Koninklijke Kpn Nv

Good day, ladies and gentlemen, and welcome to KPN's first quarter 2023 earnings webcast and conference call. Please note that this event is being recorded. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today's prepared remarks. If you would like to ask a question, you might do so by pressing star 1 on your telephone keypad. I will now turn the call over to your host for today, Mr. Reynald van Eerkoot, Head of Investor Relations. You may begin, sir.

Thank you very much, and good afternoon, ladies and gentlemen. Thanks for joining us for today's call. Welcome to KPM's first quarter 2023 results webcast. With me today are Joost Farmer, our CEO, and Kirsten K, our CFO. As usual, before turning to our presentation, I'd like to remind you of the safe harbor on page two 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 Farberg.

Yes, thank you, Reinhard, and welcome, everyone. Thank you for calling in. Let me start with some highlights from the quarter. In the first quarter, our group service revenues continued to grow, and within the mix, our business service revenues grew for the fourth quarter in a row, and that's mainly driven by continued strong growth in the SME segments. Consumer fiber and mobile service revenues showed continued growth, partially offsetting the competitive dynamics in the broadband markets. Together with our friends from the joint venture, Glossport, we added 113,000 households to our Fibre footprint. In the first quarter, customer satisfaction levels improved across the board, and we once again received an award from Oumlaut, at this time for having the best mobile and fixed network in the Netherlands, and moreover, KTM was also recognized as the best all-in-one provider of the Netherlands. And the good news is both on fiber on the first place and copper, we come in on the second place, demonstrating that our investments in qualities of our customer service are working well. As expected, EBITDA declines somewhat due to the cost inflation and the free cash flow was impacted by intra-year CapEx phasing. We expect our EBITDA and cash generation to improve throughout the year, the coming quarters, and therefore we confidently reiterate our outlook. Now, as usual, Chris will give you more details on our financials and walk you through the outlook of this year. First, I'll take you through the business details. And once again, we've made good progress with our accelerated growth strategy. We started more than two years ago. We continue to focus on the key pillars of our strategy. The first is to leverage and expand our superior networks. Second, grow and strengthen our customer base. And lastly, to continue to simplify and streamline our operating model. We intend to present a strategy update to the market at the Capital Markets Day later in the year. The fiber rollout is on track to cover approximately 80% of the Netherlands end of 2026. In the first quarter, we rolled out fiber to 85,000 households. I already mentioned the glass boards. Together we did 130,000 households, and we currently cover more than half of the Netherlands with fiber. We expect a gradual uplift in fiber rollout numbers in the coming quarters. Our continued fiber rollout and growing fiber footprint is delivering an improved penetration rate for retail and wholesale. Looking at the results of the first quarter, we currently generate almost 1 billion euros of fiber service revenues per year this year in consumer markets, and this number is growing strongly, driven by a growing base and an attractive park pool. So all in all, Fiverr is clearly at the heart of our strategy to create long-term value for all the stakeholders. So now let's move into the consumer segments. Adjusted consumer service revenues were nearly flat in the first quarter. On one hand, we see consistent mobile service revenue growth driven by base development and growing ARPU. And on the other hand, our fixed service revenues were impacted by anticipated declines from KPN's legacy portfolio. Now, despite the rising cost of living, impacting general customer sentiment, I must say, KPN, we continued to lead the Dutch market in customer satisfaction. I'm happy to mention our investments in service and quality of our products and the support of all the colleagues working in that environment are really paying off. Net promoter score improves sequentially and remains one of our top priorities. Now let's take a deeper look into our first quarter KPIs. Retail fiber base increased by 35,000 customers. Despite this solid subscriber info, our total broadband net has shown a small decline. In March, we observed a gradual improvement in our order intake, so going forward, this together with the new portfolio lineup and the customer focus should support an improvement of a broadband-based trend again. Fixed ARPU remained broadly stable at 53 euros, and combined, our fixed service revenue decreased 1.7% year-on-year. Our post-paid base increased by 11,000, and the post-paid RQ grew almost 1%. Combined, this led to a solid 3.4% growth in mobile service revenues. Then a look at the B2B segment. We saw continued service revenue growth in our business segment. The B2B adjusted service revenues grew more than 3% year-on-year in the first quarter, with growth across all segments. Business net promoters for improved further, despite volatile economic environments. Also, B2B customers continue to value KPM for the stability, reliability, and quality of our network and services. SME is the main engine of B2B growth, driven by a solid commercial momentum, especially in Momo. We serve our customers via our cloud-based KPM1 platform, and the customer base is doing good. But also, LCE continues to move in the right direction, showing growth for the second quarter, and we are finalizing the migration of our customers from legacy portfolio to the new environment, and we are confident we are on track here to create more growth in the LCE segments. Tailor solutions continue to perform in line with expectations, and as we communicated previously, this business remains subject to the timing of projects and related hardware sales. In wholesale, service revenues were broadly flat in the first quarter. The growth trend leveled off compared to previous quarter due to the impact of several small one-offs in Q1 last year, so positive one-offs in last year. But looking forward, I'm confident that we get back in growth trends in wholesale again. We had a 25,000 post-based SIMs in the first quarter while our broadband base was stable. Now, before I hand over to Chris, I would like to mention that we increased our ESG disclosure in today's presentation. In the appendix, we include a slide with more insights and additional KPI regarding some of our non-financial ambitions in this respect. From today, and in line with our commitment to sustainability, you will be able to track our performance on carbon reduction, circularity, and diversity on a quarterly basis. And with that, let me now hand off to Chris to give you more details on our financials.

Thank you, Joost. Let me take you through some more financial numbers. Let me start by summarizing some key figures for the first quarter. First, our adjusted revenues increased 1.9% year-on-year, mainly driven by growth in business and consumer mobile and higher non-service revenues. Second, adjusted EBITDA after leases decreased 1.6% year-on-year, as sustainable top-line growth was offset by higher costs. In the first quarter, and in line with our expectations, our cost base was affected by inflationary headwinds, such as wage indexation, rising energy costs, and higher lease costs. This has led to €12 million higher indirect OPEX. But actually, if we were to exclude our higher energy costs, our adjusted EBITDA would have been in line with last year. And while it's still early days, If the moderation in energy spot prices continues, there remains a scope for modest upside to our 23 EBITDA guidance. In the meantime, we keep working hard to further reduce our energy consumption. Third, free cash flow decreased 20% compared to Q1 last year, mainly due to higher CAPEX as a result of the 15-year phasing. We'll offer more detail on underlying cash developments later in this presentation. Group service revenues increased by 1.2% when compared to last year, underpinned by especially strong growth in our business segment. Business service revenues grew by 3.1%, mainly driven by continued strong performance in SME, while both LCE and Thales Solutions also continued to grow. SME again outperformed against our expectations with about 7% growth in service revenues versus last year. Also, service revenues were broadly flat year-on-year, which did resume positive growth in Q2 again. And in consumer, the service revenue threat improved slightly compared to the previous quarter, but was still marginally negative. 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 effects of content packages. For the remainder of 2023, we continue to expect some headwinds, but the year-on-year trend is expected to improve. Supported buyers depend on price adjustments and commercial improvements. Moreover, the accounting and second-hand deck, our reported broadband service revenue growth for the past 12 months, will have lapsed when we meet again and we present our second quarter numbers. At 164 million euros, our free cash flow margin declined to 12% revenues. The delta in free cash flow is explained by different phasing of Fiverr-related capex. For 2023, we expect a more evenly distributed capex level throughout the quarters. For the other free cash flow items, the impact of higher cash taxes, working capital phasing and lower EBITDA were offset by lower interest expenses and restrained restructuring charges. All in all, and contrary to 2022, we had a relatively soft start to the year in terms of cash generation. As highlighted through our full year results, we expect this year's pre-cash flow to be somewhat back-end loaded, reflecting also the timing of EBITDA generation, CapEx phasing, and improvements related to working capital and other items such as cash taxes. So looking ahead, we expect gradual improvement in this pre-cash flow number throughout the year, and we remain confident to deliver on our pre-cash flow targets. Finally, we added forward a strong cash position. We continue to have a strong and resilient balance sheet at the end of March, with a leverage ratio of 2.2 times, comfortably below our self-imposed ceiling of 2.5 times. Also, our interest rate coverage ratio remains strong, although the sequential increase is related to the phasing of interest payments, expected to normalize in the remainder of the year. As a result of higher interest rates and floating debt and other core predictions, Our average cost of senior debt increased by 146 base points a year to 3.9%. In March, we redeemed the remaining outstanding principal amount, about $150 million, of our U.S. dollar hybrid. Our next bond redemption only takes place in 2024, which gives us plenty of time and flexibility in current volatile markets. Moreover, due to the current volatility, we re-swapped some of our floating debt back into fixed, and as a result, our exposure to floating rates was reduced from 36% to 70% of our debt. Total liquidity remains robust. It consists of 1.5 billion euros in cash, in short-term investments, and our overall revolving credit facility. So overall, we're very much on track and confident to deliver on the 2023 outlook we gave to you in January. So to summarize, KPM generated results in line with expectations and we continue to make good progress with our accelerated growth strategy. We see sustainable growth in group service revenues with positive signs across all segments, especially gradually improving order balances in the retail segment. Our Fiber Rollout Program has maintained a solid base and has improved an attractive return profile. And KPM continues to lead the Dutch market in consumer satisfaction, as evidenced by the awards that Dior has mentioned and our NPS improvements. Finally, and as expected and indicated earlier to you, we had a relatively slow start compared to the previous year in terms of EBITDA and cash generation. However, the sustainable service revenue growth run rate and the measures we have put in place provide us confidence in our ability to return to EBITDA growth this year, and therefore we confidently reiterate our outlook. We expect the coming quarter, Q2, to be around flat as of last year, and in Q3 and Q4 to show solid positive EBITDA growth again. and we observe and expect a similar pattern for our free cash flow. Thanks for listening. Not absurd to your questions.

Thanks, Chris. And you, Bill, I'd like to remind you to please limit your questions to operator. Over to you, please.

Thank you very much. Ladies and gentlemen, we will start the question and answer session now. So as a reminder, if you'd like to ask a question, you might do so by pressing star 1 on your telephone keypad. To redraw your question, please press star 2 to redraw your question. The first question comes from the line of Luigi Minerva calling from HSBC. Please go ahead.

Yes, good morning. Thanks for the presentation and thanks for taking my questions. The first one is on the outlook for B2C service revenues starting from Q2 onward. I'm wondering what are your expectations based on the saving of promotions in the market and the competitive dynamics that you've observed in recent weeks. And the second question is just to get some more color about management change. So, Marike Schnepp is transitioning from head of B2B to head of B2C, and I'm wondering what kind of B2B lessons can be helpful for B2C, particularly I'm thinking about managing the transition away from legacy services, fixed services products, which is basically what is keeping your fixed service revenue in B2C in negative territory. Thank you.

Good. Luigi, on the outlook for B2C service revenues, if you start with the underlying drivers, obviously we have negative net ads in broadband in Q1 and slightly subdued post-paid net ads in Q1. On post-paid, we have some bringing forward as current due to a number of technical measures that will revert in Q2. So I'd expect in Q2 for the mobile net ads to go back to the, or not as close to the run rate we had on the average of last year. And when you look at the underlying order balances on broadband, we've seen in the last few weeks, since mid-March, the markets have to normalize. They look a lot better. So I expect also to see better and possibly positive net ads in broadband. It will not be spectacular, but at least no longer the decline in broadband net ads. if the market stays where it is, which means that I think in Q2, you see mobile service growth to go up. Now 3.4% will get closer to four, I think. Fixed service revenues is bottoming out, will not be flat in Q2, but getting close to zero. So that means the total consumer revenue should be positive in Q2. And if you implement the price increases, it's my understanding or expectation that even fixed will cross the line in Q3 and become positive. So basically underlying gradual improvement in market circumstances, reversion of temporarily increased student mobile with better net ads, as if not spectacular, but at least positive. That would support, as I said, improving service revenues in mobile and bottoming out in fixed. And if you think through price increase possibilities, bearing, of course, a mark that goes to preserve again, but normally speaking, you'd expect also fixed to cross the zero line and start showing some positive service revenue numbers as of Q3.

Yeah, Luigi, and on the managing change, good, by the way, you mentioned it. Yeah, so not unexpected for me, but Bakfula D decided after four years, four and a half years in KPN to move back to the UK. He did a great job. Jean-Pascale van Overbeek decided to step down as a KPN board member for personal reasons. So that... that gives me the opportunity to do a bit of strengthening the team and do a reset where needed. So we decided to move Marieke Snoep from B2B to B2C. I think Marieke did a great job on B2B by reorganizing the business in a more logical way, splitting it up in three business segments and then motivating the teams to do the job. And that is the real challenge in D2C. We have a plan. We know exactly what to do. It's of course based on Fiverr, but it's also about improvements we do in the customer environment. It's about the regional approach we installed in the Netherlands because we compete against players in different regions with different tactics. So all in all, it's not on what we have to do, but on how we do it. And that is where Marike comes in. So I'm confident that she can really encourage the teams to go faster on the execution of our plans. And I'm happy with the move from Marike to B2C. Then on B2B, Chantal Vergaan moves in from a Dutch insurance company. She knows KPN because she was in the supervisory board for a year. She's super motivated and a high talent. She understands the Dutch market quite well. She's in the content of B2B, so she makes a flying start and already in touch with the different team members. And in our technology and operations department, Wouter Stanmeijer, who's already working at KPM for more than 12 years, did a great job on strategy and other projects. Last six months, he was in the heart of the end-to-end fiber steering to improve that part of our business. So he's now moving into operations, and also he has the ambition to – To go faster on the execution of things. So all in all, and then again, Chris here sitting beside me is still unchanged. It's still the same, Chris. HR and myself didn't change. So all in all, I'm happy with the new team. It's really working, and I'm looking forward to work together with the team.

That's great. Thank you, Jost, for the explanation. And, Chris, if I may quickly follow up with regards to price increases in H2. I think Vigo has announced that they will apply inflation. In the past, KPN has kind of matched salary increases with price increases. Should we expect the same rationale?

Well, Chris mentioned the cost increases we faced Q1 and energy labor costs pretty high up because we do a CLA increase of 6.5% this year. Yeah, when we take the decision on price increases, especially in consumer internet, um we uh always take a look at what we do on the cla so it's pretty uh i think your expectations work quite well that we will uh work a bit in that line but of course we have to take a final decision uh yeah somewhere in the coming month but it will be higher than last year and um we also now uh follow a kind of a bit different strategy because last year we changed all contracts in consumer segments on broadband and we installed a clause that gives us the opportunity to do a price increase so we don't have to go out on a communication scheme two months in advance as we formed the whole base. So of course we will communicate to the base the price increase but probably a bit less loud, louder than last year.

Thank you so much. The next question comes from the line of Maurice Patrick calling from Barclays. Please go ahead.

Yeah, thanks for taking the question. Just I'm sort of talking pricing too much. I just wonder your thoughts in terms of how much of the price increases that you'll put through will flow through to ARPU. One of the big discussions that seems to be amongst companies that go net and gross is price increase offset by downspinning, some churn. I guess from your experiences, how much of the price increase that you'll put through and payers will put through will flow into lower ARPU? And just a quick follow-up on the previous question, if I may. On the broadband that has, did you say that you said it'll go back to growth in Q2 or should be broadly flashing Q2? I wasn't quite sure what you said on the broadband internet side. Thank you.

Well, broadband, that is, yeah, we plan for growth. It's a bit tricky to predict what's going to happen in the coming two months, but looking at the current flows, I'm aware we're in a better shape than Q1. Let's put it that way. Let's wait and see. Of course, we aim for growth. At the end, that's why we do all the Fimer installments. On pricing, you're right. That's a good question. There's a base. We do a price increase. or expect, sorry, that price increase to be reflected in service revenues. And it depends a bit on the base and the back group and the front group, et cetera. So in mobile, we have a consumer-based post-paid, which is growing, and there's two movements in that base. It's KPN moving customers more to the limited, improving ARPU, and it's Simio doing more the growth of the Simio base. So in CME, our strategy is to grow the base. In KPM, the strategy is to improve the ARPU, and the plan of that is reflected in ARPU improvements.

Anything to add, Chris? No, look, more than on the development group, the first month of the second quarter is not just final. So it's kind of 30 days, but as I said, if I look at order balances, they look increasingly positive. Of course, they will take some time to convert into net ads, and it's always a cancellation risk, but Q2 will not be spectacular, but we've not given up hope on small positive broadband numbers. So it is not spectacular, but certainly better than Q1 and an optional opportunity for some positive broadband numbers. And RQDrop, there's a couple of things, right? There's always the secretary decline in voice. So fixed voice is gradually fading out. That is a structural development. We've seen some migrations on back book to front book will slow down a bit after we have a commercial action slow down. So that's also be supported. So we have some confidence that after the price increase, it will be slightly more sticky than last year, given the underlying development that we see at this point. But again, it's something for us to also be very watchful when it comes to that point. Great. Thanks so much.

The next question comes from the line of Ousmane Gazi calling from Berenberg. Please, go ahead.

Hi, gentlemen. I just wanted to make sure you can hear me first. Yes, we can hear you. Great, thank you. So I just wanted to look at the fiber revenue growth trend versus the copper revenue growth trend in the consumer market, or in the consumer segment. What I can observe is that the growth rate in the fiber service revenues, they used to be roughly 14% through most of last year. It's come down to roughly 10% in Q1. Meanwhile, the copper declines that were roughly 14% or above, 14%. If I kind of adjust for the various provisions that took place in Q1 last year, obviously reported you're saying copper is down 11, but excluding these one-offs, it seems to be down less than 10%. So given the accelerating kind of migration from copper to fiber, it seems somewhat counterintuitive that fiber revenue growth has come down and copper declines have decreased. have come down as well. So could you perhaps provide more color? Is this just a function of, you know, more price promotions in fiber or something else? That was the first question. And then the second question was just on the, you know, if there's any update on the market analysis that the regulator is preparing on the broadband market. Thank you.

Yeah, with the question, we've seen only fiber growth higher than copper growth. We have some net-net decline in fixed service revenues. If fiber growth came off a bit, interestingly, when you look at the fiber numbers, it was still net-add positive. So if you take net-add fiber, and if you exclude whatever copper migrations there were, so net-add minus migration from copper, there is underlying growth in fiber. So fiber still is attracting net-net new customers to the KPN network. Slightly less in the first quarter that we had last year, and we relate that to the commercial intensity in the market. Actually, fiber growth sales were higher than ever in the last quarters, but also churn was higher, and I think that's all to do with the severe price competition. So my explanation is that, yes, you're right in your observation. Growth has fiber very high, churn also a bit higher in fiber, but the net that has ex-copper migrations were still positive, but a bit less than what we we used to, although if you look in the quarter, you can see it moves from Jan to Feb to March, gradual improvement of the net net ads in Fiverr. So I'd expect this trend to be supportive. And thirdly, on the RQ side, of course, we did see some more, yeah, of course, some more discounts and customers who then went in for a full discount, so that also showed up in some of the Fiverr numbers. So to me, it's a function of the commercial intensity, and I think the fiber growth relative to copper growth should normally stabilize in the rest of the year. And when it comes to the ACM, we don't know. I think they're working on a review of the market. I don't know exactly where it stands. We do not expect any surprises from them. Interesting that they pointed out in a press release some time ago that they were looking in parts of the cable market of the coax market in Amsterdam particularly, but also they said that there was no concern on the fiber market itself, competition in the fiber market was safeguarded and safe. So I don't know what their timing is, but I don't expect anything that, any surprises there.

And these market analysis is something they have to do on an annual base. So that's not a surprise for us. So we are pretty confident that our wholesale framework stands as supported by ACM recently.

Great. Thank you. Just to follow up on the wholesale, so I guess, I mean, the question is going to come up anyways, but I guess the volume intake is a bit lower on wholesale. You mentioned, obviously, I mean, cable being aggressive, so the alternative kind of providers struggling a bit. I mean, you know, are you considering maybe taking a tactical kind of approach to incentivizing wholesale as a bit, you know, given... you know, the cable strategy.

And also we saw the same development, similar development as in KPM, so affected by the commercial intensity of the market that's faded a bit during the quarter and normalized. So you saw also a gradually improving wholesale order balance. But if I get to see it in wholesale, we have, of course, a large client and some other clients. We saw also the smaller clients recover. So summary answer is one, Similar developments as in consumer, affected in our view by the commercial intensity of the market. And the good news is recovery during the quarter and a broadening base of wholesale customers in broadband. And now that you're not asking it, we're talking about wholesale, I want to make sure you guys will see, we had some lower growth in wholesale mobile, but that was very much a year-to-year effect if you go back to, Q1 last year, we saw a really big spike into service revenues mobile, which was driven by a one-off. That caused the year-on-year mobile growth to be negative. If you correct for that, and that was a one-off in service revenues last year, which was not even a margin, but a one-off in service revenues. If you correct for that, the underlying mobile growth in wholesale in mobile is still positive. So summary is encouraging trends in, if not spectacular, but encouraging trends in broadband wholesale in the quarter. And similarly, underlying growth in mobile, better than what was reported due to this one-year new comparison. And that will also show up into improving wholesale service revenue growth in Q2. So you got a full bonus question, huh?

On the broadband market in general, the Netherlands, it's fair to say, okay, there was one broadband service provider introducing pretty aggressive discounts. We decided not to react on that because we're, like I said, differentiating ourselves on quality, on the quality of the customer service and products. But other players on our network didn't either. So the good news is that it's not a market where we all follow the sharp discounts of one player. And so I think that broadband market repaired a bit in March on that.

Thank you.

The next question comes from the line of Conrad Zumer calling from ABN AMRO, OdoBHF. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. The first question is on your free cash flow development related to a more smooth CARPEX development throughout the year. Is it fair to say that you also think that your fiber rollout might be more evenly spread throughout the year, as in We're likely to see more quarters with less than 100,000 homes passed from KPN than we might have seen in the past. And my second question is on your price increase again. It seems that the main date that you might put that through will be the 1st of July. Why would you not bring that forward? Is there a contractual reason not to do it, or is that a commercial reason not to do it, given that your two competitors already put through significant price increases before you did?

Well, to start with the second one, and I'll hand over to Chris, but... So what we saw is that usually T-Mobile is doing the price increase beginning of the year, so no change there. We saw an announcement of another player in the market early, but not followed by the execution that will be done later. So that was a bit of a fault. And I like the idea of just following the pattern we usually do, which is always 1st of July. That's how we treat our customers. We do it first of July every year, so it would be a bit of a rough move to gain the advantage of six weeks or two months to do it faster than that. It's also a process we play delicately to explain why we do it, how we do it. I just mentioned that we look at the CLA increase on our side, so that means that this year could be much bigger than other years, and especially in B2B, we do higher than that. So there we also follow our contracts. So it is a process. We play very carefully not to annoy our customers, to put it that way. So it's a commercial decision. Well, it's in the contracts that we do it annually. Probably we could do it a month earlier, but I think that is not the way we play this to our customers. I mean, they're used to the process. First of all, it's also a good, easy, quiet moment in the year to do it. And I like the idea of just following that. And, yeah, do it on the 1st of May or something like that. Then we gain eight weeks. So we're in the long-term value creating businesses theory, and that's why we stick to the plan.

Okay. It's really about timing of CapEx, not too much growth of Fiverr numbers. We had more CapEx in Q4 last year and also more CapEx in Q1 this year. And especially in Fiverr, the business is so that if you start a building stream, actually you start to pay up you pay a little bit more cash in the beginning of the project and less in the later phase of the project. So basically the CapEx increase last year and the CapEx step up this year will have some negative cash implications year on year on Q1 and also to a tiny bit in Q2. This is because you start up new fiber building schemes and we started up more fiber new building schemes and that will come into CapEx. What does this mean for HP? Actually I expect the amount of homes passed to gradually improve in a year as well. So the CapEx cash out is not immediately linked to the amount of HP you provide during the quarter. It's actually the CapEx and then the cash out are linked to the starting of building schemes that will deliver homes past in six to nine months later. So One is free cash flow driven by CapEx increase last year and CapEx step-up this year, which are a function of an increased number of building streams. And that's a separate development that has some implications for the timing of our free cash flow during the year. And secondly, I would not be surprised if we could see some ramping up of the weekly and monthly delivery of FTDAs from past numbers. But those are not immediately linked to one another, at least not in the same quarter.

Okay. Thanks for that.

The next question comes from the line of Nawa Kristini, calling from Morgan Stanley. Please go ahead.

Thank you very much for taking my questions. I've got two. Firstly, starting by B2B, so clearly her top line growth is trending nicely. I have a question on profitability, precisely. Could you talk a bit about the profitability profile of the incremental growth in B2B? How does the new business compared to your current B2B margin. And then my second question is more of an industry-related question. On the fair share debate, a number of protocols are pushing really hard in here to get a CapEx recovery payment from Big Tech. Could you talk a bit about where you stand in this debate? The consultation is ongoing, and it would be helpful if you could share your views, latest thoughts, and expectations here.

Thank you. Noah, let me take the first question on the B2B business. When you look at the SME growth, that actually is quite high-margin business. Our SME business is a mobile business. There's a lot of workspace business in there, some broadband. So on SME, I would say new business has a similar margin to existing business. slightly diluted possibly because we have a little bit more cloud and workspace, which is lower Amazon margin than typical mobile or broadband. But in general, broadly speaking, the speeding business is similar contribution margin as the old business. In the large corporate segment, it's slightly negative. It still has positive margin business, but it's slightly margin diluted. but also cheaper to present, to produce. So what you see in the LCE business is that the contribution margin of some of our new business is lower, but it's much cheaper to produce, and we take that cost, and then you see cost savings in the TDO unit in the network. So end-to-end, the margin is healthy and similar. It shows up less in B2B, but it shows up in the cost reduction in our TDO business because it's simpler, more standardized business, so that leaves us an opportunity to take our costs. So in SME, you can look at it almost like an isolation in SME. In LCE, you have to also look at the cost improvement in our TDO business to look at the end-to-end opportunity and to show that some standardized lower contribution margin business also needs a lower cost upstream in KPN when it comes to the unit that produces products, and you can cut that cost there.

Yeah. And on your point of the debate in Europe ongoing on fair share, yeah, on one hand, I should say we see more and more European telcos taking an acquisition in the debate. And KPN in general, we support that debate and we follow it closely. And there's a lot of growth rates of IP traffic coming from all the top players that have big impact on our network. and the whole discussion is on reasonable and efficient use of the network, so not on net neutrality. But on the other hand, it's a bit of voice from the past, I must say, personally. I understand where it comes from, but it's the model we introduced long ago, and you could also say it's mainly the end user paying for the usage of all the capacity. balancing that out in a different way could be helpful. But for me and for us, the main challenge is to approach these over-the-top players and see them not as a threat but more as a partner. We have built our strategic locations in the Netherlands and and and together with our new network environments the fiber network edge we we're rolling out around these locations we think we have unique positioning and elements to support uh microsoft or netflix to make use of our strategic locations our solutions and be close to the customers So I would like to think more and more of these big players as future partners than as a threat doing all kind of IT traffic downloads, dumps on our network. But for me, I say we support the whole discussion.

Okay, that's helpful. Thank you very much.

The next question comes from the line of Steve Malcolm coming from Redbone. Please go ahead.

Yeah, afternoon, guys. Two questions, if that's okay. First on, just coming back to SME, it continues to grow very healthily, 8% to 7.5%, 8% this quarter. Can you maybe just sort of help us get under the bonnet a little bit in terms of, you know, what the volume price may be? drivers behind that growth and the visibility you have over future growth. You know, you mentioned, I think, the move to our unlimited mobile bundles, you know, maybe an idea of what proportion of base in this new segment is on unlimited and what the script for further upsell is, would be really interesting. And then just back to Fiverr, it seems to kind of hear your thoughts on the overbuildings. And I guess, you know, what you're seeing in the market today maybe versus what you were seeing 12 months ago, I think, you know, we all probably think that higher interest rates and inflation is a fairly major impediment to those business plans. But curious to know what you're seeing on the ground and whether the level of activity has changed necessarily over the last 12 months. Thank you.

Yes, Steve, on SME, it's actually less price, more volume. There's a price increase on SME, which have not been put through this year as well. So it's more of a volume thing than a pricing thing. And it's volume driven by increased number of triple play customers, the customers who have multiple products. We see an increase in mobile penetration and repeat buying of existing customers. There's still good employment development in the SME part of the Dutch economy. So our customers are still hiring new staff, hiring new staff to be equipped with a workspace, a mobile phone, a subscription, et cetera. So it's a giant increase in mobile base. And it's increasing cross-sale with the amount of customers. We have subscription RFUs stabilizing, increasing the share of unlimited SME base as well. Good base growth. On broadband, I think we could do better. There is growth in the SME base. There's positive broadband growth in SME. Also different by our strategy to roll out fiber in business parks. But I think we could do more. We're certainly not satisfied there. And then there's the decline in traditional voice and voice being stable.

Chris, is that volume coming from competitors? I mean, is it how much is market, how much is share? Any color on that and how sustainable those trends are?

I think a little bit market. I think a little bit market.

So in all reality, part of that is coming from competition, and that also has to do that we cleaned up full base, moved it all to a cloud-based portfolio. During the migrations, we lost some customers over the last years. So that part is coming back now because the KPM1 solution is working perfectly fine in SME. and so we really see especially on the connectivity part customers coming back and also I think there is SME market in general is growing on our side.

Yes, SME is growing and we do have a very large share in SME so I think without pumping our chest too much but our KPN1 platform with all products in there, increased security solutions, is actually differentiating and distinguishable from others. So there's a significant portion of market growth with, you know, SME customers employing more staff. And as Jo said, we're also increasing the amount of platforms in place. It's all cloud-based. It has no legacy products anymore. you do see that customers are bringing back business to us because we have a broader set to offer that shows also in the amount of triple play customers, which is now increasing. I think 50% of our SME base is now double or triple play, and that's a good sign, of course.

Okay, and do you think you can keep going in that sort of run, right, in terms of growth? I mean, is that credible?

I think actually, I would bet you that probably Q2 loop should be better than Q3. I think in the long run, 5% to 7% is probably where SME should be at for quite some time now. But then again, we could expect it to flatten off. It hasn't, but it stayed on with a higher growth path than for longer. And especially, I wouldn't be surprised if you can see a small reacceleration in Q2.

Great, great, thanks.

Next question comes from George.

Sorry, George. Sorry, I have some fiber as well. No, no, no.

Oh, yeah, so one other bill. The Netherlands is, until today, doing quite good, as you know. So in the Netherlands, we have our rollout program. There's one big player that obviously picks the regions we are not in. And there's another one that is mainly targeting the larger cities where we are as well. So either we come to a conclusion or we are going for a bit of overbuilding in the Netherlands. But all in all, I must say that until today, we really avoided overbuilding in the Netherlands on a big scale. Great, thank you.

Next question comes from George Ross. Good afternoon and thank you for taking my questions.

Firstly, a follow-up on some of the comments you made earlier around churn being a bit higher on the broadband base in the first quarter. I'm just curious whether that was mainly the result of promotions from the cable player There was also, if I'm not mistaken, last year some promotions from you around TV that maybe, you know, with the first anniversary of that, there is a bit of impact from these. But I'm just curious as to how you are thinking about churn for the rest of the year, whether you remain confident. I know you commented a bit about the second quarter being better, but also in the second half with the price increases. whether you remain confident in stabilizing, maybe slightly growing the broadband base. And if not, then maybe give us a bit of an indication as to how you expect to compensate that. And then the second question is around working capital. And I think, Chris, you mentioned the fact that CapEx will be very linear this year. Normally what we'll see from other telcos is is when you have significantly higher capex in the second half in one year, in your case in 22, and then more linear the year after, there tends to be naturally some working capital outflow linked to the capex payments. So if I remember correctly, you expected working capital to be slightly positive for this year. Is that still the case? And do you mind just giving us a few examples as to how you get there.

Thank you. George, just to start on that turn point in broadband, in simple terms, it's pretty fair to say that the first quarter was impacted by promotions by others in the market, and you're right that we did something on TV last year. I think for Chris and myself, it's very important to keep our sales team's discipline on how to react, where we try to act as a market leader and not as a follower. So that's the strategy we choose for Q1, and we see things improving looking at the trend in March and further. So I expect a better trend on Q2 and looking forward today, I must say. So the market is competitive on one hand, on the other hand in a good shape because the large service providers all introduced pretty large pricing pieces. So that was announced by T-Mobile and Vodafone Signal, and we will communicate in May on that. So that works quite well because we all do large investments in our infrastructure, and so I think that's needed today. On the other hand, a bit of a strong competition, discounts, et cetera, we didn't follow. A bit of impact on the Churn Q1, and now we see the improvements.

Yep, and on your working capital, you're completely right. If your working capital is more flat, the pattern that you described would lead to some working capital headwinds in the first half of the year. You saw some of that in Q1. Look, for example, at our trade tables. The trade tables numbers made quite a big swing from Q4 last year to Q1 this year, also compared to Q1 last year. So that actually has to do with the timing of fiber. New fiber building seems being put online, being put out, and your invoices go a bit faster. So that's one. Secondly, so we see an opportunity to improve working capital in the second half of the year. First of all, because of this timing effect. Secondly, there's still measures we can take, for example, in smarter invoicing, not even shorting payment terms, but sending out the invoice earlier. We've identified enough areas with large corporate customers where we find that the time lag between finishing a product and then actually sending the invoice is somewhat uneconomical for us, so that's where we can prove. We also talked earlier to you about inventory management. We have quite a large stock of CEP, consumer premises equipment, mostly in line with our Android TV launch. We launched, we bought five new set-top boxes for Android TV. Last year we built a significant stock of CPE given potential supply chain issues. I think we're a bit overstocked in that area, so expect us to run down that inventory over time. We have some stock of materials for consumer support activities So it's a gradual rundown of inventory. It's smarter, continuous optimization of your working capital, of your invoice terms. Some of it on payment terms, but more on the invoice terms. And then a gradual fading of the working capital direct from the capex spike. So extract work capital to be also a bit of a headwind in Q2, and then improve in the second half of the year.

Just clarify, you still expect it could be positive for the full year or around flat positive?

Well, it's slightly positive. It's not going to be a massive number, but it's slightly positive, I would think, for the year.

Very clear. Thank you.

And the last question comes from Kevel Kiroya calling from Dutch Bank. Please go ahead.

Thank you. I've got two questions in slightly longer term. So you've talked about the scope for CapEx for post-2026. I appreciate this is a topic for the CMD, but at this stage, would you be able to share any thoughts on how you should think about longer-term CapEx? You've talked about non-FTH CapEx sales running at less than 14%, and does this still make sense at the group level after FIBA? And then secondly, as we think about you reaching the 80% five-to-home coverage targets, what are your latest thoughts on what to do with the remaining 20%? It sounds like you want to avoid overbuild, so would you consider wholesaling, off-the-alternatives, or M&A at all?

Thank you. This is an important part of our strategy. We're building a fiber network. We think we have to cover 80% of the Netherlands, not because we don't want to serve 20% of the Netherlands, but we think it's pretty fair to assume that third-party players will cover the other 20%. That's what we're building. At the end of that program, Our capex will go below a billion, and our free cash flow will go above a billion. So take that in mind, the number of a billion. That's an important one on our capital markets day, I would say. Yeah, wholesaling, that is our business. So we're opening up our network for other players. We're not making use of other networks because in our vision that would encourage other players to speed up their rollout because that will defeat the business case. So we currently see third-party fibers struggling on getting the right penetrations to make the business case work. So we take the decision in these areas to benefit from our upgraded copper network until we are there with our copper ourselves. At the end, when we're reaching the point of 70, 80%, that could be a moment to consider the usage of third party networks, but not today. That will be a strategic mistake, I would say.

Yes, to the point that you're saying, you will see a significant drop off in paybacks after So now we will continue. I guess there will always be some fiber CAPEX after 2026 or 2027. There's new builds, there's some connection homes activated that you need to do. There may be some final zip codes that you want to do above and beyond the 80%, but expect a certain portion of fiber CAPEX and the rest of non-fiber CAPEX and we still stick to those number. whether it's 26, 27, it might be taking a few months longer than 27 to get there, but it will be around that zip code that will see that drop in KPEX, so we're pretty confident in that, given the fact we're molding KPM to run with like non-fiber KPEX at the current stand by the time that the company is used to that spending level, right? That's our job to make sure we get used to that level of spent on non-fiber KPEX. So when the fiber drops, you keep this portion for new builds, for homes connect, for homes activated, and then you stick with that. And for George's point with the final 20%, there's no point at this point in being wholesale on a competitive network. That would be a strategic mistake. We'll continue to build. We believe that overbuild, selective overbuild, creates value, creates a return over a cost of capital. We look at that. And if we're winning 20%, you might do some wholesale there. We might also look at rural areas, right? You might look at a combination of fixed wireless and copper connectivity for hybrid solutions. So we have something to offer there as well. 5G. 5G is also. But again, your point on a significant fiber drop once we've reached the 80%, Fibromark does absolutely still part and parcel of our strategy.

That's very clear. Thank you, Dave.

Okay. Thank you, Jos and Chris. That concludes today's conference call. If you have any further questions, please contact the KTN Investor Relations team. Thank you very much. Thank you.

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