Koninklijke KPN NV

F:KPN

Earnings Call Analysis

KPN Reports Growth, Shareholder Returns

KPN's year-on-year Wholesale Service revenues increased by 3.2%, with EBITDA growth primarily fueled by service revenue gains, despite cost pressures from inflation and investment to the tune of about EUR 100 million. In response to these challenges, they are taking steps to ensure operational free cash flow growth in the mid-single digits, with a projected free cash flow of EUR 880 million for 2024, which is an upward revision. They expect service revenue growth to be around 3%, with adjusted EBITDA anticipated to reach about EUR 2.48 billion for the year. A continuing effort to enhance shareholder value is seen in their progressive dividend policy with a 13% increase to EUR 0.17 per share and a share buyback program of EUR 200 million slated for 2024, part of a larger commitment to return approximately EUR 3.8 billion to shareholders by 2027.

Solid Performance and Optimistic Outlook

The company demonstrated solid growth, with group service revenue growing by 4.2% in Q4, signaling an upward trend across all segments. Specifically, consumer service revenues rose by 4%, buoyed by increases in mobile service revenue and a positive trend in fixed services like broadband. Their B2B revenues also witnessed a 4.4% growth on an annual basis, with SMEs contributing significantly to this segment. The wholesale services did not fall behind, showing a 3.2% upswing, driven by both broadband and mobile sectors.

Strategic Investments Yielding Results

The company has been investing in their competitive edge—fiber networks—achieving an accelerated fiber footprint expansion. Approximately 550,000 homes were reached last year, which contributed to a service revenue of more than EUR 1 billion in the B2C fiber sector. With such robust figures, they aim to cover about 80% of Dutch households by the end of 2026, which is expected to significantly reduce CapEx to more sustainable levels thereafter.

Financial Sturdiness Amidst Inflationary Pressures

Despite experiencing around EUR 100 million in inflationary costs, the company managed to maintain a strong financial performance. Adjusted EBITDA grew modestly from the previous year, propelled by revenue growth, and operational free cash flow expectations remain positive, anticipating a mid-single-digit growth. Free cash flow has been revised to approximately EUR 880 million for 2024, indicating confidence in the company's cash-generating capabilities.

Sustainable Growth and Progressive Dividend Policy

Sustainability and shareholder returns go hand in hand for the company. They've implemented strategies to significantly lower their carbon footprint and are pursuing goals to be almost 100% circular by 2025, with a net zero value chain by 2040. In parallel, they're advancing a progressive dividend policy, planning a 13% hike in regular dividend per share for 2024, designed to yield attractive returns for shareholders.

Shareholder Returns and 2027 Ambitions

Their commitment to shareholder value remains relentless. The company proclaims revenue service and EBITDA growth goals of approximately 3% yearly, with a compounded annual growth rate (CAGR) of free cash flow projected at 7% until 2027. On top of dividend increases, a substantial EUR 200 million share buyback program for 2024 has been announced, envisioning a cumulative return of about EUR 3.8 billion, around 30% of the current market cap, to shareholders in the following four years.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, ladies and gentlemen. Welcome to KPN's Fourth Quarter and Full Year 2023 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]

Good afternoon, ladies and gentlemen. Thank you for joining us. Welcome to KPN's Fourth Quarter and Full Year 2023 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 first walk you through some of the highlights of last quarter. A key highlight, of course, was our Capital Market Day early November, where we shared with you our new Connect, Activate and Grow strategy. We have now started executing on this ambitious 4-year plan.

In 2023, we have consistently grown our group service revenues and we delivered on our outlook. Group service revenue growth accelerated to 4.2% in the fourth quarter with growth visible across all the segments. Within the mix, we continue to see positive developments in consumer, driven by higher mobile service revenues and further improving trends in fixed with 30,000 broadband net adds for the full year.

Business service revenues continue to grow with, again, SME as the main contributor. And also wholesale made again a solid contribution, thanks to our open wholesale policy.

We saw good commercial momentum across the board, driven by strong execution. And together with joint venture, Glaspoort, we added a record number of households to our fiber footprint this year. We delivered EBITDA and free cash flow growth despite inflationary headwinds and our return on capital employed is strong, reflecting shareholder value creation.

Finally, our outlook for this year for 2024, we've raised the free cash flow guidance to approximately EUR 880 million. And the other outlook items are reiterated, including our ambitions for 2027 as disclosed during our Capital Markets Day. As usual, Chris will give you more details on our financials later.

We delivered on our 2023 outlook. EBITDA came in at EUR 2.4 billion, which is slightly ahead of our outlook. CapEx was around EUR 1.2 billion in line with guidance. And free cash flow came in at EUR 886 million, slightly ahead of our outlook. We reiterate our dividend commitment, and we will pay a regular dividend per share of EUR 0.15 over 2023 following the AGM approval in April.

Let me now walk you briefly through the key highlights of our new strategy. First, we continue to invest in our leading networks that will support our competitive position for years to come and enables us to create value for all the stakeholders. Second, we continue to grow and protect our customer base, supported by our quality networks, differentiated services and an outstanding customer experience. And third, we further modernize and simplify our operating model, supporting the next wave of quality improvements and cost savings for the company. And together, these strategic priorities support our ambition, to reinforce our position as the #1 Internet company in the Netherlands and lead in mobile revenue market share, to grow in service revenues and profitability, and to provide attractive shareholder returns covered by a growing free cash flow.

ESG is at the heart of what we do, and it is closely linked to our strategy. We focus our efforts in 3 areas linked to 7 United Nations sustainable development goals. We are a responsible corporate entity, and we prioritize reliability and security and uphold fundamental human rights across our entire supply chain. We will strengthen our commitment to diversity and inclusion in all respects, both as an employer and as a service provider. And we will continue to be a front runner in achieving net zero emissions and circularity, and we will continue to reduce our energy consumption even in the face of upward pressure from data volume growth.

Let's now move to the foundation of our competitive advantage. In 2023, last year, we expanded our fiber footprint with approximately 550,000 homes passed, and this includes the homes passed from the Primevest and Kabeltex acquisitions and adding Glaspoort to this, we expanded our fiber footprint with a record number of 725,000 homes passed. And jointly, we now cover almost 60% 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.

Our fiber business case continues to deliver results, and we have generated more than EUR 1 billion of fiber service revenues in B2C in 2023. And the double-digit growth rate is driven by a solid pace in flow and attractive ARPU development.

Let's now look at the consumer segment. Adjusted consumer service revenues accelerated throughout the year and increased to 4% in the fourth quarter. We see consistent mobile service revenue growth, driven by solid base developments and growing ARPU. Our fixed service revenues also continued to improve, supported by accelerating fiber service revenue growth. And as expected, our Net Promoter Score recovered to plus 17 from the temporary dip in the third quarter. I'm happy to see that despite all the customer traffic generated as a result of all accelerated fiber rollout together with additional commercial activities in the Dutch market, we are able to really outperform against competition on Net Promoter Score.

Now let's take a deeper look into our fourth quarter KPIs. We saw another quarter of broadband-based growth. We realized 5,000 broadband net adds in the fourth quarter. Our fixed ARPU grew 2.6% year-on-year. We continue to see solid trends in mobile. Our postpaid base increased by 22,000 while the postpaid ARPU increased 5.7% year-on-year, supported by the price increase as of the 1st of October and the inflow of unlimited. Combined, this led to a strong 7.9% growth in mobile service revenue.

Now let's move to B2B. Our B2B service revenues grew by 4.4% year-on-year, mainly fueled by SME. Business Net Promoter Score was plus 5 in the fourth quarter, and we remain the Dutch market leader here in NPS as well.

SME continues to be the main growth engine in B2B, driven by continued solid commercial performance in both mobile and broadband. And due to our future-proof propositions, we expect to deliver continued growth in SME going forward.

The year-on-year LCE service revenue trend is showing a stabilizing trend, driven by the strong performance of IoT mainly. Nonetheless, LCE still requires some work to deliver sustainable growth. And to achieve this, we will leverage our KPN smart combinations propositions and add new services that can address concrete customer needs. And in addition, we will improve our go-to-market strategy, and this will be one of the priorities for us in the coming period. And with this, we plan to deliver sustainable growth in LCE as well like we did in SME.

And lastly, the tailored solutions business was solid again. We started to focus on specific markets such as critical communications, financial services, main ports and logistics, et cetera. And we make sure we serve our largest customers in a decent and profitable way.

In wholesale, service revenues increased 3.2% in the fourth quarter. And during the quarter, we added 29,000 postpaid SIMs and 29,000 broadband lines, of which 18,000 relate to the Primevest acquisition, so underlying still a healthy inflow of 11,000 net adds in the fourth quarter. Now let me hand over to Chris to give you more details on our financials.

[Hans Figee, executive]

Thank you, Joost. Let me now take you through our financial performance. Now let me start by summarizing some key figures. First, adjusted revenues increased 4.3% in Q4 with growth visible across all segments. Second, our adjusted EBITDA after leases grew by 2% -- 2.2% actually year-on-year in the quarter despite inflationary headwinds such as weight indexation and higher energy costs.

Our quarterly EBITDA in 2023 has behaved fully in line with the pattern that we indicated at the beginning of the year, and we've met our targets of stable to slight growth in EBITDA. Third, our free cash flow increased 2.7% compared to 2022 and slightly exceeded our guidance, mainly due to higher EBITDA and working capital improvements.

Group service revenue growth accelerated throughout the year to 4.2% in Q4. Our consumer service revenues increased by 4% year-on-year, driven by strong growth in mobile, supported by our CPI adjustment and base growth and further improvements in fixed. And in fixed, we delivered positive net adds in Q4, both mobile and fixed are now in growth [indiscernible].

Business Service revenues grew by 4.4% year-on-year, mainly driven by a continued strong performance in SME and improvements in LCE in Q4. Wholesale Service revenues were up 3.2% year-on-year, driven by both broadband and mobile.

Adjusted EBITDA grew slightly compared to last year, fully driven by service revenue growth. An increase in cost of goods sold is mainly due to costs related to higher nonservice revenues such as handsets and hardware sales, third-party access cost [indiscernible] and to a lesser extent, a change in service revenue mix in B2B. The indirect cost base was affected by well-documented inflationary headwinds. This translated into about EUR 100 million higher net indirect OpEx in 2023.

For 2024, our direct cost base will continue to be impacted by third-party access costs [indiscernible], B2B service revenue mix effects and inflationary effects, while our indirect cost base will be mainly impacted by wage indexation and some inflationary spillover from 2023. Our energy costs are expected to remain broadly stable.

Our operational free cash flow decreased by about 2% due to a marginal step up in CapEx. Alongside some inflationary effects, we stepped up investment into fiber rollout and customer CapEx, partly funded by a decline in other CapEx. And for 2024, we keep a strict eye on CapEx to ensure it does not necessarily exceed the EUR 1.2 billion. As a result, we expect a decent mid-single-digit growth in operational free cash flow, driven by EBITDA growth and effectively stable to declining CapEx.

Let's now focus on the moving parts of our free cash flow. Our cash generation remains solid, and we've been able to grow our free cash flow and outperform our outlook. Effectively, the modest decline in our operational free cash flow and higher taxes was counted by more favorable development in working capital and other line items.

Regarding the first on the back of a series of smaller initiatives that are part of a broader and comprehensive working capital optimization program, we managed to structurally reduce our working capital intensity. And as a result, we managed to increase our free cash flow. Our cash margin at 16.3% of revenues was broadly stable compared to previous year. For 2024, we expect to see a small drag on free cash flow from the phasing of working capital. And nonetheless, we feel confident about the cash generating ability of our group, especially due to slightly lower interest and tax headwinds than we earlier anticipated. And that is why we upgraded our outlook for free cash flow a bit to about EUR 880 million, broadly stable compared to the realized results for 2023. And finally, we ended the quarter with a strong cash position of EUR 802 million.

At KPN, we remain focused on creating long-term value, which is evidenced by the strong return on capital employed. This orientation on shareholder value creation is evidenced by an increase in our ROCE. For the coming years, we see scope to further enhance our return on capital employed as part of our continuous pursuit to deliver long-term shareholder value creation, driven by fiber investments, cost savings and an improving top line profile.

We have a very robust and solid balance sheet. Our exposure to floating rate is about 15%, and our average cost of senior debt is 4.1%. Total liquidity remained robust and consists of about EUR 1.8 billion in cash and short-term investments, including our undrawn revolving credit facility. This provides ample flexibility to pursue bolt-on growth investments as they may arise and to acquire spectrum in the upcoming 3.5 gigahertz auction expected to take place later this year.

Leverage has been stable year-on-year at 2.3x, and credit rating agencies acknowledge our strong balance sheet and market position, which is evidenced by solid ratings and a stable outlook. We expect and plan to continue to run with a net debt-to-EBITDA ratio at about or below 2.5x in the medium term.

Now turning to sustainability. The following slide shows the performance on carbon reduction, circularity and diversity. As shown, by working more energy efficiently and implementing circular operations and services, we have been able to significantly reduce our carbon footprint over the past years. Looking ahead, we want to be almost 100% circular by 2025, whilst being net zero in the whole value chain by 2040. We made good progress on reduction in full year energy consumption, but also in reuse and in the recycling of materials. And we attach great importance to diversity in our workforce and aim to have at least 35% women across our senior management by 2025, up from a current 25%, a bit lower than last year while we are taking additional measures. With this, KPN will not only deliver financial results, which enables us to continue our progressive dividend policy, but we'll also connect the Netherlands to a sustainable and long-lasting future.

Now let's move to our outlook for 2024 and ambitions for 2027. As highlighted, the free cash flow outlook has been raised by about EUR 10 million to approximately EUR 880 million. Headwinds from higher cash taxes and increased interest will be offset by service revenue and EBITDA growth. Other outlook items have been reiterated. Group service revenue growth is set at approximately 3%, driven by continued growth in consumer mobile and a further improvement in consumer fixed. Also, B2B has delivered healthy growth, driven mainly by SME. Wholesale is expected to taper off a bit this year due to some technicalities, but will recover afterwards.

We expect adjusted EBITDA after leases to come in at around EUR 2.480 billion, signaling accelerating growth compared to 2023 mainly driven by service revenue growth. Year-on-year growth in EBITDA will likely be especially strong in the first half of 2024.

CapEx will remain stable at the peak level of around EUR 1.2 billion. And finally, over the entire plan period until 2027, it remains our ambition to grow our service revenues and adjusted EBITDA both by 3% and our CAGR free cash flow by 7% on average, as reflected in our [ 3-3-7 ] CAGR model. Our 2024 guidance is in line and on track with this multiyear ambition.

As outlined at the CMD, we intend to pay a regular dividend of EUR 0.17 per share over 2024, up 13% compared to the EUR 0.15 per share in '23. This gives KPN shares and our shareholders an attractive dividend yields. In addition, we intend to execute a new share buy program -- buyback program of about EUR 200 million in 2024, effectively distributing all of our free cash flow to our shareholders. The repurchase period will start tomorrow and expect it to be completed by the end of May at the latest.

From 2025 onwards, our dividend per share will be growing by about 7% a year and the remainder, of course, of our cash is paid out for our share buybacks. And over the entire plan period '24 to '27, we expect to deliver total buybacks of up to EUR 1 billion. And cumulatively, our growing dividends and planned buybacks enable us to return around EUR 3.8 billion in total or about 30% of our current market cap to our shareholders in the next 4 years.

Now let me briefly wrap up with the key takeaways. Early November, we shared with you our new Connect, Activate and Growth strategy. We are now executing on its ambitious and exciting 4-year plan. We delivered on our 2023 outlook, showing improving top line trends, growing EBITDA, rising free cash flow despite more than EUR 100 million higher inflationary costs. We see solid commercial [indiscernible] across the board and our fiber rollout program has maintained a solid pace.

Our return on capital is strong, reflecting shareholder value creation. And finally, our EBITDA continues to develop favorably, and we feel confident about the cash generating ability of our group and as such, we've slightly raised our free cash flow outlook for the next year, our other outlook items, including our ambition for 2027, as disclosed during our CMD, I will reiterate it. Thank you very much for listening. Now let's turn to your questions.

[Reinout van Ierschot, executive]

Thank you, Chris. Before moving to the questions, as usual, I'd like to ask you to keep your questions to 2. Operator, over to you to start the Q&A, please.

[Operator]

[Operator Instructions] The first question is from Mr. Andrew Lee from Goldman Sachs.

[Andrew Lee, analyst]

Just had a couple of questions both around the same thing around operational gearing in your business model. Obviously, what you're saying today is what you said at the CMD, but just wanted to -- we've had a number of companies give guidance now in the results season so far exhibiting limited operational gearing and get the inflation plays an impact in that. But just wondered if you could talk to how you see the progression of operational gearing in your business through 2024, maybe beyond. So the 2 specific questions were, firstly, why is it that you anticipate first half '24 EBITDA growth being higher than second half '24 growth? And then secondly, could you just talk to any other activities you're going through that could see operational leverage a bit better and EBITDA growth a bit better into the second half, i.e., kind of any kind of self-help that you can do to maybe maximize operational leverage and EBITDA growth.

[Hans Figee, executive]

Right. Andrew, let me take this question for you. Basically, into layman's terms, if you're growing revenue by 3%, why you're only growing your EBITDA by 3%. I think the 2 things that into this in next year is, of course, inflation and cost. There's still some spillover of inflation from '23 into '24 and obviously, in our case, we also have the Glaspoort cost, right? Glaspoort charging goes up by about EUR 25 million to EUR 30 million next year. Part of it is also coming in as part of our minority interest, positive line below EBITDA. So there's a bit of artificial effect on our EBITDA, which will be there until we consolidate Glaspoort. So it is on one end, inflation and on the other hand, it is the Glaspoort charging that increases and that hurt your EBITDA. It supports net profit all on the EBITDA line, you see that coming back.

H1 versus H2. Well, obviously, on H1, also our comps are pretty solid and relatively easy. Remember Q1 last year, we had an EBITDA decline. So it means that Q1 this year, our EBITDA growth will certainly be -- will surely be north of 3%. Our service revenue will also be growth north of 3%. So in the first month of the year, you will have spillover from business momentum, spillover from price increases from last year and relatively easier comps. That means that the Q1 results, service revenue and EBITDA growth will both be above 3% and it's possible to sustain it in the second half of the year, but that depends again on our cost performance and on our -- on how price indexation develops relative to inflation.

So for the full year, we're fully confident on the 3% EBITDA and service revenue growth, but it might be a bit tilted towards the front end. And then towards '25, my crystal ball is as good as yours, but it starts to look a bit better in the sense that if you look at CLA increase, there's a 5.5% increase in 2024 and 3% in 2025. In '24, the total cash out on energy will be stable compared to 2024. And in 2025, it's likely to drop if you look at the current energy prices. So some of those inflationary headwinds, which showed up in energy cost, which showed up in labor cost will start really to fade in '25. So basically, it means that '24 is still a relatively tough year in terms of operational leverage and operating margins. And some of these headwinds will fade into '25. So in summary, Glaspoort messes up the number a bit, if you allow me to say it in terms of understanding the operational leverage. It's not much we can do about it internally to consolidate. So underlying, it's a bit better. H1, the first month of the year I expect growth north of 3% in EBITDA. It could be around 3% in the second half, but that depending on inflationary effects and actions that we take. And as of 2025, you expected operating leverage to be a little bit more supportive if these inflationary headwinds start to fade.

[Operator]

We take now our next question from Mr. Polo Tang from UBS.

[Polo Tang, analyst]

I have 2. The first one is just on CapEx. Can you talk through why CapEx for 2023 was higher than expected? And what do you see as the upside and downside risks to the CapEx envelope for 2024. So it does it make sense, for example, to accelerate your fiber rollout in order to realize the first-mover advantage versus other players like ODF and Delta Fiber and how should we think about your direct fiber build? That's the first question.

Second question is really just about competitive dynamics. Can you comment on the situation in both the mobile and the broadband market? And do you see a risk of increased promotional activity through the year, particularly when VodafoneZiggo starts showing Champions League right in August 2024.

[Hans Figee, executive]

Yes, Polo, let me take the CapEx question. Look, the CapEx is higher, but if you compare it to last year, it's about 3% to 3.4% up. So it's still in the realm of like manageable amount. It's not a massive increase as far as we're concerned. The CapEx is up in fiber and in CPE. So consumer-related CapEx linked to growth at the expense of nonfiber CapEx. So in our point of view, it's kind of good CapEx. There's a little bit of inflationary effect as the -- your higher labor cost feature into CapEx that you have to fend off. So inside the CapEx, we still feel comfortable with the delta in CapEx that we report. It's a manageable delta, and I said, it's concentrated in the right areas. This is kind of the absolute ceiling, and we want to keep it stable to manage it down in the coming years.

Do we want to accelerate for fiber? Probably not. You may try to bid it again. You have to have a certain amount of discipline in how much money you spend over time. And also, there's a question of how much money you could effectively deploy and whether the marginal return on the marginal euro at some point goes down. Important to say whatever CapEx is, we feel confident on the cash that we generate. That's why we were confident to up our free cash flow for next year, a bit to EUR 880 million, meaning the outperformance of this year is probably there to stay. It shows that with all the developments in and around CapEx, spending a bit more on fiber and on consumer, we feel confident that the cash generating ability of the group is not a factor and importantly, that's the ultimate line item that counts.

[Joost Farwerck, executive]

Yes, Polo. And on the market dynamic when it comes to mobile and broadband, as you know, the Dutch market is highly competitive. We did great on mobile last year. 100,000 growth is strong and also ARPU improvement. Good news is that all main providers in the Netherlands are growing. So the Dutch market is moving from prepaid to postpaid, that we see a strong development of a shift to unlimited, which is especially attractive for us with the best network.

So all in all, we see a good growth in mobile, but also in the market. Broadband is more competitive, especially the fourth quarter is always traditionally -- yes, more stretched than other quarters with Black Friday, and you name it in the quarter. So I was glad to see that we still were able to develop a positive growth of the base, only 5,000, but that's taking into account everything happening there in the market, of course, is good.

Of course, there's [indiscernible] on the other side, a bit of pressure on the broadband side on Ziggo especially, other fiber players are growing, especially Delta owned by EQT and there's an initiative from KKR trying to roll out fiber network in main cities. Not that successfully today, I must say, but -- so especially Delta is showing growth. So all in all, the 30,000 growth in broadband, not bad for us. Of course, we aim to do more looking forward and taking into account everything that's happening in the market is super important that we keep on rolling out fiber because that's really working.

[Operator]

We'll take now our next question from Luigi Minerva from HSBC.

[Luigi Minerva, analyst]

Yes. I was wondering if you can talk to us about the 3.5 gigahertz deployment strategy, assuming we will get your spectrum in the auction. So what are you planning in terms of deployment, whether that comes from the CapEx budget as I presume. But also more importantly, whether you think 3.5 gigahertz is just like a business as usual deployment that you have to do or if it's an opportunity to really extract more value finally from 5G? And what impact you would expect on the company returns from that.

[Joost Farwerck, executive]

Yes, Luigi, on 3.5 gigahertz, first of all, we have prepared our network not for a nationwide coverage because that will be very inefficient. But on the main spots, we prepared our network to go live when we have the spectrum. Auction is coming up in the second quarter. So it should be done before summer.

Yes, the design of the auction looks pretty straightforward, more or less in line with what we asked for. So that's probably helpful with a minimum price clusters prepared for 3 operators, local licenses to be bought later in the process for more local players. So that's the auction design, yes. And we truly believe that 3.5 gigahertz can bring a lot of value. In the first place, it adds a lot of capacity to our network. It is about super fast Internet via mobile. So the combination of fiber and 3.5 gigahertz 5G -- the real 5G, especially, we think we really can create value there because the difference between mobile and fixed in proposition sense is disappearing in the market. We, of course, are going to launch speed tiering and we will -- we launched a new lineup, which is more about the download speed than about the capacity of the bundle because, yes, the market is moving to unlimited.

And in B2B, we really see attractive propositions. We are already have ready like what we call Campus, which is a network slice private network for larger customers. And we are very active in launching new initiatives on -- when it comes to logistics, industrial solutions. So we think on the longer term, it can bring a lot of value when it comes to new propositions. First wave is really about having a lot of capacity in a very efficient way when it comes to network management.

[Luigi Minerva, analyst]

Okay. Well, I guess if I may follow up, just like -- obviously, 5G has been very underwhelming in Europe so far. And I guess KPN is in a strong position there because you are getting the spectrum much later than the others. And so I guess, going back to the question, is it going to be just business as usual or really incrementally important for your returns?

[Joost Farwerck, executive]

Well, I mean, you're right. We looked at a lot of cases abroad when it comes to 5G and the 3.5 gigahertz implementation. So that's why we also think that investing in a network in a prudent way is very important not to overinvest for things that are only in the market in a couple of years. It's everything we do, and we have done when it comes to 5G is in the planned CapEx envelope. So I would say in the first wave, it will add value in consumer markets. In the first wave, we have private network kind of service ready in B2B, and it's very important to manage capacity in the network. When it comes to really no latency kind of services, I think it will take more time like we saw in other countries, but we are convinced that later on in the midterm, that could bring value as well. But the base case we managed is about network management and the new propositions I mentioned.

[Operator]

We'll take our next question from Mr. Georgios Ierodiaconou from Citi.

[Georgios Ierodiaconou, analyst]

Both focused on financials, the first one is around working capital which was a good contributor to free cash flow in '23. I know there's structural plan to keep it being positive in the coming years. Curious if you can give us a bit more specifics as to how it could develop in '24 and the years ahead. And my second question is around other OpEx. I think earlier, Chris, you when you [indiscernible] Glaspoort on direct cost, CLAs on personnel expenses and how energy will phase. There was around EUR 28 million increase in other OpEx in '23. I was wondering if you can maybe give us some color as to what's driving that and whether it's temporary or not.

[Hans Figee, executive]

Right. Georgios, on working capital. I understand your question. I mean, I guess from your perspective, this is like a blackbox suddenly turned to be a treasure chest. So look, obviously, working capital was a positive contribution to our free cash flow this year. We have been running a working capital program for quite some time now.

The positive result in 2023 was a broad series of smaller measures. There was a bit of intra-year phasing, advanced payments to contracting suppliers that were paid back in Q4, bill run timings mostly between Q3 and Q4 that led to some movement of cash throughout the year. And as you can recall, in the beginning of the year, working capital was a bit of a drag. In Q4, it was a plus. So we knew that was about to shift. Then a number of initiatives to really structurally reduce working capital, lowering inventory levels, that will continue into 2024, timing and optimization of especially CapEx invoices and when you pay them and your payment terms towards suppliers. Earlier invoicing in some areas, especially for service revenues and subscription type of fees, we found opportunities to earlier invoice and also in tailored solutions where you invoice earlier rather than a reduced payment term, you sent out the bill earlier. So a whole series of small measures that added up to this number.

To the question behind the question, how much financial engineering is there behind this, relatively limited. If you look at the total working capital improvements, the amount of delta and handset financing is about less than 20% of the delta. And if you look at our total KPN finance exposure, I think less than -- more than half is still what I call unencumbered by handset financing and I'd like to not go too far in that play. So it is structural. It's there to stay. Will it return in 2024? Probably not. I mean, this is not a gift that keeps on giving. So we've optimized our working capital. There will be some measures in '24, but expect in '24 to be stable, possibly conservative, taking a slight drag, but at least this year, it has contributed. And when you take a step back and you look at our free cash flow development, in 2023, our operating free cash flow growth was negative, like EBITDA -- I mean CapEx or revenues we total spent, there was a small decline countered by a series of lower rates, better working capital.

In 2024, that buildup will change. So the operating free cash flow will grow by at least 5%, given EBITDA growth and where our total spend is. And then you'll see some headwinds from what I call corporate cash flows, flattish working capital and then a drag, of course, from interest and taxes that we flagged in the Capital Markets Day. So basically, it's a different -- it's the development of KPN over time. But my most important view is the working capital delta this year is structural, maybe a small give back next year, but then other parts will take over the torch leading our free cash flow charge in terms of more operational cash to support our free cash flow ambitions.

And then there was a question on costs. On other OpEx. It's mostly around like ITTI to technology cost, there's licensing in there. Marketing cost that includes third-party call center staff facility costs. So all -- most of it is really affected by inflation and you find that inflation is creeping up in many things, higher marketing spend, but also if you want to ratchet up your call center staff and you hire external people, those will be more expensive, licensing fees have coming up. So the EUR 28 million of other cost is really inflation in all the other parts of the business.

[Operator]

The next question is from Mr. Titus Krahn from Bank of America.

[Titus Krahn, analyst]

Just 2 as well on my side. Maybe the first one is a little bit more conceptual, I would say, on your CapEx trend. I mean we saw this year that you can end up at the higher end of the range. And you mentioned inflationary drivers as part of the reason. Just looking at your guidance for 2027, even, which is quite far ahead, you give an absolute guidance for that rather than other telecom operators in terms of CapEx to sales, which gives us, of course, better visibility to model that.

Is there any risk from even more inflation coming over the next couple of years, which might impede that? And kind of is there a way to steer that CapEx even if it's kind of 3 years ahead. So just on the CapEx in the medium term. And then just a very quick question on -- we saw the price increases on the consumer side went through pretty well. You now have 1 quarter of visibility on mobile, 2 quarters in broadband. They look pretty nice on the ARPU side as well. Is there any learning or indication for next year's pricing action on your side?

[Joost Farwerck, executive]

Okay. You were a bit difficult to hear here in the studio, but on price increases, I think you were asking how we will move on looking forward in '24. Last year, of course, we made a strong step-up especially in consumer market, but also in B2B which was all related to inflation, but not only CPI related, we also look at purchase power in the Netherlands, what larger institutions do on the CLA like KPN to our own staff. So that -- these are all very important developments.

Yes, I think over 80% of our services -- of our revenues is in subscription. So we have a very important tool there. So every year, we will look on how we can increase different price points. And we always take a look at CPI developments on one hand, but also what we do on the CLA especially in consumer market, it's very important. So result -- we will prepare for a decision end of this quarter, how to move on price increases in '24, but of course, we are, yes, working on that.

And before I hand over to Chris on CapEx, you were asking, okay, the risk on developments on CapEx related to inflation, I think. Well, that is, of course, always a pressure on everything that's related to spend. On the other hand, we're also working on the simplicity of the company, the digitalization of the company, and we're innovating in a way in rolling out fiber. So on one hand, I would say inflation will put pressure on spend in general. But on the other hand, we have strong simplification programs ongoing to also work in a more efficient way and safe spend in that perspective.

[Hans Figee, executive]

Yes. On your question on CapEx, look, obviously, we monitor CapEx as a percentage of revenues, but I think it's dangerous to steer your CapEx as a function of revenues because that inflation goes up, your CapEx goes up. There's no lid on CapEx and as Andrew pointed out earlier, yes, all our telcos, we have a bit of a challenge with operational leverage. So inflation goes up, it's high enough to keep your [indiscernible] stable. And if you then link your CapEx to revenues, then inflation effectively will kind of almost enable you to take a hit on your free cash flow. So I think it's the right thing to steer CapEx on an absolute number and then work on a range for practical purposes.

The increase in last year was -- there was a bit of an inflation in there, but the most of the effect is on fiber and on consumer CapEx. So it is yes, inflation features in there, but it's more like we didn't want to say no to some last fiber projects and also obviously, when you have some growth in consumer, you don't want to deny your customers of set-top boxes and other equipment. So we will steer CapEx on an absolute number, which means in real terms, your CapEx is going down, which is the right thing to do because it forces us to be efficient. And the step down in 2017 is really because our fiber goes down. We will stop fiber or at least really reduce fiber in 2 phases. So in essence, the CapEx drop is not so much dependent on massive productivity increases, it's dependent on finishing the fiber program.

So in that combination, we feel confident and it's the best way to manage CapEx in a year nominal level.

[Operator]

The next question is from Mr. Keval Khiroya from Deutsche Bank U.K.

[Keval Khiroya, analyst]

I've got 2 questions, please. So firstly, can you update us on the Ufone acquisition and when we should get the regulatory decision. If approved, do we think this provides a bit of upside to the '24 guidance? Or is this more a 2025 contribution? And then secondly, can you provide any commentary on what percentage of your overall fiber and copper broadband lines sit within your areas versus outside given you're more insulated in your own FTTH area?

[Joost Farwerck, executive]

Well, on the Ufone acquisition, we're waiting for approval from ACM, our regulator. We think it takes a long time. So -- and we anticipate on hearing something in the coming weeks, although that's not officially confirmed. But we think taking into account the process they took and all the questions they asked, should be done somewhere in the coming weeks. And personally, I expect, yes, that it should have a positive approval because we do not see any reason to block a smaller acquisition like Ufone is.

On a fiber copper performance, yes, that's, of course, a very strong development in the broadband market, and that's what we are currently executing on is more customers to fiber and the switch off of copper meanwhile. So we are happy that we now have more customers and more service revenues on fiber. On the rollout, we have a very -- yes, I must say, a prudent way of building a fiber network compared to other initiatives in the Netherlands on homes passed and homes connect, we show numbers of above 50%, 60% homes connect. And also in the first wave, we connect -- we activate 30% to 35% because we migrate our customers commercially to fiber. So once we roll out fiber, currently 60% of the Netherlands, we also connect households and we try to activate as good as it gets the large part of the customer base.

[Hans Figee, executive]

Yes. Keval, to your point, I mean, the Ufone is not in our guidance yet. So in case the ACM would advise negatively, that's not a downside risk to our numbers. If they advise positively, that would be a small upside to the numbers, which we'll then disclose fairly to you. At present, it's not in there.

[Operator]

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

[Usman Ghazi, analyst]

My 2 questions are the following. Number one. Just on LCE, I know there was a bit of a roaming drag this year which is seen as a bit of a one-off. Excluding this drag, you indicate what the growth rate of the business was and if you would expect kind of continued improving trend in this business in 2024. The second question was kind of linked to capital allocation and -- in the past, I mean, I think you've spoken about potential options you might explore for [indiscernible] and management with someone else, is that on the agenda? And similarly, given the multiples we continue to see for edge data centers, I mean are you active in pursuing kind of say with your various points of presence?

[Hans Figee, executive]

Well, on LCE -- the LCE was -- had a decline in Q3, a positive result and growth in Q4. I'd expect Q1 to be a bit tougher, but we're probably slightly negative and then go back to flat and grow structurally. I don't have a hard number ex roaming. It fluctuates a bit over time. We see in the LCE market, of course, there is a competitive mobile market, although it feels like the corporate mobile pressure has been abating, reducing a little bit in Q4. There's healthy underlying growth in our model and connectivity services. Next year, our next-gen work from home solution will really kick in and start to contribute to our business. So I think there's underlying healthy developments in the core productivity portfolio, some fluctuation in mobile, depending on competitive intensity in the markets and there's roaming that actually, I'd say, could be on and off in various quarters.

As said, I don't exactly have the exact numbers ex roaming, but I expect it really to be slightly lower in Q1 and then come back to structural and sustainable growth as of Q2, Q3 onwards, and then we should be in the growth zone as well, which means that, for example, for B2B, I mean, SME is growing super fast. I wouldn't be surprised if we're still looking at an 8% to 9% growth in Q1. That will eventually at some point, before we retire SME growth will probably taper off. And at that time, LCE, I think, can capture a bigger chunk of the growth rate in B2B. So the overall growth in B2B will substantially be north of 3%.

And the second question, I didn't really capture it what you wanted to ask Usman.

[Usman Ghazi, analyst]

Yes. So just in terms of exploring potential M&A in the past, I believe the tailored solutions that segment has been an area where you've considered other options for that kind of segment. So just any update there? And I also wanted to ask about the -- your edge data center, there'll be over 800 points of presence that you have. If there's any update there on potential transactions given the multiples in the space continue to be very high.

[Joost Farwerck, executive]

Yes. So we're rebuilding our network. And already a couple of years ago, we decided to work to a robust design of 161 metro core locations instead of over 1,000 number exchanges. These 160 locations are serving our customers well when it comes to edge as well. So we're introducing edge as we speak, not because we like the technology because we translate it to real services for LCE kind of customers. So that is an interesting way to differentiate from others because we are the only player in the Dutch market with that position. So that's also where we invested in. I think you also asked after -- yes, tailored solutions, yes. So what I like about the way we run B2B nowadays is that we separated 3 clusters.

One of these is that tailored solutions part. And we really run it in some kind of a metrics way focused on the examples I gave you in the introduction, critical communication is super important for our important customers like police, Ministry of Defense. We serve government a lot on larger projects, but it always is to support the core business of KPN. So we moved a bit away of larger IT programs to just do revenues. That's not our business. We really decided to support the core business, which is all -- yes, based on how the networks we're building, high-margin telco kind of business. And these kind of programs are developed now from tailored solutions. I see growth, and I expect more coming from that.

[Operator]

Next question is from Mr. Nuno Vaz from Societe Generale.

[Nuno Gontardo Vaz, analyst]

Just 2 quick questions from my side as well. And both related to cash taxes and cash interest and how they potentially are contributing a little bit more to free cash flow. At the CMD, you gave a very useful sort of soft guidance, let's call it, on the cash taxes step-up, picking in about EUR 300 million in 2027. Just wondering if you could sort of update us on that. If anything has changed, for example, you guided on EUR 50 million to EUR 60 million in 2024. So wondering if that's still the same? And on cash interest, just from the fact that Euribor is dropping, I'm guessing you're seeing already expecting to see some benefit from that. So just wondering what's the amount. I know most of the interest is fixed but in the past, you've had swaps to variables. So just wondering what options you have on that side as well to benefit from the drop in interest rates.

[Hans Figee, executive]

Yes, good point. Nuno, as I said, the -- we look at our free cash flow next year is the kind of continuing insight and optimization on cash -- on tax and interest that allow us to kind of up our free cash flow a bit, including, I think, confidence on the cash earnings of the group. I mean, you're not asking but I'm still answering the question, [indiscernible] if you look at EBITDA minus provisions, you can see that the amount of cash earnings in the group is gradually going up. So if you look at the charts, EBITDA minus out the provisions of the past few years. That actually increases gradually. So we feel the cash earnings of KPN also are gradually improving. So the quality of the earnings going up. So it's a combination of that plus increasing insights in tax and interest that allow us to increase our free cash flow for next year.

On total cash taxes, I still think we'll be moving to a EUR 300 million in 2027. Perhaps the path to that is a bit more back-end loaded. And there's always opportunities to optimize a bit here and there to save a handful of millions, but you talk about a handful of millions here and there. But then again, if you increase your free cash flow by EUR 10 million a year, EUR 4 million, EUR 5 million of additional tax savings is meaningful. Secondly, on interest rates, we also see opportunities to lower interest rate expense a bit versus the guidance we gave. That's also in the EUR 10 million which has to do with optimizing your bond portfolio. You may see more of that in the coming period.

As to the floating part of things, as you say, we've only 15% floating. So any drop in Euribor is not baffling us so much because also we've got a bunch of cash against it. Obviously, a drop in Euribor generally speaking, is good for us. If you think of the balance between debt and cash, but there's an offsetting effect. Could we swap back to floating? Well, for that the curve is now still kind of inverted to flattish. I mean when the curve steepens, that's when you do those type of things. At this point, we feel comfortable with the 15% float and the rest fixed. And if it will be a bull steepening of the curve from lower floating rates, obviously, that would open up many opportunities. That's not in the numbers yet, except for the fact that we see some opportunities to optimize rates -- as it optimizes around the edges, but then again, around the edges on tax and rates could easily help you meet your free cash flow target.

So again, in summary, the EUR 300 million in tax expected to be there, the path to that a little bit more back-end loaded with some opportunities to save some costs on the site. So maybe the EUR 300 million becomes EUR 295 million or EUR 290 million. That's kind of the order of magnitude, something similar on rates. We'll have a plan to execute on those in the coming months. Lowering rates is always good, could provide a bit of upside. But the underlying -- also the underlying -- I think the cash generation of the business, if you adjust for typical provisions is also going up gradually over time. So that all together points to I'd say a little more optimism on free cash flow generation in '24 than what was highlighted in the Capital Markets Day.

[Operator]

We'll take now our last question is from Konrad Zomer from ABN AMRO.

[Konrad Zomer, analyst]

I've only got one question. Can you tell us from the more than 3 million homes you switched off copper last year, what's the proportion of those homes that signs up for your fiber proposition and what's the proportion of those homes that signs up for an alternative provider like Ziggo, for example?

[Joost Farwerck, executive]

Yes. So before we switch off copper lines, of course, customers are migrated away from copper. And since we agreed with our regulator to announce a copper switch off in a certain area on time, I think the schedule is 3 years at least. We give customers in an area of time to migrate to fiber. So there's -- especially when it comes to KPN customers, and you're talking to KPN customers because they are on a copper network. Most of them move to fiber. And on top of that, we improve our fiber penetration by aggregating more customers from others in that area. And we -- on top of that, we add wholesale customers. And at the end, we reach a penetration level in a certain area above 60%.

So I would say most of the active copper lines and -- are, of course, KPN customers, and those are migrated mainly to our own fiber network.

[Hans Figee, executive]

Konrad, when you look at the program, the loss of customers that feel like we're forced to migrating and we move to somebody else, that's really minimal. So basically, when a customer switches off from copper, he or she either already is a fiber customer at KPN or our wholesale partners or becomes one, we upgrade to copper or it was not a customer and active customer at all. And the actual customer loss on switch off is negligible.

[Reinout van Ierschot, executive]

Okay. Thank you very much. That concludes the call for today. If there's any further questions, please reach out to the Investor Relations team. Thank you very much.