Turkcell Iletisim Hizmetleri AS (TKC) 2004 Q1 法說會逐字稿

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Welcome to the Turkcell Conference Call on June 11 2004. [Operator Instructions].

I would now like to hand the conference over to Mr. Koray Ozturkler. Please go ahead sir.

Thank you. Thank you all for participating to our Q1 2004 conference call. We basically have the whole management team here, including our CEO and CFO. We will start with a presentation, actually led by Mr. Akpinar first.

First a couple of reminders. First of all, the audio recording of the conference call will be available until June 25. So in case you have to leave the conference early on, that will be available as well as the IR team's availability. We also have mailed the presentation to you in case you haven't looked at your mail, and it is also on the web. You can access it from turkcell.com.ir.

Let me turn it over to Mr. Akpinar at this point for his presentation. Thank you.

Thank you Koray. I would like to welcome you to our first quarter results conference call. We are quite pleased to announce our results, which we believe show a strong operational performance for the first quarter. As we have announced on April 29, Turkcell's success in attracting new subscribers continued during this quarter and we achieved a satisfactory growth of our customer base in line with our expectations.

Based on our best estimate, given that we are the only public company in the sector, we believe we have continued to lead the new additions market share by gaining more than 50% of the new acquisitions.

Despite the slight decrease in MoUs, mainly due to seasonality, we have seen strong improvements in our revenue and ARPU levels. The increase of our subscriber base, TL appreciation recorded during the quarter, and 7% upward price adjustments applied throughout 2003, led to a year-on-year surge in revenues.

Our ability to retain customers relies on our mass and segmented retention activities. We believe the subscriber growth was a reflection of our leading brand image, variety of services and high quality national coverage. As a result of our efforts, we gained a satisfactory level of new subscribers in line with our targets and churn remained quite flat.

Based on our understanding of the market, and considering the changing dynamics this year, we believe we can achieve similar subscriber growth in nominal terms compared to that in 2003. As with the churn rate, we believe it is reasonable to consider that it can be kept at similar, if not lower levels, compared to last year, under the foreseeable competition level.

Quarter-on-quarter MoU slightly decreased we believe mainly due to the religious holiday and fewer working days in the first quarter of the year. On the other hand, overall we feel that improved consumer sentiment and positive macroeconomic developments will help improve MoUs this year in comparison to 2003, and we generally have optimistic expectations.

We aim to further stimulate usage through various offers and campaigns. We continued our segmented volume and destination-based campaigns together with mass loyalty programs. Discounts for GSM to fixed calling after certain hours is an important campaign we started in this quarter, as part of the destination-based campaigns. Campaigns for targeted groups of corporate customers and selected communities are among some of the other initiatives we've taken, which are again in line with our aim of increasing minutes of usage.

We will continue to differentiate our offerings selectively for various segments of our users, while trying to ensure necessary satisfaction levels and loyalty of our subscriber base.

Turkcell's competitive strengths remained quite consistent during the quarter. We believe that in all aspects we have demonstrated the necessary strengths and we led our three-player market. We believe on the other hand, the visibility of our competitors is likely to increase throughout the year as the competitive environment is due to evolve further.

We have yet to see how rational the competition may become regarding their pricing policies. And we cannot say for sure whether or not the signs we have so far seen towards a more rational competitive environment is sustainable.

As part of the deregulation of the Turkish telecom market, new operators are now allowed to offer domestic and international long distance services. There are 27 new long distance telecom operators, whose licenses were issued by the Telecommunication Authority on May 17, 2004. As a result, a decrease in international and domestic long distance pricing is expected, as it has already announced by TT and the new players.

Generally speaking, such decreases in price are also expected to facilitate an increase in international and domestic long distance traffic. However, the price decreases may just outpace the traffic growth depending again on the level of price cuts, which is not known exactly at this point of time. As far as we can see, these companies may not become fully operational for several months, as signing of the interconnection agreement is a prerequisite.

We expect to see clearly the impact of this liberalization, particularly on Turkish Telecom and the other long distance carriers within the next six months or so and it is too soon to speak of possible impact on Turkcell at this time.

We will continue to be responsive to future developments in the market. The Telecommunication Authority nominated Turkcell as having a dominant position in the Turkish mobile telecommunication services market. The Telecommunications Authority had previously designated Turkcell an operator holding significant market power in the mobile telecommunication services market and in the mobile call termination services market, as of September 2003.

The process of privatization of Turk Telekom continues. The bidding phase starts on mid July. While we currently do not have any definitive plans for bidding, being a major market player, we will continue to observe the developments on the privatization front.

There were two specific developments on the legal front in the first quarter of 2004, both of which will be appealed once Turkcell receives an official written statement from the Courts.

One of them is the Civil Courts cancellation of the ICC ruling, which had excluded taxes and late payment interest charges from the calculation of gross revenue.

The other is a ruling which enables Turkish Telekom's new infrastructure usage directive to be effective, imposing new pricing for infrastructure usage fees with Turk Telekom. We do not expect to see a major impact from these price changes going forward.

Last quarter we had $1.180b provisions along with the additional $539m provision recorded based on our best estimates. This quarter the total provision amount, including interest calculations, amounts to $1.280b.

We also understand that the parliament Planning and Budget Commission added an item on the Turk Telekom's privatization draft law, allowing government to resolve their legal disputes with commercial entities through settlements. As management we have a positive view towards settling disputes, as we have done so in the past. Especially those creating major uncertainty and expense on the company as long as it is in the best interest of our shareholders.

Before concluding my presentation, I would like also to emphasize a few points on Turkcell's international operations.

As for Fintur operations, although small in scale, each company is in a leading position in its market, where penetration rates are still very low, which promises a steady growth. In total, we have 2.7 million subscribers and revenues have reached $109m as of end of first quarter of 2004.

We expect each and every company in the CIS region to continue to create value and continue to remain self-sufficient. We can simply conclude by saying about Fintur that we are quite pleased with the ongoing operations and have a positive shareholder view for the future.

During the period, developments continued with our new investments in Ukraine and in Iran. The Board, management and working groups of DCC and Irancell are in the process of being formed. Please note that DCC's financials will be audited and consolidated into Turkcell's financials starting from the second quarter of 2004, whilst the registration of Irancell proceeds along with the financial structuring of the company.

We expect to sign a license agreement once Irancell is formally established. Under the current circumstances, Turkcell is planning to undertake limited long-term credit risks relating to either company, which are expected to find their own long-term financing solutions once the operations are set up.

We continually assess investment opportunities selectively to ensure Turkcell's growth. You are aware that we opted not to participate in some of the tender processes, as in Pakistan, recently, mainly for strategic reasons as we already have quite a challenge with two large markets on hand with an overall population size of 220 million people.

We believe that for the short term we will continue to mainly drive profitability from our local operations, complemented by existing Fintur operations. We also expect that we will see more of the long-term impact coming from our two new international investments.

At this point, let me pass the discussion to Ekrem for his discussion of our financial results. Ekrem. Thank you.

Thank you Muzaffer. Good morning and good afternoon. I would like to take you through the company's financial performance for the first quarter of this year.

In line with the increase in revenues, blended ARPU improved in the first quarter of this year, reaching $12.7, comparing to both the first and fourth quarters of last year. We have recorded a similar increase for both postpaid and prepaid ARPU. Postpaid and prepaid ARPU have increased to $28.8 and $7.4 in the first quarter of this year, from $20.7 and $5.8 in the same periods of a year ago respectively.

The company generated $746m revenue in the first quarter, resulting in very strong revenue growth when compared with both the same quarter of 2003 and a quarter ago.

A year-on-year increase of around 52% in revenue in the first quarter is attributable to first, consistent subscriber growth, increasing customer sentiment compared to last year resulted with a greater increase in MoU, 7% total price adjustment in March and December 2003, and around 23% increase of TL against US dollars.

The company's EBITDA increased to $337m in the first quarter, from $232m in the same quarter of 2003, mainly due to favorable revenue generation, strong operational performance and appreciation of TL against US dollars.

The company's net income in the first quarter came to around $126m, more than tripled comparing to $40m in the same quarter of year 2003.

Direct cost of revenues including depreciation increased to $433m in the first quarter, from $327m in the same quarter of 2003. The main reason behind the increase is the increasing revenue base cost, plus the Treasury share interconnect costs, in line with the increasing revenues and appreciation of TL against the US dollar.

Sales and marketing expenses increased to $76m in the first quarter, from $49m in the same period of a year ago, remaining stable at 10% of the total revenues in both quarters.

GA expenses on the other hand increased to $29m in the first quarter from $22m in the same quarter of a year ago, mainly due to one-time fees paid for [indiscernible].

So operational performance of the first quarter of this year resulted with a strong operational cash inflow at EBITDA level, amounting to around $337m.

We raised an additional financing for $200m from Akbank and Garanti Bank, $100m from each with a maturity of three years, in the first quarter of 2004.

Other cash flow items in the first quarter mainly consist of [indiscernible] of year 2004, which has been paid. However, we will be extending an extra portion in the remaining quarters of this year.

As a result of the continued strong operational performance of the company and additional financing, our cash position had reached $939m as of end of the first quarter of this year. Our total net debt after deducting total indebtedness has recorded at minus $86m in the first quarter, by the fact of the company's strong financial position.

I would like to mention that our cash position has reached $884m as of yesterday.

Turkcell's total legal provisions amounted to $1.278b as of end of the first quarter, compared to $373m in the first quarter of 2003. As already known, $539m portion of additional provisions was recorded in the last quarter of 2003. We can group all legal provisions under four main categories.

First, legal provisions for Turk Telekom-related disputes have increased from $442m in the last quarter of 2003 to $468m in the first quarter of this year.

Second, legal provisions for Treasury shares-related disputes increased to $585m from $560m for the same period.

Third, we also recorded a total provision amount of $215m in the first quarter of this year for several disputes with the Telecommunication Authority.

And finally, we have also reached a settlement in the class action lawsuit filed in the United States at an amount of $19.2m. This amount is fully provisioned in the last quarter of 2004.

With respect to our financing activities, we have repaid $28m principal and interest in the first quarter of this year. And for the whole year of 2004, Turkcell will [salvage] $161m total debt including principal and interest. As of the first quarter of 2004, we had total financial indebtedness of around $852m.

During the first quarter of this year, we continued to restructure our debt in line with our priority to decrease the borrowing cost, extending the maturities. We have finalized a Murabaha Syndication with IDB and HSBC in January 2004, amounting to $100m with a maturity of two years. Our aim was to diversify our international investment base and lower our borrowing costs on an [integral] basis. From this security we utilized $75m as announced.

In the first quarter of this year, we also raised an additional $200m from Akbank and Garanti Bank. $100m from each, with maturities of three years. These securities provided us further financial flexibility for our foreign investment [equitization] and legal provisions. Meanwhile, we are able to extend the maturity of our loan portfolio while lowering our total borrowing costs through these local financial activities.

As part of our risk management strategy, we always monitor and consider constantly the financing alternatives in line with our business plan.

Thank you.

Ekrem, thank you. At this point we are actually ready to proceed with the Q&A session. Just a brief reminder, if we could limit the questions to two per person that would be excellent. Now let me turn it over to the operator for facilitation of the Q&A session.

Thank you sir. [Operator Instructions].

The first question comes from Mr. Havid Drued. Please state your company name followed by your question.

Yes, good afternoon. This is Havid Drued from HSBC. First of all, congratulations for those strong results. My two questions are, the first one is if you can tell us if you have taken some provision, you have net on the revenue side regarding the interconnection dispute with Turk Telekom, i.e. is the net sales figure you have reported net from any provisions?

The second question is regarding roaming. I would be interested to know if you can give us what is the percentage of your revenue coming from roaming, coming from other users [inaudible] network as a tourist and how do you see the trend evolving looking forward?

Thank you.

The provisions in respect of first quarter of this year [especially a quarter ago], we actually have changed the provision methodology, mainly for two little disputes with Treasury and Turk Telekom. And for the first time ever, we have included the provision, we have added provision for the interconnect dispute for the Turk Telekom case. So this quarter we have in effect continued applying the same principle for the national legal dispute. And the total amount of the provision for Turk Telekom has in total - there are several disputes but the main one is definitely the dispute with the interconnection - the total amount has increased from $447m to $468m, representing total accrual for the Turk Telekom.

For the Treasury [at close] the amount that we accrued by the year-end was [$560m]. That amount has been increased to $585m total for the company's amount to be [reached completely continued] provision allocation for the Treasury share dispute.

So the total amount as stated has increased from $1.181b as the [company established it] to $1.278b. When we look at the two [indiscernible] and in the first quarter, we see $1.278b total amount that was accrued for the several legal cases.

Maybe if I can elaborate further on this question.

Please continue to hold, ladies and gentlemen. We are experiencing a technical difficulty at the moment. Please continue to hold. Ladies and gentlemen, the conference will resume shortly. Please continue to hold.

Are you back connected, Havid? Can you hear us clearly?

Yes, I can hear you now.

Sorry, we were disconnected. I don't know where you lost us, but I wanted to elaborate on this answer, in the sense that there's a distinct differentiation between these two disputes, the Treasury share and the Turkish Telekom. In the sense that we made a new agreement of interconnect with Turkish Telekom on September 20, which prevented accumulating the capital of the dispute September 20 after. That is why the dispute is capped for the date of September 20 and from then on obviously we'll make the estimate the best estimate of the company's management as of the year-end. But after that we have accumulated the interest only and the revenue is recorded as revenue. The cap payments are against the interest rate of the best guesstimate of the company in December.

And the second question was on the roaming, international roaming revenues. It is swinging slightly between 3-6% of the total revenues. Obviously the second and the third quarters are quite high seasons for incoming tourists, obviously. And the latest result in the first quarter is slightly above 4%.

Okay. Is there in the month of May, for example, there've been some strong numbers that have been published by Turkey in terms of tourism picking up sharply. Have you seen anything along those trends as well, that may push this roaming revenue up looking forward?

In terms of Q1 versus Q1 comparisons, we do not see any trend change at this point in time. I think this is just something that will have to be monitored and we'll tell you as we monitor more.

Okay. Thank you very much.

Thank you. The next question comes from Miss Anna Bosson. Please go ahead with your question. Miss Anna Bosson?

Oh sorry, yes. Hello, I'm sorry. I wanted to ask about your SIM card revenues, which seemed a bit higher than I was expecting. And that was my first question, basically.

And my second one was really price outlook. Given that the Turkish Lira has weakened in the second quarter, if you'll be looking to have any further price increases.

Anna, what was the first question? We all missed it.

Oh sorry. Your SIM card revenues, if you were expecting - as they were very high in the first quarter compared to previous quarters, and I wondered why your SIM card sales were so high.

I guess it's because of seasonal campaigns. It was the [type of picture], price has changed a lot. I have to check out, really, which figures you are mentioning but - is that quarter-on-quarter? During the quarter we had some campaigns [indiscernible] on the price of the total package changing, ever changing it. So it's affected by campaigns and also by the [package].

Do you think that trend will continue in future quarters, those high revenues?

Actually, it depends on the environment. We are time to time changing the price of [stock effect]. Actually they are all the time trying to increase it because as long as we can increase it we can get higher revenues and which means less stock, lower stock. So we are trying our best to increase it but of course it depends on the competitive environment. You also see that whenever we increase the price of [stock effect] the customers, the subscribers are performing better. It's a kind of major election, so we are trying [to reach] at all times as much as [the market permits].

Thank you, that's great.

For the second part, on this business of the-- For the pricing we obviously watch out the market all the time, and we had an annual operating plan for the whole year. In the first quarter the currency changes have been better than expected. Favorable towards the company and in May obviously there has been some fluctuations. We believe at this time this volatility is cooling off and the currency rates have come back again. And even though we have the past three, four weeks of volatility, our currencies are still in line with today's currencies and the annual operating plan, and we haven't changed our expectations for the year-end, which is still in line with the government's expectations.

So we do not have any expected or planned price increase for the near future unless there are major unexpected things and also at the same time there is an allowance at the market place. So we'll be watching out, nothing planned as yet.

That's fine. Thanks very much.

Thanks.

Thank you. The next question comes from Mr. [Tom Ferder]. Please state your company name followed by your question.

Good afternoon. It's Tom Ferder from Citigroup Smith Barney. I had two questions. Firstly, just could you share with us your views on what's happening competitively in Turkey? How's the competitive situation? And also, what your market share estimates are at the end of the first quarter?

And secondly, I had a question on DCC in the Ukraine. Could you give us an indication of when you expect you can launch services? And what kind of CAPEX are you looking at for the full year, or CAPEX by the end of this year?

Thank you.

Well, for the first question, obviously for the competition there are new things happening around, like [Calcyon] being run by BRSA at this time. And we have the market information that there are candidates for the company and BRSA is looking forward for the sale of this company in order to close some debts between the shareholders and the government on other industries like the banking, for example.

We haven't heard any concrete roadmap for how to make or realize the sale of [assets] or company, but it is obviously an important cornerstone and we as Turkcell believe that this should be done as soon as possible so that the marketplace is back on the directional track. At this time, [Calcyon] did not change a major strategy compared to the previous strategies, but most probably if it happens after the possible sale of the company we should expect some changes. We'll be watching out on that.

On the other hand, the [turn on] the four operators, TT and the Aria and Aycell companies, have merged and they have constructed TT Tim. They've been at the marketplace for a few months by now. We haven't seen a major change in the strategies and the operating environment from that side. We are still expecting to see some major moves in the next one or two months, but we believe there has been long-term irrational moves in this market anyway. And at this time we believe it cannot be further irrational than the previous six to eight quarters, if not a better or more rational environment, in which the total value chain will be the base set of criteria for competition, which is our game plan and our competence anyway. But anyhow, we are working on each and every skill set of the company for the total competitive environment and we will watch out and see how they will come up with strategies.

On the new additions marketplace, we believe (as I have read on my presentation) there is only Turkcell's data being expressed on a continuous and transparent basis. That is why we might be wrong on some guesstimates, but our understanding is that we are having still the majority of the new adds out of this past quarter. And it is most probably around 60% but still based on the cautious approach of different numbers flying around for the competition.

And your third question was - what is happening in DCC, Ukraine. Obviously our estimation is to have both Ukraine and Iran up and running by the end of the year. And for Ukraine we gave a guidance of $250m-$300m worth of investment in the next two years. We haven't broken up this number into annual approach yet, so I cannot give, unfortunately, a precise number for the year-end. Maybe in the next [one or] quarters we can be more explicit and detailed on this information, but at this time this is all that I can exchange. I hope it is satisfactory for you.

That's great. Thank you very much. Could you, though, maybe share with us where market share currently stands with regard to the three players in Turkey? And have you seen churn away from Telsim towards yourselves or Aria or Aycell?

With the same research, we believe the market share of Turkcell is slightly above 60%. But in the last quarters we haven't seen any major churn from [Calcyon] to Turkcell. We believe they've lost some share from the additional market, additional subscribers market, but on the existing cumulative subscribers that they have we haven't seen any major churn towards us. And obviously we haven't figured, based on the realities of the market dynamics at this point of time, we tried to be wise and sensitive to those dynamics and we haven't figured that churn either.

That's great. Thank you very much.

Thank you.

Thank you. The next question comes from Mr. Alex Wright. Please state your company name followed by your question.

Good afternoon. It's Alex Wright from UBS. My first question was just to clarify the treatment of the revenue provision that you established in the fourth quarter of last year. I presume that you're releasing that provision as the interconnection payments by Turk Telekom are withheld over the course of the quarter. Could you confirm that that is the case, and what the amounts were in Q1, what amount was withheld by Turk Telekom?

My second question is regarding - just a follow-up question really - on the funding of the international businesses. Can you just clarify the timing of the equity contributions to Ukraine and Iran, when those payments are being made? And also in the presentation you mentioned that you would be prepared to take on limited credit risk as far as these two businesses were concerned. Could you offer any quantification of what you consider to be a limited credit risk?

Thank you.

For the first question, on Turkish Telekom dispute, in the first quarter, we do not deduct anything from the provision. So the main amount of the provision has been the same as the fourth quarter. As we've said, it is not even accumulating any further so that it is capped with the new agreement on September 20. What we have done is that we put the interest on top of the fourth quarter best guesstimate, but that is very much similar just by coincidence to the total numbers unpaid by Turkish Telekom to Turkcell in the first quarter. That is why the number has only changed $3m in total compared between the two quarters.

And the second question, the funding of the international operations. Well, we made the equity injection of $50m to DCC to purchase its 1% of the company and our partners put in kind their contribution into the new company. And we believe at this time that will be the equity that we will inject in the short space of time, and we are having the negotiations with the vendors on limited recourse collateral for the short time, which is 18 months. And we believe that limited amount of recourse financing will be about 55% of the total exposure of the vendors into that market at this time.

For the longer term, it is difficult to give any guidance at this point of time, so that that criteria will be fixed based on the performance of the DCC company in Ukraine within the next 18 months. So that we do not have any performance yet, it is difficult to elaborate on that. But obviously if we perform better we believe the longer-term collateral of Turkcell will be lesser than 55% at this time.

For Iran, it is difficult to give any guidance as yet because it is at a preliminary or earlier stage than Ukraine, but we are discussing with vendors on the pricing and total volume of the investment at this time. Only thereafter we'll be going into the final [stage] discussions and whenever it is known we will obviously share it with yourselves.

Okay, thank you. Just a follow-up on that last point, as regards financing in Iran. Would you potentially envisage a similar financing situation whereby the vendors would provide financing with recourse to Turkcell? Or could you envisage a situation whereby Turkcell provides shareholder loans to Irancell? Is that an alternative you're looking at?

Basically, we are trying to follow a similar situation for Iran compared to Ukraine. A short-term financing with the vendors and then a longer term - most probably five years, seven years - afterwards. And some portion of the collateral will be given by Turkcell for the short term. For the long term we will deliberate this question after some performance.

Thank you, and just to clear up finally the timing of the equity payments. You mentioned you've already made the $50m contribution to Ukraine, presumably in the second quarter. Have you already made your portion of the equity contribution to Irancell as well? Or is that to come at some later point in the second or possibly third quarter?

For Iran we are expecting the company to be established first. That procedure is not yet finalized. Once it is finalized then the process of contributing to the capital of the company will start. Obviously the requirement of the license agreement is €450m for the Irancell contribution altogether. And obviously after the establishment of the company and acceptance of our [indiscernible] application, then the signature of the license will be done and also the payment of €300m of license fee. For that we believe we do not have several months, but a shorter period of time most probably.

Thank you very much.

Just before we go to the next question, Alex, I believe the first part of the question you have asked included also the revenue amount that was [passed] by Turk Telekom for the quarter. And we can tell you that that amount is approximately $35m, which is actually fewer than 70% of Turkcell's interest on [indiscernible] revenues in Q1.

Right. Thanks a lot.

Sure.

Thank you. The next question comes from Mr. Martin Taylor. Please state your company name followed by your question.

Yes, Thames River Capital. My two questions are as follows. Firstly - sorry to return to the provisions issue - could you clarify just in terms of interest accruals on your outstanding provisions? Are you saying that in the first quarter and going forward, the additional interest accruals will always be taken through the balance sheet, or will they at any stage hit the P&L? That's the first question.

And the second question was just if you could clarify your guidance on your effective tax rate for this year and for next year I'd be grateful.

Thank you.

The [trend of] interest going through the [indiscernible]. For the Treasury share-related issues, where we will continue allocating provisions for the interest part of that, but on that [it is] expected a little while ago. For the Turk Telekom there are some further cuts from the revenue for the interconnect dispute. So the application [trend] of the company will be similar that what we have done for the first quarter, meaning that we will accrue some interest, but we will be deducting the total Turkcell contract part of the business from the total amount in [indiscernible].

Sorry, but does that mean-- For instance, in your presentation at the end of last year you had $501m of accrued interest, and at the end of the first quarter you had $578m. Now the difference, that's just gone through your balance sheet? Is that correct?

You're right Martin. There has been some [indiscernible] that Turkcell [paid around 6%] in the first quarter. It is actually the difference it comes from the [indiscernible] 6% in fact of the [inaudible].

I suppose another way of putting it would be, the $40.5m that you have in the P&L as interest, it's net interest expense. Does that solely relate to your financial, to your gross debt and your gross cash, and have nothing to do with your provisions?

We should be [not answering] this question.

Sorry. Another way of putting this question would be, in the first quarter in the P&L you have a charge of $40.5m in net interest expenses. Does that $40.5m only represent the actual cash interest paid and received on your debt, and have nothing to do with the provisions?

There is, in fact the amount represents a total interest. In that total amount there are the actual payments plus the amount that accrued for the first quarter. That includes all of them.

Sorry, does that include cash interest paid and received and some accrued interest on your provisions, or is it?

[Indiscernible] yes. The total amount includes both interest accrued. If you look at the P&L, the amount that you are seeing is actually the amount that we paid for the amount that we accrued for the first quarter. But if you look at the cash flow, that amount that you are seeing is much different, which is [$12m] for this interest. The [indiscernible] is that there are some accruals that have not been paid yet. That's why the interest expense in the P&L is different than the cash flow.

Okay, thank you.

Martin, before we go to the next question, actually, we didn't respond to the second question of Martin. Martin, I believe you asked about the corporate tax rate this year and next year? The company, as you know, has tax incentives. Therefore we don't pay corporate tax, which is 30% in Turkey. So withholding tax, which is 19.8%, is being paid, and we expect to pay that next year as well. That is the current picture right now, because there's also a potential of receiving ongoing incentives for the investments that we are planning.

Thank you.

Thank you. The next question comes from Miss [Benita Nicholaevich]. Please go ahead with your question, please.

Yes, good afternoon. It's Benita Nicholaevich from ING. Could you please tell us exactly what items of your P&L or balance sheet were impacted by changes to provisions and by how much?

The P&L impact for the first quarter has been, in respect of legal provisions, has been distributed to several P&L items. The first one is operational expenses, which has amounted to [$42m]. The sales and marketing expenses also has been impacted by [$6m] for the first quarter, and interest expense totaled [$54m]. So there are several items actually that will have included the provision for legal cases. [$42m] represents, for example, ongoing Treasury shares. [$6m] mainly represents the amount which is coming from [indiscernible] for the year 2002, and interest expense represents the interest of these items, all of the ongoing items for the company's total provisions.

So net interest, [you said] were $40m, while in your P&L total net interest expense is $40.5m.

There are also interest income as well. When you look at the P&L, what you see is the net of the interest. In that amount there are two factors really, the interest expenses and interest incomes. When you look at the P&L what you see is the net of both items. So that's like, if you try to match the total interest in the P&L with the real interest, it's [indiscernible] allocated for the [indiscernible] it's different [indiscernible].

Yes, so it seems that you have probably around $20m of interest income?

The total interest expenses in fact is [$77m] minus [$26m] interest income. There are several more items, including the total interest income and expenses you do not see by looking at the one line, I cannot tell you.

Sure, and I have the other question, in terms of timing. When do you think it's reasonable to expect any progress in terms of sale of Telsim and Turk Telekom?

For Telsim it is quite difficult for us to expect or to make any guesstimate on the roadmap and the timing. For Turk Telekom we know that there is a timeline starting from July 15 for the bidding process. Besides that there isn't any concrete information about how the tender will take place and there isn't any information or announcement about Telsim's process.

Sure. Right, thank you very much.

Thank you.

Thank you. The next question comes from Miss [Isa Moreau]. Please state your company name followed by your question.

Hi. Good evening. This is Isa, Raymond James Securities. Just three questions. First one is regarding provisions again. How were withheld revenues from Turk Telekom exactly reflected on the income statement in the first quarter of the year?

And secondly, could you please explain how the ownership rights in Iran is different for you from the case of this airport company, TAV? We have seen that they have run into some problems over there. Do you think your ownership rights are better protected than they have done so?

And lastly, regarding the settlement issue. Is there a timetable for the negotiations with the government, or things are just going at an ad-hoc basis currently?

Thank you.

Regards of provision that the telecom [indiscernible] to telecom companies represent 30% of the total, the revenue that we are getting from the Turk Telekom. The total amount if you gross it up to 100, the total amount that Turkcell should have received from Turk Telekom actually [indiscernible]. So we have recorded [$160m] minus $35m in terms of revenue.

And that was the only line that was affected?

The total amount is [$160m] we have included in the total company revenue, but we have decreased $35m from that, the first quarter accrual. But you see the total amount as revenue, but deduction is actually interest level for the first quarter.

Okay, thank you.

The second question, about Iran. Obviously what happened at the airport was something that we closely watched out and followed, and I believe even the local environment did not believe that it helped towards the international investments. They were also very sensitive about the case, and we are trying to make sure that our investment doesn't have any such record or track record in the future. And we believe in order to achieve that, to understand the local market, the dynamics of the local market, and to honor the local realities and the local content is a major criteria, which we did from the very beginning. If we follow those rules, we believe we will be better protected.

In the settlement issue timetable, actually there is no timetable. It is not such a timetable or framework which is going [forth ways], but it is more of a effort as you have underlined; exchange which (as we have expressed in our presentation) if it is for the shareholders' and the company's benefit, and if it is well balanced against the court cases, then we would go and grab it. But we cannot give any timeframe at this point of time.

Thank you very much.

Thank you.

Thank you. The next question comes from [Maria Tonada]. Please state your company name followed by your question.

Hi. I'm Maria Tonada from Citigroup Asset Management. I apologize for going back to the provision questions, because it's still not clear to me. The first question I have is whether you are recording the revenues that you're not receiving from Turkcell, the 30% that you're not receiving on interconnection. Is that included on your revenues or not? I guess you said no, but I'm not sure about that.

The other thing is that on debt provisions, would it be possible to have a breakdown of the $1.3b? How much of that is the Treasury and how much of that is related to the interconnection?

And another thing is not clear to me is on the Treasury part, is that estimate assuming that the Treasury share has to include the taxes and the interest as well? Or should we expect in case that the rules are not in favor of Turkcell, should we expect additional provisions in the future?

The last question I have about this is that from what I understood on the previous answers, the provision for the fourth quarter is only related to interest on the claims, and that provision is distributed in cost of services, marketing expenses and interest expenses. Could you provide a breakdown of all of them?

Well, this answer before I would not repeat one more time. The total amount that the company should receive from Turk Telekom before any [costs] actually is recorded to company revenue in the first quarter. So what we do is that we decrease this [indiscernible] Turk Telekom has from the interest accruals in the expenses for the first quarter. The main logic behind that [indiscernible] earlier by the year-end we know only the estimated and declare an actual amount of [$460m] for interconnect dispute with Turk Telekom. And we assume that the risk will not grow relatively, as it happens for the Treasury-related legal dispute.

So that's why we believe that Turk Telekom interconnect cost cuts for the period after the end of year 2003 should be reduced from the company's accruals. That's why we have decreased this $35m from the interest margin of the first quarter. So that is on the interconnect risk will not gradually grow principle. What we have done, we have allocated all revenue that we should have received from Turk Telekom, around [$160m], and decreased $35m from the first quarter accrued interest for the Turk Telekom dispute.

That is the methodology that we have applied for the first quarter and the estimated [indiscernible] that [on our total costs] we are [indiscernible] for the following quarters.

It's difficult. You have a little bit of echo and it's a bit difficult to understand exactly what you're saying. The total amount of interconnection you mentioned is a hundred and?

[60].

150?

[$160] is the amount that the company has recorded in total revenue from Turk Telekom.

And that excludes the portion that they're not paying?

For the first quarter. The amount that they have not paid is $35m. We have decreased the amount from the first quarter interest accruals for the Turk Telekom dispute. So repeating the principle. So we had a cut, [define] principle by [demand]. So the principle for the Turk Telekom dispute is that the interconnect risk will not increase. So that's why any cuts for the Turk Telekom interconnect dispute should not impact the revenue but should decrease from the total accrued amount. But on the other hand, we continue increasing the interest accruals for the Turk Telekom dispute. So this quarter what we have done, we have not touched the revenue, we have recorded all revenue as company income amounting to [$160m], but decreased $35m Turk Telekom cuts from the interest expense accruals for the first quarter.

Okay. If I look at your P&L, can you tell us the numbers, exactly how they have been included in your P&L? You previously mentioned in the costs of sales and marketing and the interest. Could you exactly tell us the numbers?

I said it earlier. In the revenue, so [$160m] the total revenue of the revenue that we are declaring. It actually comes from this Turk Telekom revenue. So what we have decreased from the interest expenses, $35m interest expense I mentioned earlier was related to legal dispute was [$54m]. So approximately [$25m] plus the [$31m] of this interest expense is actually coming from the ongoing first quarter interest accruals. But the minus $35m, the amount that Turk Telekom cut, then we end up with [$54m] total interest expense that is associated with the legal provisions for the first quarter.

Okay. Out of the $1.3b provision, what is the breakdown of that?

Several categories, but the [total] relating the total amount, $585m for the Turkish Treasury share dispute, $468 the amount that we have allocated for the Turk Telekom dispute. There are other amounts, for example the cases with Telecommunication Authorities, like [indiscernible] for year 2002, [indiscernible] for the subscriber numbers and national roaming. The amount was $214 by the end of first quarter, but we have already paid these amounts in April. So when you look at our second quarter we will not be seeing accruals if there's no additional case. We will not be seeing accruals for the Telecommunication Authorities.

So repeating the total number, the accruals have increased from $1.181b to $1.278b by the end of the first quarter.

So roughly the breakdown is $500, $400 and $300? The rest is others?

Maria, there is a slide in our presentation, which is slide number 15. If you like we can clarify with you after the call again, but do you want to refer to that slide for the breakdown of the legal provisions.

Okay, yes. I saw it already. On the Treasury side, are you assuming that taxes are going to be included?

The answer is yes.

Okay. Great. I'll call you later to clarify the provisions side. Thanks a lot.

There has been quite a few numbers going around and I think some of the numbers that's mentioned may create some uncertainties, so let me just clarify one thing.

We had earlier said that the $35m is the amount that was cut by Turk Telekom, and we also said that that represents 70% of the actually cut, which is based on a legal decision which was the injunction decision received earlier in favor of Turk Telekom. So if that's 70% of the revenue then really the 30% of the revenue, the total revenue actually, is $50m. So what we received is really $50m. That's the clarification that we wanted to make. I think enough said on this topic unless you have further questions that we are ready to clarify also after the call, and I think at this point we can proceed with the next question.

Thanks a lot.

Thank you.

Thank you. The next question comes from Mr. Ishtan Matis. Please state your company name followed by your question.

Good evening. This is Ishtan Matis from CSFB. I have two questions. My first question relates to the breakdown of the negative working capital change. I'm afraid I may have missed when Ekrem provided the breakdown. Could you just please tell us what the components of that working capital change were?

And secondly, could you share your view with us on how you think the government's intention to settle with you, what kind of progress will be made going forward? I have the impression that it is probably more important for the government than for you at this time. Are there any milestones? What would be, roughly, your strategy? Please share some of your thoughts with us to the extent you can.

The reason that in the first quarter we have negative items for the others, which has amounted to $114, I believe there's no question. [Indiscernible] actually in that amount is the [indiscernible] for year 2004. That has been full paid, the total amount of course was [$19m]. This amount has been paid but because the amount is actually related to all year, the [indiscernible] rate we have to allocate the expense quarterly basis. So what we pay is more than what we allocated as expense. So that's why you see a minus amount for the free cash flow other item. So we paid but we have not [indiscernible] expenses but we have paid through a quarterly basis throughout end of year 2004.

But you also made $90m, or almost $100m, of provision on a net basis. So something must have gone down by about $200m, to get to $114m. Could you tell us what the other roughly $100m was as well?

So the amount that I am recording is $114m. I believe [despite] your question with respect to cash flow other item.

Yes, correct.

Which will be minus. It's not $200m. The majority for that comes from the year 2004 from the [indiscernible] we are billing to Telecommunications Authority. The amount has been paid in the first quarter but not accrued because of accounting principles. So the only provisions, we have only expended the first quarter part of it. But the main part will be expended throughout the quarters to be [indiscernible]. The principle is that what we pay is more than [monthly expense] then the cash flow item becomes minus.

That's clear. Thanks a lot, but are the positive working capital impact of the provisions recorded in other as well?

No. These are EBITDA level impacts.

Okay, thank you.

For the second question, maybe we can say that at this time government has, or Turk Telekom has, some motives of settling the case before the privatization, yes. That might help the environment. The same motive may not exist for the Treasury side of our disputes. This is obviously not anything that is declared to us but this is our guesstimate. But anyhow, although there are motives around there isn't any precise timetable for it, unfortunately.

Thank you very much.

Thank you.

Thank you. The next question comes from Mr. [Burt Prima]. Please state your company name followed by your question.

Good afternoon. UBM. There was some press comment about the draft law for the Turk Telekom privatization, and that some paragraphs in that might relate to dispute with the GSM operators [and] Turkcell. I'm a little bit puzzled about two things. First of all, it was never clear whether this related to the Treasury share dispute or the Turk Telekom interconnect dispute. And secondly, I'm puzzled why a new law would be necessary to resolve the dispute. Can you help?

Well, frankly speaking this is obviously an internal bureaucracy or governmental issue. I really don't know if it is necessary to have a law or not to settle the cases, for any governmental institution to do this kind of deal. So it is quite difficult for me to elaborate on this question, unfortunately.

Can you say whether this relates to the Turk Telekom dispute or the Treasury share dispute?

I believe the law is especially for the Turk Telekom environment. It is only one item within a major law passing through, or that will potentially pass through, and the law is not only for this item anyway, it is a major law.

Yes. Thank you.

Thank you.

Thank you. The next question comes from Mr. [Rees Hamilton]. Please state your company name followed by your question.

Rees Hamilton, Smith Barney Citigroup. I just have two questions. One is - could you give us some certainty about year-end? I know you are in discussions to finalize some of the issues there, setting up the company, but I really want to get certainty that you believe that the license has been awarded to you and that you can start operating once the paperwork has been sorted out. That's the first question.

Then the second one - could you just give us an indication of, on your Turkish subscribers, what level of inactivity you see in your prepaid and postpaid base, as well as just the period that you are using in active subscribers as well please?

I'm not sure if we have heard the third question. There has been a wireless phone ringing around. Could you please repeat that once more?

Yes, sorry. It's just the second one, about your period of inactivity that you have on your subscriber base, and how long that is on your inactive subscribers and your prepaid subscribers.

And the question after that? The third?

No, I only had those two questions. Your inactive base, what level is that, and what period you are recording your inactive subscribers.

Okay. So let me answer the first one. In Iran, well frankly speaking we are certain that we are the owner of the license at this time. So that we have placed a guarantee letter for €300m, which is not a small money for us. And we have been issued the license agreement with the discussed and agreed terms, and at this time we see the procedure as a normal procedure for the establishment of the company for the acceptance of the [indiscernible] application. And thereafter we will be signing the agreement and paying €300m, and after that we will start hopefully the operations. This is how we look at the situation.

And I hand over the floor to Tulin for the answer of subscribers.

For prepaid it's seven months. All subscribers who do not rescind their line will be deactivated after seven months. And for postpaid the customers who are [indiscernible] when its contract is up are possibly to be acted and normally we are just, if they don't pay for two months we consider them. We apply to the court and after the court case they are deactivated.

You are clear, or do you have one more question?

Sorry, I just wanted to say how many, what percentage of your base is inactive at this point?

All our subscribers we are announcing are active base. Because after seven months they are deactivated and they are not counted as subscribers.

Okay, thank you. Sorry, just to go back to the Iran question, is there anything that you can see going forward that might change your outlook on that license? Are there any negotiations that still need to be conducted?

On the Iran case?

Yes.

Well, we believe there isn't any major discussion going around for the Iranian case. Obviously there are always minor discussions on any issue, but we are hopeful that we will close this deal in the recent future.

Thank you very much.

Thank you.

Thank you. We have a follow-up question from Mr. Alex Wright. Please go ahead with your question sir.

Yes, hello. Given that you'll be consolidating the Ukrainian operation from the second quarter, I wondered if there are any recent historical headline figures that you could provide so that we could make some estimates for the coming quarter. Thanks.

Alex, unfortunately we don't have any guidance for what we can expect for the second quarter, but I can give a sense, if you like. For our total consolidated statement, what we will pick up or what we will consolidate from this in the second quarter will be minor numbers. Very minor numbers. Because the existing operation is a very small one and the numbers will not have a major impact on our statements. And most probably we will not start seeing our GSM operations before the fourth quarter [in this year].

Okay, but there are no recent historical revenue numbers or whatever that you can make public at this stage?

At this stage, unfortunately no, but I can say they are minimal numbers.

Sure. Thank you.

Thank you.

We do understand that no questions are waiting in the queue. Perhaps we can take a last question or so, if there are any.

Sir, we have a follow-up question from Isa Moreau. Please go ahead with your question.

Hi. I just wanted to ask how comfortable you are with the margins that you have recorded in the first quarter of the year going forward. Thank you.

When we look at the next quarters, we don't see any major change from the existing environment. So we believe we can maintain the existing margins unless there is any unexpected happenings, either in the industry or the macro environment.

Thank you.

Thank you sir. There are no further questions at this time.

Okay. Thank you for that last question. At this time we are concluding our session. I'd like to remind you that an audio recording is available until June 25. Please do call at the IR team for any detailed follow-up questions. We do hope the presentation was helpful for clarification of the results. Thank you again and bye-bye.

Thank you ladies and gentlemen. This concludes the Turkcell conference call. Thank you for participating.