Koninklijke Kpn Nv

Good day, ladies and gentlemen, and welcome to TPN's first quarter earnings webcast and conference call. Please note, this event is being recorded. At this time, all participants are in listen-only mode. We'll be facilitating a question and answer session towards the end of today's prepared remarks. If you would like to ask a question, you may do so by pressing star 1 on your telephone. And I'll turn the call over to your host today, Matthijs van Leeuwenhorst, Head of Investor Relations. Please go ahead.

Yeah, good afternoon, everyone. Thank you for joining us. Welcome to KPN's first quarter 2024 results webcast. With me today are Joost Fouwerk, our CEO, and Kistie Ge, our CFO. As usual, before turning to our presentation, I would like to remind you of the same hardware 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 KPM'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.

Thank you, Matthijs, and welcome everyone. Let's start with some of the highlights of the first quarter. Our group service revenues increased by 3.6%, 4% corrected for that business. Within the mix, we continue to see positive developments in the consumer, driven by both fixed and mobile. Business service revenues continued to grow with SME as the main contributor. And as expected, growth in wholesale leveled off a bit, but this was mainly due to lower regulated tariffs. And together with joint venture Glassport, we added almost 160,000 households to our Fiber footprint. We delivered EBITDA growth while free cash flow was a bit lower due to facing of working capital. Last month, our regulator approved the UFON acquisition that is important for us as it enables us a more effective base management strategy. And finally, our outlook, we have raised our full year guidance for EBITDA and free cash flow, reflecting the UFON acquisition. And the other items in our outlook are reiterated, including our ambitions for 2027, as discussed during our Capital Markets Day. As usual, Chris will give you more details on our financials later. Our Connect, Activate, and Grow strategy is supported by three key pillars. One, we continue to invest in our leading networks. Two, we continue to grow and protect our customer base. And three, we further modernize and simplify our operating model. And together, these strategic priorities support our ambition to grow our service revenues and adjusted EBITDA by 3% and our free cash flow by 7% per annum on average in the coming years. And this is simply our 337 framework. Let me now walk you through the business details. In the first quarter, we added 130,000 households to our FIBA footprint. This number includes 21,000 households from acquisitions. And together with Hotspot, we now cover almost 60% of the Netherlands with fiber, and we are well on track to reach 80% of the Dutch households by the end of 2026. After reaching that point, the capital will come down to a much lower sustainable level. Our fiber business case continues to deliver results. Year-on-year fiber service revenue growth has accelerated to 13%, and we currently generate more than a billion of analyzed fiber revenues driven by a solid base inflow and attractive output. Let's now look at the consumer segment further. Our consumer segment started the year well with the acceleration of our fixed service revenues and continued strong momentum in mobile. Customer satisfaction remains one of our top priorities, and I'm happy to see that we can really outperform against competition on that promoter score. Let's take a deeper look into our first quarter KPIs. We saw another quarter of broadband-based growth. We realized 5,000 organic broadband net ads, and our fixed output grew 2.7% year-on-year. And we continue to see solid trends in mobile. Our pro-state base increased by 30,000, driven by the commercial success of our new speed theory proposition and our post-state architecture grew more than 5%. And combined, this led to a solid 8% growth in mobile service revenues. As mentioned, last month, we received green light for the acquisition of Ufone's Dutch 50s. And I'm happy with this deal, as it strengthens our position in the no-frills mobile segment. It enables us to play a more effective base management strategy by positioning the Ufone brand alongside our Flanker brands, such as Cineo and Access Role, and, of course, next to our main brand, KTM. And with this approach to our offerings, we remain relevant to all customers in all life cases. The closing date was 4th of April. And from that date, we added approximately 540,000 post-grade subscribers and 55,000 broadband subscribers to our customer base. Let's now move to B2B. Adjusted business service revenues grew 3.2% year-on-year or 4.4% per record for the divestments of two smaller entities. Growth was mainly driven by continued strong growth in SME. And business net promoter score was in line with last year. And we also here see that we remain the Dutch market leader. SME continues to be the main growth engine in B2B, driven by solid commercial momentum, especially in cloud and workspace. And due to our future-proof propositions, we expect to deliver continued growth in SME going forward. Underlying LCE service revenues increased slightly, mainly driven by the continued strong performance in IoT. Internet of Things has been a very successful part of our LCE business over the last years, and now representing 100 million euros of analyzed revenues with good contribution margins. Nonetheless, LCE still requires some works to deliver sustainable growth. And lastly, the tailored solutions business was followed again. And this business remained subject to the timing of projects and related hardware sales, but the performance is moving to a much more profitable level. And then wholesale. In wholesale, service revenues increased 0.8% in the first quarter. As expected, the growth trend leveled off compared to previous quarters due to the decrease in low-margin interconnect revenues because of lower regulated tariffs in these traditional voice business. Broken service revenues increased 6% year-on-year, driven by a higher base compared to last year. Mobile service revenues increased 2.6% year-on-year and also driven by a growing mobile base and increased data volumes. Now, let me hand over to Chris to give you more details on our finances. Thank you, Joost. Let me now take you through our financial performance. I'll start by summarizing some key figures. First of all, adjusted revenues increased 3.3% in the first quarter, with growth visible across all segments, especially in consumer. Second, our adjusted EBITDA after leases grew by 3.6% year-on-year, driven by higher service revenues, but also due to the facing of some headwinds and tailwinds. Net net, Our underlying EBITDA growth is broadly in line with our report EBITDA growth. Our EBITDA margin increased 16 basis points to 44% despite weight indexation and higher lease costs. So overall, we had a solid start to the year and are confident in our ability to reach our EBITDA targets and expect some fluctuation of course in December during the quarters ahead. Third, free cash flow decreased 6% or 10 million compared to Q1 last year, but will pick up in Q2. will give you more detail on the underlying test developments later in this presentation. Group service revenues increased 3.6% year-on-year, or 4% corrected for divestment in the B2B space, and is thereby in line with growth in previous quarters. Our consumer service revenues increased by 4.5% year-on-year, driven by consistent strong growth in mobile and further improvement in taste. Across consumer, we see sole-based development, especially in mobile. Business service revenues grew by 3.2% year-on-year, or 4.4% for the credits for divestments, mainly driven by the strong Canadian performance in SME. Wholesale revenues were up 0.8% year-on-year, driven by both droppers and mobile, and negatively affected by some changes in regulated tests. Our operational free cash flow increased by 6%, in line with our guidance for mid-single-digit growth, and was mainly driven by EBITDA growth. The stock operating free cash flow did not yet fully trickle down to free cash flow. The delta as of last year is mainly explained by different phasing of working capital during the year. For the other free cash flow items, the impact of higher lease payments was fully offset by temporary low taxes. At 154 million euros, our free cash flow margin was 11% of revenues. All in all, in line with 2023, we expect this year's free cash flow to be back-end loaded reflecting many improvements related to working capital. So looking ahead, we expect a gradual improvement in December throughout the year. Finally, we end the quarter with a strong cash position. We continue to have a strong balance sheet. At the end of March, with a leverage ratio of 2.3 times, comfortably below our self-imposed sheeting of 2.5 times. Also, our interest coverage remains strong. Our exposure to floating rates is less than 16%, and the average cost of senior debt is 4%. Credit rating agencies acknowledge their strong balance sheet and market position, which is evidenced by solid rating and a stable outlook. Total liquidity will be robust and consist of about 2.3 billion euros in cash and shorter investments, including the on-drone revolving credit facilities. This provides ample flexibility for, for example, the final cash payment of the UPIN acquisition and pursue opportunities as they arise. And, of course, also to acquire Spectrum in the upcoming 3.5 gigahertz auction as expected to take place in this time. Early February, we reached a new senior bond and put out a tender on part of our outstanding scoring notes, due 2006 and 2029. With a successful placement, in combination with the tender, we increased the average maturity of our outstanding debt and lowered the average cost of debt as well. That moves our outlook for 2024 and ambitions for 2027. Given the solid underlying business performance and momentum, and the closing of the European transaction, we raised our full year 24 outlook for EBITDA and free cash flow. We now expect an adjusted EBITDA after leases of approximately 2.5 billion euros and a free cash flow of over 890 million euros. Other outlook items have been reiterated. Group service revenue growth is set at approximately 3%, mainly driven by continued growth in consumer and B2B, and CapEx will remain stable at peak level of about 1.2 billion euros. Finally, over the entire planned period until 2027, it remained our ambition to grow our service revenues in adjacent EBITDA by 3% and a free cash flow by 7% on average per annum based on a 337-figure model. So wrapping up with the key takeaways, we had a solid start to the year with consistent group service revenue growth drifting down into EBITDA growth. We had yet another quarter with solid commercial momentum, especially consumer model and SME. Our stable rollout program remains solid-based and has an improved and attractive return profile. And we've raised EBITDA and free cash flow for the year 2024 outlook, while other output items, including our ambition for 2027, has closed during this year and we are already reiterating. And finally, we almost finalized the share buyback program of €200 million in 2024, effectively again distributing all of our free cash flow to our shareholders. Thanks for listening, and I turn to your questions.

Yeah, thanks, Greg. Thank you. As usual, we will now open the floor for questions. As a reminder, please limit your questions to two, please.

Thank you very much, sir. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star 1. Yes, sir, we will. Our very first question is coming from Keval Hiroya, Carver Deutsche Bank. Please go ahead. Your line is open.

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

Yes, we obviously increase our guidance for the year. I think Q2 looks actually quite strong. We always have a few also more spiking items in our EBITDA, so ones that are in our planning but are due to discrete customer deals or asset monetizations, and they will show up in Q2. So in Q2, we'll see quite high EBITDA growth. Underlying to be up 3% plus like this quarter, but the headline number will be higher in Q2. In Q3, a bit more muted, cost of capacity, year-to-year capacity, and then Q4 up again. So there's some volatility in the numbers, but expect Q1 at 3.5 to 3.7% actual growth, excluding divestments in Q1. Q2 will be substantially higher. Q3 will be lower, and Q4 will be up again. So that's kind of the phasing that expects certainly a solid Q2 to what we see right now. Yeah, and on the price increases, your question, of course, last year we had a current price increase following CPI developments. In mobile consumer, we one-on-one follow CPI later in the year, first of October, if I'm not mistaken. Mid-year, we will do the broadband price increase. That will be a call we will make – in the coming quarter, this quarter. And we have a look at CPI, CLA, but of course we expect less of an increase than we did last year. So it's also very important that with our new strategy where we focus on the base and loyalty of customers that we can explain why we do a price increase. So we always focus on price increases and do the best in there, but it's also important that we can explain it, and therefore we use CPI and CLA developments as a good argument. And in B2B, we try to pull up contracts and do the utmost as well. So it's a bit of a – in different phases, we do price increases, and every year we do that. And the first important moment there is bid this year in broadband from June 1st.

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

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

Thank you very much, sir. Our next question. Thank you, sir. Our next question is coming from Andrew Lee, client from Goldman Sachs. Please go ahead.

Hi, good afternoon, everyone. Just two questions. First one was on wholesale broadband competition. So your wholesale broadband base fell a little this quarter. I'm just wondering if you'd give a bit more insight into what is going on there, who you're alluding to and why you think that is. And then I just wouldn't mind just – Just following up on Kevin's question on the consumer fixed side. So I understand that obviously you need to explain to your customer base why you're raising prices. But at the same time, you know, incumbents in strong markets across the sector are leading prices higher. And it was referenced that they go raising prices more than you. Why do you feel it's not just as important as the CLA rises? to really show strength and leadership and prices just to make sure the market remains rational given some, you know, fairly aggressive behavior by Zygo over the last, you know, 18 months. Thank you.

Andrew, let me pick up the first question on wholesale broadband. I think broadband, you know, if we take one step back, broadband service revenues are still growing quite nicely. I think they'll go back, could now get a Q2 and spear back in Q3 and Q4. So it's good to also have that in line with, you know, what the phase is of service revenue growth of the year. Then on broadband in particular, I mean, the market has been quite intensive and it is a competition. And I think we see that some of our smaller broadband customers find it a little bit more difficult to compete with that. Broadband competition has increased a bit, but that's not very notable. It's mostly the smaller broadband customers who find it difficult to compete with these, you know, more intense competition in the market, and they suffer from some short on copper. Obviously, we're taking steps to support them here to make sure they have the room to compete, but that's the main drive of the Delta and broadband, broadband NFs. for KPM as a whole, we see total network penetration as well. So across wholesale, across consumer, and across the business market, when we look at our total network penetration, it's still increasing. So it also feels there's a bit of a shift between different segments going on in the background. Yeah, and then again on price increases. Last year, we did 6.4 in broadband consumer, 8.4 on mobile. And the competition was more or less in the same area, a bit higher. Odido announced at the beginning of this year something like 5.5%. Flora for Ziggo announced a 2.5% increase in the front book. So we have to find the delicate balance between the utmost price increases and a nice number to land on and explain to our customers again. So we will announce the price increase if we do one at the end of this quarter.

Thank you very much.

Thank you, sir. We'll now move to Paulo Tang of UBS. Please go ahead.

Hi, thanks for taking the questions. I have two. The first one is just on fibre. Can you talk through what you're seeing in terms of fibre build from competitors? And then how do you think about your own build rate for fibre? And then related to that, when you guided for 1.2 billion of capex for 2024, was this guidance up to 1.2 billion or was this a rounded figure from memory He guided towards 1.2 billion last year, but ended up spending about 1.25 billion. My second question is really just on competitive dynamics. So can you talk through in a bit more detail in terms of what you're seeing in terms of competitive dynamics for both broadband and mobile? Specifically, what are you seeing for the likes of Delta Fiber and Odido? And do you expect the Vodafone Z to get more promotional when they start showing Champions League rights in August? Thank you.

Yeah, follow up, Chris. On the fiber bill, I think we have actually delivered quite a fair amount of homes past this year. I mean, look at the first quarter, we're looking at 159, including capital tax, I think 140 in organic capital, plus last quarter, getting into the homes past. We're focusing on some more homes connect. We've got organically 90,000 homes connect, including acquisition around 100. So I think about 100,000 connect homes over the next 90 is organic. And we're just continuing with that pace of building out. What do we see competitors doing? I mean, it feels that certainly Delta is rounding up existing building teams. So I don't think they're going to start new streams from here. So round up what they have and then focus, I think, on increasing penetration on their networks, which I think is a sensible strategy to do as well. OpenBridge Fiber appears to still grow. I'm not sure whether they will meet the entire 2 million that they initially announced, but then it's for them. But I wouldn't be surprised if that goes not to the full amount, but that goes to them. So what we're seeing is the build competition gradually become a bit less and less. We also see that when you talk to construction companies and the availability of construction capacity. So We feel that it continues to build. It continues to plow along. We have a plan that we will fulfill and complete. It feels that our main alternative builders, whether it's the smaller ones or the larger ones, are gradually into either the mode of not adding new building streams or rounding up what they have. When it comes to CAPEX, rounded to 1.2, obviously, in the end, CAPEX is the function and the ultimate goal of free cash flow. So the free cash flow will be, for sure, $890 million. That's the goal that we have. It's not up to 1.2, around 1.2, but rounded to 1.2 billion for sure. But the key criteria and the goal is, of course, meet our free cash flow goal of at least $890 million for the year. Yeah, and to add on that, on fiber, there's a big difference in how KPN is rolling out fiber footprints and the other initiatives mentioned by Chris. We are very strong in moving HomesPass to also HomesConnect above 60%, and by migrating our own customers, increasing the first wave above 30% HomesActivated, while we see in the other footprints that they mainly struggle to get HomesPass really to HomesConnected. So I think we're building an infrastructure of much higher value than the others are doing. On the competitive dynamics in the Dutch market, it's a highly competitive market. On one hand, mobile is relatively healthy. The whole mobile market is growing. That's very good. We see KPN growing as front runner, as Vodafone is growing, Odido is growing. We see a strong inflow on KPM unlimited supported by that speed fairing. So customers now decide on what kind of download speed they want to buy their unlimited proposition. We see a very healthy inflow on that. So there's a good, strong growth in our base, both on revenues per customer and in the base itself. So that's good for future revenues. And I'm also, therefore, very happy that we consolidated DuFont to really position no-frills segment in a completely different way than we run the KPM portfolio or the KPM base. On fixed, the market is quite challenging and driven by our fiber industry. We were steering up the market, so that's leading to competitive prices on the Ziggo side. Also, Odido and Delta are doing deep promotional offers. Every now and then, market is cooling down as well. So I think the important announcement we did, and also Odido is making sounds in that direction, is that we want to focus on our base and on loyalty, and not on the acquisition side only. So we tried to cool down that market a bit. Having said that, at the end, I think we did great last year by growing 30,000. I think we will drive the growth in broadband days further this year. But when it comes to competition, it's mainly happening in broadband. And I expect that to continue until we've done the 80% rollout. And it's interesting perhaps to note that we look at our fiber sales. And obviously the gross ads in fiber are a combination of new, new clients and clients that we migrate from copper. So copper to fiber migrates. If you strip out those migrations, you look at the real net new customers, so new fiber customers, in the last, I think, 12 to 24 months, every month is between 4 and 7K, pretty stable, never less than 4, never more than 7, around 5 or 6 per month on average, real net new clients. And we've also seen it in the first quarter of this year and something similar in the last quarter. So when you look at Fiverr, there's a steady inflow of real new customers, which has amplified and add to add the competitive Fiverr migration, and that is almost – We get independent but less affected by the competitive dynamics. The competitive dynamics affect our copper base where churn goes up and down. So you see this steady inflow of, you know, new fiber net ads of between 4 and 7K a month, say 5 on average, really month after month after month. You add copper customers to migrate to fiber, and the fluctuation really is in the copper churn of our copper customers who respond to, you know, competitive pricing. And now when our broadband base is now 61% fiber, increased by 3% per quarter, that dynamic should, you know, every quarter should improve gradually. I mean, that's the plan. But I think it's most important to note that the fiber inflow of real new, new clients is very steady.

The Champions League impact, do you expect that to have any effect on KPN? Next question, please.

The next question is coming from Maurice Patrick.

Could you repeat the question?

Hi, it's Maurice here from Barclays. Thanks for taking the question. If I could ask a little bit more about the wholesale loss. If I understand the negative bads in wholesale, if I understand some of your comments in the previous questions, you seem to be indicating that some of your resellers effectively are struggling due to the retail dynamics. Are you losing wholesale subs in cyber areas and legacy copper areas? I'm curious whether this shift of losing wholesalers in both the new fiber areas where maybe your 5,000 to 6,000 new clients maybe is cannibalizing your copper base, or whether it's in the legacy areas where you don't have the fiber. And just a second question, just more broadly, could you give some more color on the Uphone acquisition? And specifically, you know, I think if I'm not wrong, when you announced the transaction, it sounded like the competition authorities were going to have a good look at it, and in the end it was approved without any remedies, unconditional. Just sort of your insights in terms of your conversations with the competent authorities, what their concerns were, and how you managed to allay those concerns. Thank you very much.

Yes, maybe on follow, on the rebound, on follow-up questions, obviously, it's mandatory that Dutch teams have to be broadcast and be available for the entire country. Now, obviously, our football teams don't have a history of making it very far into the European football championships, but, you know, there's always hope. But it means that Dutch teams will be visible and have to be broadcasted by anyone. And secondly, our own indication is that Ziggo Sport will be open. We are a customer of Ziggo Sport. We may tell. So let's see. But we think that that might be an impact, but it feels it has to be manageable. Certainly as a Dutch team, it will be visible by anyone. That's the law. By the way, we have been reselling Ziggo Sport over the last years for typical niche content that's not available via KPN directly. a main part of European football matches will be visible in open channels. And when it comes to wholesale, it really is a turn on copper, right? So what you see is that In the competitive market, copper pages churn. So that's where churn happens, and new info goes into fiber, and you find that these smaller resellers have difficulty to getting new clients. So they have, like, elevated level of churns based on the competitive dynamics. And traditionally, you grow by fiber, but they have difficulty to growing with fiber. So fiber wholesale should be still growing, fiber wholesale-based. and the turn is taking place in copper, and you'll find in this current environment that the smaller resellers have difficulty competing with fiber. They're not losing fiber, but traditionally you lose on copper and you win on fiber, and the fiber wins are more difficult for them in today's pricing environment. And it is that we are taking steps to help them here and there. When it comes to Uphone and the acquisition, how ACM looks, I think they want to assess primarily the impact on the retail market and secondly the impact on the wholesale market. So what is, does the acquisition of U-Fone by KPM constitute an undue concentration on the retail market, an undue consequences for consumer retail pricing? And then secondly, the other question I asked is, if KPM buys U-Fone, does that change KPM's perspective towards MVNOs and will you be less forthcoming and less supportive of the MVNOs because with Simio and U-Fone, you're owning now a bigger chunk of North Wales, so will you be different towards different MVNOs? And we think the impact on the retail market is manageable, and also with our policy towards wholesale mobile, MVNO business does not change because of the acquisition of UFON. So I think they looked into that, they modeled it, they asked questions through the Q&A, and I think they concluded at the end that the acquisition of UFON by KPN would not materially change the market dynamics in both mobile retail and mobile wholesale. So that's why the whole thing went through without any remedies. Well, it took nine months, which is quite long. So we are in the process of evaluating this with our regulator because the questions they have and mentioned by Chris. we were able to answer them pretty straightforward. So, I understand that things sometimes move through phase two, but nine months is long. So, I think that it's very important to evaluate without regulating why it took them so long. Thank you very much.

Thank you, Mr. Patrick. Our next question will be from Luigi Minerva calling from HSBC. Please go ahead.

Yes, good morning, and thanks for taking my two questions. Now, the first one is on operational leverage. Now, if I look at your outlook, obviously 3% service revenue growth, 3% EBITDA growth. to see an incumbent that grows. But if one was to play devil's advocate, you know, you could argue that there is no operational leverage. So I was wondering, you know, what tools do you have to boost a bit more operational leverage and what differences you see between 2024, where I think, you know, the 5.5% salary increase is probably difficult to match with broadband price increase, and 2025, where perhaps you see a more rosy outlook. And the second question is on regulation. I mean, the white paper from DG Connect has been widely praised by ETNO and other incumbents. It's currently under consultation until the end of June. And the key driving principle in the white paper seems to be deregulation. Now, I think the Netherlands is a step ahead of other markets. I think of your agreement with the ACM on wholesale fiber access till 2030. Still, if you think about the white paper, do you see upside for the Netherlands? Thank you.

On operating leverage, whatever you do, there's something to challenge. I mean, with 3.5%, 3% to 6% service revenue and EBITDA growth, I would expect everybody to cheer. But you obviously find the critical point. The two factors, the most important one is the Flossport charging. So we have a JV with APT called Flossport, as you know, and the lines we run from, we're also a customer from them. The lines we run from, of course, are charged to EBITDA. and we own 50%, and so we get 50% back as minority interest below the line. So if you were to adjust for that, EBITDA growth would probably be about half a percent to a percent above the service revenue growth. It's simply the fact that the whole surcharges by Fluffport to KPN are in our COPS, cost of goods sold, and the ownership of that is actually below the line in the minority interest and towards net income. If you adjust for that, there's underlying operating leverage. Is it to our liking? No, I would like it to be higher. The main driver is these cost developments, and there appears to be some light at the end of the tunnel when you look at our cost base. You know, the inflationary peak of last year, still has an echo, like some implications for this year. You know, CLA is 5.5%. We're getting less and less. So, for example, energy costs. Last year, we had a massive spike on energy costs. This year, energy costs are flat. Might be three opportunities if the markets stay where they are to be likely lower. And next year, they'll certainly be lower. So the energy spike took a year to wash out. It's flat this year, lower next year. On a CRA increase, it's 5.5% this year. It's 3% next year. So that's fading out. On other areas, last year, anything you looked at was affected by inflation. Today, the inflation, you can see back on IPTI, mostly platform costs and licenses, was relatively well re-insensed. So when I look at our cost base, I think the indirect cost pressure from inflation is gradually fading out. 24 is almost like a transition year in which you can see the impact still echoing in the numbers, but it's fading out into 25. And obviously what to do against it is reduce costs, reduce the cost drivers. So that's what we're working on. I think the FTE decline this year You have to look at the total workforce, internal and external staff is about 250, like 2% less than last year. Obviously, we want that to be higher, and we will accelerate that in the coming years. Not this year, because there's still also hiring staff, and we're adding specialist mechanics to include or accelerate our Homes Connect program. But it's a cost program that introduces AI, robotization, automation, digitization. We'll start shutting down more offices and next year we'll start saving on energy. We think we'll find these things to fade in. So long story short, operating leverage is higher than you think, but masked by the cost allocation of costs. And secondly, going into 2025, you'll see it showing up as the cost pressures gradually start to fade. With that, I'll leave Joost to give some regulatory wisdom. Yeah. Well, and adding to that, you're right. A bit of operational leverage should kick in. So if we do everything we plan for, then we probably will perform a bit better on the a very clear vision on how we want to move this company to a new operating model, all kind of supported by AI work streams to really redesign the company. So all in all, like Chris said, on top of the run rate and everything that happens there, really pushing down costs and really redesign the operating model of KPM could be an important program to benefit from in the coming years. Yeah, on regulation, yeah, the Netherlands is a bit of an exception because KPM is formally not regulated on the fixed broadband site on the internet, I must say. Recently, our regulator investigated the retail market for internet again, and the conclusion is that it's very competitive and they don't have to interfere. We have the KPN open wholesale access model as the framework in the Netherlands for, I believe, until 2030. So, that's all quite good. When it comes to regulation, I think mainly from the competition point of view, things could improve further. And taking the Uphone acquisition as an example, we always consider that as pretty straightforward consolidation. something we were able to explain in a pretty efficient way. Although it takes nine months, and we think that especially on competition side, it would be nice if we could easily buy smaller operators here and there in the Netherlands. But all in all, the Netherlands is a bit of an exception in the European landscape when it comes to regulation.

I agree. Thank you very much.

Thank you very much, sir. Our next question will be coming from Nuno Vaz of Bernstein. Please go ahead.

Hi, good afternoon. Thank you for the opportunity. Two questions from my side. One is on the B2C post-paid ARPU growth, which, from what I see, is very similar to the one from last quarter. Given that the CIGAR indexation was only two months last quarter, did you assume that this quarter you would see a bit more growth? So just wondering if there's anyone else there who might explain. a little bit the lack of growth. And then second question, just focusing on CPI indexation. First part is whether you did CPI indexation for the wholesale broadband lines at the start of the year. It's my understanding you would have the right to do so. And if that might explain a bit the negative net ads on wholesale broadband. And second, on the B2C side on CPI indexation, what is the flexibility for you to increase back book prices higher than average CPI without changing consumer contracts. My understanding is you could not do so, but it would be helpful to have some color on that. Thank you.

Good. That's kind of three questions into two, but that's okay. You're forgiven for that. I'll give you a question, one A and one B on the invitation. On RFQ mobile, we're actually quite okay with RFQ mobile. If you open the hood and look what's going on underneath, look at committed and the non-committed RFQ. So committed is contracted RFQ. On the contracted RFQ, we can see the price rise really sinking almost one for one. So on the committed RFQ, part of the RFQ, price actually goes up. with the initiation that we push through, and you'll see this going up over time. On the non-committed side, we see a little bit more pressure. One is some challenges for us to fix insurance revenues, like the small additions on insurance. And secondly, we have unlimited customer base, of course, and we have MB sharing. Those kind of measures take out a bit of the top-ups and the out-of-bundle calling. Since the bundles reduce a bit as a function of the more sales of unlimited and the MD sharing that we do. So I think there's a series of the non-committed RFUs. Our inflation indexation sinks in actually very nicely. There's hardly any leakage. Secondly, the more for more program that we have leads to higher RFUs, higher unlimited and higher download speeds. So the speed tiering program starts to have actually quite a positive impact. That is to growth in committed RPU and you pay for it with less in non-committed RPU and pay less insurance revenues, but on the latter you make very low margin. So I think RPU will be developed actually to our liking, to our liking actually the margin of RPU is getting a bit better because we see growth in the margin component of the RPU. On wholesale broadband, we hardly pushed through any price increase last year. There is an indexation framework that we agreed with the ACM. It was just at a very funny moment, or depending how you look at it, that the moment at which the inflation was picked, at which month the inflation was set, it was actually at a very low number. So wholesale price initiation was actually relatively small last year. I expect to be higher this year and will be supportive towards wholesale broadband revenues in the second half of the year. So that's in the second half of the year, COC support. So actually, last year, that's a very, Funny coincidence, the way the CPI was calculated, the moment it was picked was really on the moment it was at its lowest point. So that will be a huge support for wholesale revenues in the second half of the year. Yeah, so your final question on B2C CPI increases. Yes, you're right. We can increase prices if we do that above... the CPI mid-year, then customers are allowed to move out of contract, customers in the front book, that is. So it's logical, do we go for a price increase of, what is it, 3.84% CPI increase, or do we wanna do more? We also changed the clause one and a half year ago, so all the customers we move into new context now, we lock in for two years instead of one year. So that's also an important thing to take into account when you make a decision like this that from the real early customers in the base now are locked in for two years. So that's important when we look at the base and how to optimize the value.

Thank you, that's very useful. Thank you.

Thank you very much, sir. When I move to now our Christine, calling from Morgan Stanley. Please go ahead.

Thank you very much. I have two questions, please. The first one is a follow-up on the complex environment and also relating to your volume expectations. So the Q1 service revenue growth was very strong, which is great to see. But the 3% service revenue target of growth over the next year relies to a certain extent on the continuous delivery on volume growth. Obviously, it's early days, but I was keen to hear how the competitive environment and the volume dynamics in particular are developing versus your own expectations so far since you have provided the capital market targets. And secondly, a question on the fiber-based landscape. We continue to see across a number of European markets a rising appetite for fiber M&A and partnerships. The partnerships and M&A we saw so far in the Dutch market have been mainly contained to small players. Do you believe that for now this activity will continue to be focused on the smaller asset space? Or do you also foresee a scenario where the action could move also to larger builders? And in this scenario, would you consider inorganic actions to address the non-covered 20% of the country? Thank you very much.

Well, I'll start and then Chris will probably follow. So when it comes to competitive environment and fiber, like Chris was explaining, our customer inflow on the fiber side is working really well. That's very important. Sixty percent of the KPM base is on fiber, and the more customers we get on fiber, the more sticky the base is and the more easy it becomes for us to grow the base. So our strategy is working. It's a bit time-consuming. It's capital-intensive, but the plans we launched – four years ago are really working and quarter by quarter we're meeting these plants, we're doing a little bit better. So I'm convinced that we should continue the way we currently operate and push that fiber rollout in the Dutch, in the country. And then we will be very successful and perhaps later on the base will grow faster than we're doing today. So our strategy is working, it's based on the fiber rollout and migrating our customers in the first place to Fiverr. So we will continue that. When it comes to Fiverr build, yes, of course, we're always interested in a buy or build discussion, small or larger opportunities we will investigate. We've done some smaller acquisitions last quarters, a network last year, PrimeVest, some smaller networks last quarter. So we're always interested in that. We're also interested in larger builders, but of course, it all comes at the end to a price and value of the network the others are building. And like I already mentioned, we're rolling out Homescast and the whole market is reporting on Homescast. In reality, it's all about homes connecting. Are you really connecting households or just rolling out fiber-free streets? Because KPN is in 100% of all the streets in the Netherlands. We already, I mean, for us, it's very important that we connect households when we roll out the real fiber thing and connecting 60 to 70% of the households in our homes past the print is the least we should do to really migrate our customer base and other customers to the fiber network. So first of all, yeah, the price is one thing and also the quality of the network. And that's why But that's why we keep on building ourselves because we're confident that that's an excellent network we're doing. Yeah, it's really a make versus buy decision, right? And in the make versus buy decision, we are very confident of our financial framework, the returns that we make, and we don't want to dilute the returns. So it's a very clear financial framework on which we evaluate all these transactions, big or small. And secondly, as Jo said, it's important to look at what the network actually constitutes, if it's homes passed or also homes connected. In the end, that's what it's all about. So that all features it. I think on the competitive environment, to me, mobile is actually better than what we expected, our mobile performance, than what we expected in the CMD. Broadband is still quite competitive, but I think our fiber business is holding up well. And I'm also particularly pleased with the performance during our SME business, where we continue to report high growth for longer than we ever envisioned. So the SME business is still continuing to grow, and it looks set to continue as well.

This is helpful. Thank you very much.

Thank you, ma'am. We will be there when we turn to our next question, which is going to be coming from Joshua Mills, RBNP Paribas, Exxon. Please go ahead.

Hi, guys. Thanks for the questions. I've got one on the wholesale business and another on Uphone. So on the wholesale business, I think at BNB you were talking about a one to one and a half percent revenue growth target over the three years. And within that, as I understood it, the moving parts were some inflation linkage on pricing, some upsells, too. And then on the negative side, I would assume maybe flat the negative volume. And then the ongoing shift of customers from the Uvula to the ODS products, which I believe is a bit cheaper. So I'd like to check, is that still the playbook for you to get to the 1% to 1.5% revenue growth on wholesale? And how much of a headwind do you expect volume losses to be? Is it expected that this will stabilize near term? And then the second question on your phone, can you give us a bit of color about what the reach and net ad trends have been in that business? And if you're able to maybe comment on where the revenue in EBITDA has settled in 2020. Thanks very much.

Yeah, on the wholesale side, I think 1 out of 2% is what the revenue growth in wholesale should be. But it's also absorbing some regulatory headwinds. So MTA tariffs have been slashed over time. So I think the assumption on wholesale is not negative net ads over time. It's flattish to small growth in net ads over time. So you see growth in mobile flattish to small growth in fixed. We have a shift from copper to fiber, and in fiber, you actually see a shift from ODS to Hula gradually because we move into increasing share of PON technology, XCS PON technology, where you offer the full product. This is a Hula product, so there's an RQ increase in there set off by MTA pairs, interconnect pairs, gradually going down over time. Obviously, next quarter, things will change also because Uphone will be shifting from wholesale to retail. We'll give you full clarity in the Q2 numbers. But on a life-like basis, 1.5% to 2% growth in wholesale after having absorbed regulatory territory pieces. And we look at the Uphone performance. What we saw is that the language for growth in mobile net apps, and flattish in broadband, reflecting the fact that some of these smaller players have obviously difficulty to make the broadband work. As a smaller broadband reseller, looking at about 50,000 broadband . Now, obviously, under the KPN flag in the APN context, I think the situation for you from broadband will change. You can be benefiting from KPN's organization, KPN scale, and obviously, There's no risk of the wholesale fees that are charged to Ufone will no longer matter. So I think Ufone in KPN will have an opportunity to regain momentum and involvement over time, but in line with the market growth in mobile subs and slightly some broadband subs. Then again, the latter, I think we should definitely be able to turn around in the KPN environment.

Thanks for that. And going forward, would you be willing to give maybe a bit more disclosure, say, next quarter on the split between the KPM main brand and then the sub-brand customers and the NetAds share? Because we might expect that NetAds accelerate in post-tape, but I suppose that will be coming from lower-quality customers or lower-value customers, I should say. Is that something you're going to give us more detail on in the future? Yes.

Yeah, well, probably. I mean, we know Ufone for a long time because they always used our network, so the interaction with the company was always on an excellent level. Very strong in mobile, like Chris said. Very strong player on the mobile side. Yeah. And we will keep Ufone a bit on a distance, of course, leveraging on the broadband side the KPM machinery. But from a mobile point of view, I think it's very important to keep the brand alive and keep the very efficient organization like this. So I think we can be transparent on what Ufone will do in the future. But the team is currently sitting together with Ufone, and let's see how we are – going to disclose on your phone link you do. That's what we have to work on. Great. Thanks very much.

Thank you, sir. Ladies and gentlemen, we have time for only one more question. That last question will be coming from Georgios Eredio, Konu of Citi. Please go ahead.

Yes. Thank you for taking my questions. It's just a couple of follow-ups on topics that were discussed earlier. The first one is on wholesale broadband-based. And I think, Chris, you mentioned that it's been some of the smaller operators that are struggling. And I'm just curious whether you've already seen any impact from Odido's other wholesale partnerships in the market and whether some of their traffic or migrations are going to other fiber networks or whether that's not come through yet. And then the second question is around some of the pricing calls that you just made, and particularly on the promotional side. What we saw in previous years is active price increases were reinvested promotionally by other players. You mentioned earlier that both you and Odido are making moves that suggest you are more focused on your Proton base. Do you mind commenting a bit on the behavior of Zygo? Do you think now they've made smaller price increases, maybe it'll be less promotional also, or whether you've already seen any signs of that.

Thank you. Yeah, on the first one, on the wholesale growth and competition, the flattening of growth and growth is more the decline in smaller players. So basically, what happened today, they cheered on copper and have little chance, a little success in growing on Fiverr. And I think we can help them there. On wholesale broadband competition, we do not see any active migrations. So basically we don't see anyone who has multiple wholesale clients actively migrate wholesale customers away from KPM to other lines. And we don't expect it either because Once you touch them, the risk of churning is way too high. So we see that happen, that we don't see it happening. It might be that the growth ads may be affected going forward as they have alternatives to go to because of growth ads, but migrations, active migrations from K-10 crop to others is actually not a stable point in time. So it's really the net effect of, I think, smaller players affected by the competitive intensity having ability to compensate with growth apps. And then if any broadband competition, it's a bit less new inflow, but surely not additional outflow or active migration. That is not at play at this point. Yeah, your question on our dear friends from Ziggo. Yeah, of course, we have to understand that we really are putting pressure on the company with our fiber strategy. And it's also a bit that they need a new kind of strategy, to be honest. They have been pretty tough on discounts in the market. Compared to us and other players, they went deeper. So it's important that we cool things down a bit in the Netherlands, at least for now, that is. So that's why I like our Household 3.0 strategy that much. It's a signal to the market that we want to cherish our base. To give you an example, for all existing customers, we have a renewal package ready in the app. You only have to click to get it. And it's all about the improvement of quality and download speed. But that's also for KPN a bit of a change. It's easy to communicate, but it's also something we really have to implement as a company. And it also should signal to Ziggo that it's not only about acquiring customers and losing a lot of customers on the churn side, but it's also about cherishing your base. So if we do that, probably we will cool down the market a bit better. All right.

Thank you, everyone. As usual, we will... Yeah, okay, everybody ready? That concludes today's conference call. If you have any further questions, please reach out to the IRC. Thank you. Thank you.

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