee, executive]

Yes. It's about EUR 20 million or so plus. And I think it's all fair to say that's actually -- that supports the growth in our free cash flow somewhat.

[Operator]

Your next question comes from the line of Alex Roncier from BofA.

[Alexandre Roncier, analyst]

I would just like to come back to CapEx please. Obviously, we've talked about the ramp-up of the fiber rollout into 2023 and even in the later years. But -- but I was just adding question regarding your total envelope. And obviously, if we do some quick math and cost per home pass over the year, the bit on paving there, but could you maybe disaggregate the buckets of the fiber spend you were having this year. Issue fully fibered back a lot of homes. I mean you talked about 70% of your home pass you now connected. But equally, why the small moderate increase in non-FTTH CapEx this year as I think a while back, you're more targeting to actually reduce the rest of that investment envelope?

[Hans Figee, executive]

But on the non-FTTH CapEx, please note that non-FTTH CapEx is still below 14% of revenues that has been there for the past it still is there. The small increase actually is on customer CapEx. It's most actually business customer CapEx that went up. So non-fiber CapEx -- non-fiber non-customer CapEx was flat and it was the customer CapEx that was up, and it was really in the business segment where we had some CapEx rated to the growth in our business areas. So if you look at fiber, fiber was down a bit in euro terms. But also last year, we had an acquisition that was qualified as CapEx. So EUR 20 million -- EUR 30 million less fiber investments included last year about EUR 17 million or so M&A. So the net real decrease in fiber spend of EUR 12 million.

And then on the non-fiber CapEx B2B customers up, customer CapEx and the real network CapEx was flat in the year and still well below 14% of revenues.

[Operator]

Next question comes from the line of David Vagman from ING.

[David Vagman, analyst]

And sorry to come back on the size of rollout. I'm referring to the stand-alone fiber rollout. Could you explain us how we should basically model the stand-alone fiber rollout until 2025? I think in the past, you were referring to 500,000 [indiscernible]. And then given the technical change in the definition of home pass, should we become more prudent on the takeup rate, so that's on fiber. And then secondly, on the last post JV. So the home pass, it made quite some nice progress in 2022. What are the wholesale costs that you have budgeted for this year for 2023 roughly?

[Joost Farwerck, executive]

Yes. So on the fiber rollout, we plan for this year, '24, '25 and '26. Like I said, we want to reach the level of 600,000 roughly. We'll see how that works. We're also changing the way we roll out. We go a bit faster. We have improved the customer process to connect households. So we don't need all these steps in between often. And we're also going to do something new and that is to touch high buildings to connect. That's also a completely different ball game compared to the lower build households that's, yes, the SDU steering compared to the MDU steering. So -- and therefore, it's very good not to try to connect 80% of all the households before we start the commercial process.

On Glaspoort, your question is how we distribute rollout capacity. Yes, we have a plan on Glaspoort which is up to 1 million households roughly to build for us. And so that's under construction. But that's more, yes, ring-fenced. So that's ring-fenced when it comes to areas, capacity and number of households. And the rest of the Netherlands is KPN's own, yes, target. So we run it in parallel. And especially this year, I would like to upscale KPN's rollout a bit more.

[David Vagman, analyst]

Okay. And when you're referring to the 600,000 that's KPN stand-alone, excluding the Glaspoort...

[Joost Farwerck, executive]

No, no, no. That's consolidated. Stand-alone will be a major trick. So that is consolidated. It's important for us to look at the plan consolidated because we take the commercial approach consolidated as well.

[David Vagman, analyst]

Okay. And on the wholesale costs that you don't -- KPN has to pay Glaspoort?

[Joost Farwerck, executive]

Yes. So we pay wholesale broadband access to Glaspoort like T-Mobile is doing to KPN for a while. And until we come to the moment of consolidation.

[Hans Figee, executive]

And we all have a KPN base to the wholesale is fully in line with the new ACM regulatory framework that's in place. So KPN is, I'd say, almost an ordinary cost of Glaspoort in this regard, and we pay according to the ACM framework that Glaspoort has made public.

[David Vagman, analyst]

And I guess it's a bit of a headwind in 2023, given the install base, the home pass increasing?

[Hans Figee, executive]

Yes, I agree. It's a bit of a funny thing, right, because we are actually paying those costs out of EBITDA and we're reconsolidating as a minority interest, the results below EBITDA. So almost like until consolidation last Glaspoort is a bit of an EBITDA drag in this regard. I'm not sure whether my personal view of the market fully comprehensive value of Glaspoort. But at this point, you're right, up the consolidation. It's a drag on EBITDA and the plus is seen below the line, below EBITDA, which very few people see, that will turn around post-consolidation, but in the mid-time, midterm, it is an EBITDA drag. So that also some color towards what I think is a fair achievement to deliver some growth in EBITDA next year because this actually is some increase in cost we're at.

[Operator]

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

[Georgios Ierodiaconou, analyst]

The first one is another question on fiber. I think you said earlier, you mentioned the fact that you are already making the planning for '24 and '25. I was curious if you could share with us any indications around costs involved in the rollout when you engage with some of the subcontractors, whether there's been any changes because of inflation. I understand there may be a change of mix to MDUs, but curious if like-for-like you are seeing any significant changes in terms of the cost of deployment.

And then my second question is just a couple of quick clarifications for '24 and some of the answers that Chris gave earlier. Firstly, around energy, you mentioned that 40% fetched for '24. I was curious if you can give us roughly the price that [indiscernible] was catch that maybe you mentioned it, but I missed it. And then secondly, when you are discussing earlier, the working capital moves and some of the benefits, I was curious to understand which ones may also continue to give incremental benefit in '24. So you have -- or the EUR 7 million, which is sustainable for a few years. On working capital, some of the actions you are doing, is it going to be not just sustainable but also enhanced in '24 versus '23, the inflows that you may see?

[Joost Farwerck, executive]

Yes. So on the fiber planning, I indeed -- I mean, we have a plan until the end of 2016, it's about planning in areas and construction capacity. Of course, with our partners, we also negotiate labor cost. And as you can understand, these go up. With most of the partners, we increased about 5% when it comes to labor. On the other hand, we also do a lot of innovation on the fiber side by rolling out in a more efficient way, connecting households from the outside instead of the inside.

So listening to all your questions, by the way, I think later in the year, we should do a fiber update for you guys because there's a lot to say about fiber, but we innovate a lot on moving from homes passed to homes connected to house activated. We innovate in our commercial approach. So all in all, I'm confident that the CapEx envelope of EUR 1.2 billion is enough for the coming years and that we can step down after '26 completing the rollout for the main part and covering 75% to 80% of the Netherlands.

[Hans Figee, executive]

Yes, George, you sneak in 2 questions into one, but there are follow-ups. So we're allowing you to do it. No. Look, on the EUR 7 million on pension debt, that's what be sustainable for the compared to plan at 3 to 4 years. At some point, the plan was actually supposed to end because of our annual contributions that we brought it forward. So it's about EUR 7 million to EUR 8 million free cash flow tailwind for the coming, say, 3 to 4 years compared to the plan that I have.

When it comes to Energy 2024, as you've said, is about 38%. On average price of EUR 160 to EUR 170 because we started buying it also quite early last year and even a bit before that. So that means -- at this point in time, it feels that with today's prices in '23 and '24, that the energy bill for '24 will not rise materially towards 2023. The average price we're paying for '24 is about the average price of 2023. It's equal to the average price in the spot market today and is equal to the average price and the forward market for 24%.

So in a very fastening situation, they're all aligned, which actually means that for 2024, if prices stay where they are, you see energy prices being flat or being slightly less even than 2023. Now what does that mean for 2024 and cash generation. Going back to your first question, sort of the third part, actually, the third question you sneaked in on working capital. The measure we do DCR tend to be one-off. You can change your -- you can invoice earlier, that's often a one-off measure. There could be some spillover into next year.

But I always find that 2 things. One is the more you look into the more new ideas you find. So of course, increasingly to become marginal, but I think the measures we take this year will predominantly in 2023 and small spillover in '24. And then we have to come up with new ideas, but also I expected 2024 that the increase in EBITDA will be the leading factor increase in our free cash flow again. Of course, it depends on how the world develops if energy prices stay where they are, I think we should be able to resume the increase, the delta EBITDA that was passed with EUR 5 million to EUR 10 million or so in 2023, but it will be larger next year.

[Operator]

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

[Keval Khiroya, analyst]

I've got 2 questions. So firstly, we've seen the helpful back book price increases that you've talked about. But do you think the Dutch mark can also sustain front book price increases on important tariffs like mobile unlimited and fixed broadband? I note some of the lower mobile tier tariffs have nudged up slightly. And then secondly, can you comment at all on how we think about personnel expenses in 2023. Is there any room for declines given you have the new CLA agreement to? And I guess, there may be some force reduction beyond that.

[Hans Figee, executive]

Could you please repeat the first question, Keval, we kind of missed the gist of the first one.

[Keval Khiroya, analyst]

Yes, yes. So you've obviously seen back book price increases in the Dutch market. But do you think we'll also see front book price increases as well on tariffs like mobile unlimited and fixed broadband. I think some of the lower mobile tariffs have noted that those haven't as yet.

[Joost Farwerck, executive]

Well, Keval, when it comes to price increases, we're not increasing back book only. We look at more or less every proposition on its own, and then we decide on how to increase. So for instance, all our legacy has increased much higher than the newest version of what we introduced. And then we show you the blend of 3.5% in Internet and 5.8% in mobile. So it's not that we only focus on back book. We really try to lift up the whole base when we do an increase. Yes. And your second question?

[Hans Figee, executive]

Yes. Keval, on your personnel expenses, it's a very good question because it brings me to a point I'd like to make at the end on our quarterly distribution of EBITDA next year. pers expenses can we bring it down in 2023? Obviously, we've got a CLA increase, which on average 6% which is a reasonable, which will cost us EUR 45 million more in terms of total labor spend for 2023. We obviously counter this by reducing head count, increasing productivity and using attrition. So our total personnel spend will not go down. That's the 6% is too much of that, but we'll try to nibble as much away from that increase as we can by increasing efficiency by using attrition by looking at smart restructuring certain units of KPN, and continuing the path of FTE decline.

Last year, we declined by about 350 FTEs. I think we should certainly do the same next year to even more to make sure we continue to increase productivity and counter that. I know what you're asking, what you're not asking, but I'm not going to use the opportunity to tell it. Remind you that we've set a '24, EUR 10 EBITDA for next year, say, EUR 5 million growth, EUR 10 million growth that order of magnitude. We feel pretty confident with that number. It foots to be seen as a bit of a floor.

But then again, the distribution will be a bit old during the year. It will be back-end loaded Q1. Remember, in Q1 -- last year was very good Q1, 2022 was a fantastic Q1. So year-on-year comps will be tough. The energy price will kick in, of course, in Q1, and we earned back during the year. And our CLA will have a first batch starting in February. So the 6% that distributed over 2 rounds and the first batch starting in February. So that means that in Q1, I expect the headline EBITDA to be declining for the last year. We will be growing ex energy, but of course, the number that counts EBITDA will we see a small decline. And now we bring it back up to our growth during the year as, of course, during the year last year, we had this one-offs paid out [ during next half ] that we won't do again. It's all embedded in the CLA.

During the year, you can see the end of the benefits of our base growth, you can see the benefit of our price increases. So it's important to note that while we fully underwrite the EBITDA commitment to the year, see it as a floor for 2023. It will be somewhat back-end loaded. It's good to flag that Q1 will probably be a negative EBITDA number but then recover during the year. So I want to make sure we're all on the same page before we get to that reporting part of the season.

[Reinout van Ierschot, executive]

Okay. Thank you, everyone. If there's any further questions, please contact the KPN Investor Relations team. Have a nice afternoon. Bye-bye.

[Hans Figee, executive]

Thank you.

[Joost Farwerck, executive]

Thank you.