Turkcell Iletisim Hizmetleri AS (TKC) 2013 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the second quarter 2013 results announcement conference call on the 23rd of August, 2013. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (Operator Instructions).

I will now hand the conference over to Nihat Narin, Director of Investor Relations and International Media. Please go ahead, sir.

Thank you, Kevin. Thank you for your participation, I would like to say welcome to our call on behalf of management in here. We will start today with a presentation by our CEO Sureyya Ciliv followed by a presentation by CFO Murat. And then we will go into Q&A session.

Just before we start the presentation, I would like to remind a brief notice. Please remember that this presentation may contain statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk and uncertainties which may cause actual results differ materially due to factors discussed in this presentation.

Please also note that all financial data are consolidated, whereas nonfinancial data are unconsolidated unless otherwise specified. Mr. Sureyya Ciliv, please go ahead, sir.

Good morning, good afternoon and welcome to Turkcell's second quarter of 2013 results call. We are glad to report 11% revenue and 12% EBITDA growth. We recorded Group revenues of TRY2.9 billion, once again double-digit revenue growth and record quarterly revenue. We continue to implement our profitable business model, registering TRY869 million EBITDA with a margin of 30.4%.

EBIT, in my opinion one of the most important KPIs, was 15%.

Net income rose by 4% year on year to TRY556 million, slowed down by one-off items.

Moving on to page 5, in the second quarter all major business lines delivered solid performance. Our core business, Turkcell Turkey, generated over [80%] of Group revenues. They continue to perform well on 8% topline growth and a stable EBITDA margin through a sustained rise in postpaid users and data demand.

Our fiber broadband business, Turkcell Superonline, posted 37% year on year revenue growth. The EBITDA margin rose 6 percentage points to 26% due to the rising share of the more profitable residential and corporate segment.

Meanwhile, at Astelit we are delighted with both 16% topline growth and 32% EBITDA margin, the Company's historic highs.

Moving on to page 6, in the second quarter mobile voice, mobile broadband and subsidiaries remained the key revenue growth drivers. The growth in voice revenues continued with a 4% year-on year rise. However, the pace of growth decelerated due to the prevailing competitive climate that has intensified in the first quarter and reflected to the second.

We achieved good growth from the continued uptick of mobile broadband, rising 42% year on year. Meanwhile, a stronger rise in subsidiary contribution persisted, mostly driven by Turkcell Superonline and Astelit. The total revenues of our subsidiaries grew by 29% year on year.

Now let's take a closer look at our operational environment on page 7. The regulatory and competitive environment in Turkey continue to present significant challenges. On the regulatory front, recall that the authority increased the lower limit for on-net voice and set a lower limit for the on-net SMS tariffs of Turkcell, while for all operators cutting SMS invoice termination rates.

We expect these changes to negatively impact our financials and operational performance. For 2013, we expect this negative impact to be partially offset by our strong first-half Group performance and the foreseen higher second half contribution from subsidiaries. This enables us to maintain our guidance range.

Meanwhile on the competition front, given Turkcell's superior quality, we observed that our competitors have solely differentiated themselves through heavy price discounts, causing price volatility and low profitability levels in the market. Indeed, Turkcell remains focused on innovation and operational excellence to deliver a unique customer experience and further increase the quality gap.

Moving to page 8, in such an environment, our technology vision, experience, collaboration and innovation keep us ahead of the competition by creating significant value for our customers. With this vision in the new era of high-speed access to information, we continue to prioritize investment in our network and future technologies.

And so recently, we tested LTE Advanced. The indicator reached approximately 900 megabits per second, which set a new record for Turkey. We expect this new technology to become available in Turkey beyond 2015.

Furthermore, in pursuit of higher smart phone penetration data usage, we continue to promote our T series. We will introduce Turkey's first domestic smartphone, T40, designed by Turkcell engineers, to the market in September.

Moving on to page 10. Relying on our Supernetwork capabilities and smartphone focus, we continue to launch services that enrich individual and corporate customers' lives. In the first half we added new services in our portfolio which includes mobile transportation, payment, SMS+, mobile ticket, Smart Map, mobile fax and smart vehicle.

Moving on to page 10. For the quarter, we lost 191,000 subscribers as tough competition impacted the prepaid segment. Yet our value focus led to further quarterly improvement in our postpaid base of around 293,000, reaching 578,000 net additions for the first half. As a result, postpaid users accounted for 67% of Turkcell Turkey's overall revenues.

Meanwhile, both MoU and blended ARPU, which was helped by a positive subscriber mix and continued pickup in the data usage rose by 8%.

Moving to page 11. During the quarter, the number of Smartphones reached 7.6 million, welcoming 620,000 new users. Consequently, penetration in our network rose to 24%, highlighting huge untapped potential.

In a short period of time, since the launch of 3G in Turkey, mobile growth and revenues have risen almost sixfold from TRY60 million to TRY340 million in the second quarter of 2013. This now accounts for 15% of Turkcell Turkey total. As a result, the share of nonvoice revenues, including messaging and services, in Turkcell Turkey reached 28%.

Moving to page 12, Turkcell Superonline is an important component of our topline growth and overall Group strategy through increasing synergies and integrated total telecom solutions. With our minimum fiber broadband speed of 25 megabits per second, rising to 1000 megabits per second, we have eased access to information and served as a global example on several fronts.

Given Turkey's 18 million households, fiber business growth potential is considerable. With continued investment in our fiber backbone, Turkcell Superonline reached 1.5 million home passes and signed up our 500,000th customer.

In light of this, we expect Turkcell Superonline to continue selective deployment of its fiber network and focus on increasing its scale.

Moving to page 13, our Ukrainian business Astelit maintained its regional growth strategy. Accordingly, three months after subscriber base rose to 8.6 million from 7.4 million year on year while ARPU rose by 10% quarter on quarter to $4.50, mostly due to seasonality in price increases in some tariffs in line with the market trends.

On the data front, the share of mobile broadband revenues continued to increase and reached 12% of the total through simple offers while smartphone penetration rose to 20%. Overall, based on Astelit's solid performance of recent years, we fully expect continued profitable regional growth going forward.

Thank you, and now I will hand over to Murat for the financial review.

In the second quarter of 2013, Group revenues rose by 11% year on year to TRY2.9 billion, with a sustained growth momentum of Turkcell Turkey's voice and mobile broadband businesses and the higher contribution of [group company], mainly Turkcell Superonline and Astelit.

Consolidated EBITDA in nominal terms climbed 12% while the margin was flat year on year. As a percentage of consolidated revenues, direct cost of revenues excluding depreciation and amortization rose by 1.3 percentage points year on year. The 1.3 percentage points rise in interconnection costs were offset by lower G&A and sales and marketing costs.

As highlighted during the first quarter, the ICTA decision dated September 2012 enabled mobile users without subsequent (technical difficulty) and the cost of this registration is led by the mobile operators. Therefore the direct cost of revenues included in the registration related tax expense of TRY14 million in the second quarter of 2013, similar to the first quarter of this year.

Now moving on to page 16, Group net income grew by 4% to TRY556 million while the EBITDA rise was a key driver. Yet this improvement in EBITDA was partially offset by TRY24 million, higher depreciation and amortization expenses. The improvement in EBIT and the greater net impact of translation gain was partially offset by a monetary loss of TRY19 million, plus a TRY23 million higher tax expense and TRY31 million higher other expenses in the second quarter.

The increase in other expense was mainly due to the total impairment of loss of TRY25 million arising from exterior and T-Medya businesses.

Impairment test was conducted following the Savings Deposit Insurance Fund's decision to take over the management of Aks TV and T-Medya against its overdue receivables from the Cukurova Group.

I will now talk about our balance sheet and the cash flow items on the following slides. Our financial position remained strong with TRY7 billion cash on our balance sheet and a net cash position of TRY3.9 billion as at end June.

Our consolidated debt rose to TRY3.1 billion. As of the second quarter the debt balance of Ukraine was TRY1.3 billion. Belarus was TRY1 billion and the Turkcell Superonline was TRY615 million level.

Of the total CapEx figure of TRY355 million, TRY208 million was related to Turkcell Turkey, [TRY33 million] to Turkcell Superonline, and TRY74 million to the other subsidiaries. Other major cash outflow items in the second quarter, [quarter's result] TRY120 million, corporate tax payments of Turkcell Turkey, and TRY46 million of [change in] working capital.

That concludes our presentation, thank you very much.

Thank you, Murat. Kev, I think we are ready to have a question. Please initiate the Q&A session.

(Operator Instructions) Alex Kazbegi.

Yes, good afternoon. I wanted to understand a bit more about the impact of the introduction of the higher [floor club] price. And you mentioning, of course, the adverse impact on your revenues for the second half.

Where do you see the impact coming, because again, the price will be higher, you expect the usage to come down significantly? Do you expect it to drop significantly off net prices? Where do you see sort of, say, the impact of the higher on-net prices to be felt through the revenues, but sort of item by item if you could give us some idea about that?

The second question would be, I remember probably about two years ago I think you mentioned that Ukraine would generate longer-term something about 30% EBITDA margin. We're almost there.

So the question is, again, in light again that your competition there seems to still have the margins around 50% and in some cases improving, would you think that the 30% is actually the area which you already reached and you'll be looking for further improvement of the margins in the Ukraine, let's say over the next 2 to 3 years? Thank you.

Hi, this is Murat. Regarding your first question, I think our comments on the impact of the ICTA decision was also including not only the minimum on-net price decision but also the NTR cuts that have been imposed recently, so it was a comment based on the overall impact of this decision.

But also on the other hand, I think you can -- you will also agree that having yet minimum price level at a higher level, 70% more before -- from the prior levels will make us more -- make things more difficult for us in a very competitive market. So that's why we have made the comment both the impact of the NTR cuts and also regarding the competitive situation.

Sure, no, I understand that. That's why I was asking. So you would expect then sort of say losing more subscribers than probably, or decreasing the usage, where do you see the impact of let's say, I guess, losing subscribers? That's the answer, probably?

I think in general it might be difficult to differentiate all the impact. But it will be a combination of many factors coming in, when it's a more difficult situation in terms of the competitiveness.

Yes.

Okay, on the second question about Ukraine, you know, we did set 30% as a target now. We reached that. Now we'll try to go higher up in EBITDA margin and improve our EBIT. So, I think we are happy about the progress our Company has made and we hope to improve our EBITDA margin further in the Ukraine.

But you don't have any specific numbers to give at the moment?

No, not at the moment. I think that there is also -- in the next one or two years 3G and LTE licenses should be awarded in the Ukraine. And I hope that will also help us grow our business there.

Okay, understood. Thank you very much.

(Operator Instructions) Dalibor Vavruska.

I have two questions, if I may. One is about the economic situation and the possibility of a scenario, given what's happening in the markets, that you will see perhaps some slowdown next year or in the next couple of quarters. How do you think that Turkcell is positioned to this relatively to competitors?

On the one hand you could say that you are a higher premium priced operator, and in tougher times you would expect the customers to search for value so that that may be possibly seen negatively. On the other hand I can say that, you know, one of your main competitors has foreign currency debts and maybe the slowdown will hit their fixed line business as well.

So I'm just wondering how do you think that, in that kind of crisis scenario or slowdown scenario, how do you think that your -- you can do relatively to the competitors? Yes, I think that's the first question.

Okay, you know we don't see ourselves as a lower cost competitor. We see ourselves as higher value generating player. So, I think both our corporate customers and also our consumers, because of Turkcell's quality and innovation, I think they get higher value from Turkcell. That's point number one.

Point number two is, you know, the prices in Turkey are one of the lowest in Europe. So for average person, telecom expenses are not a significant part of their monthly income or monthly expenses. As a result, I feel Turkcell will continue to compete very well under any scenario going into the future because we are focused on creating higher value for our customers, and this is appreciated by our customers.

And obviously, our corporate customers understand this value equation better. As a result, we have even higher market share in the business segment. But I think it also applies to the consumers.

And if I may just have one quick follow-up?

Sure.

In terms of the impact of the regulations on your business, I understand it's negative and it's inconvenient to have these surprising [flooring] constraints. But I think you indicated in the past that they may see some ways to soften this. Perhaps campaigns wouldn't count as offers, etc.

It now seems that, based on the way you're presenting it, that this regulation is more serious and they may not be that easy to soften that impact through some other tools. Is that a correct understanding?

First of all, we are not changing our guidance. And we admit that regulatory decisions are serious and they are -- mostly they impact the market's profitability negatively. You know, I think it is well understood that drop in mobile termination rates negatively impact profitability of the market.

So, we are concerned about that. But we also know that our international subsidiaries and Superonline are growing. And their performance in 2013 is making up for the losses that were created by these regulatory decisions.

And we will continue to communicate and build on our dialogue with the regulators for a healthier marketplace because traffic, data traffic is especially growing fast and demand is growing fast. And there are investments required. So, you know, looking at some other markets, I think there are important lessons to learn about the profitability of the operators to be able to invest in the future.

So we'll continue our dialogue with the regulators, so that there's a healthier environment for everybody.

Yes, and if I can just have a quick one, is it possible to quantify somehow the impact of the negative impact of this regulation? Is it going to be offset by the subsidiaries? So, by how much do subsidiaries you think are going to outperform to sort of neutralize that impact?

You know, we don't want to -- for competitive reasons we don't want to get into more detail on this. I think basically we are keeping our guidance is what we want to say this point.

Thank you very much.

(Operator Instructions) Alex Kazbegi.

Thank you. Well, another two questions from me are quick ones. One is that the 30% penetration of the Superonline in terms of the -- for the subscribers vis-a-vis homes past, what kind of targets you are seeing there? Do you see that penetration goes -- I mean, as you said, you will be adding very selectively new lines. Presumably you will be trying to upsell and increase the uptake of the, so to say, residential usage. So you looking for like 40% penetration? What sort of numbers are you looking there?

And secondly, could you remind, because I think you gave a bit of a break down by country of your debt allocations, but by currency if you could make a quick rough update of which currencies you have in your debt in? And also your cash -- is it all so to say in Turkish banks just generating lira income, or there is also FX portion, if you could give us some details on that? Thank you.

Okay I'll take the first part and then I'll pass it to Murat to respond to the cash-related questions. On Superonline, I would like to remind you that there are 18 million households in Turkey, and our 1.5 million is less than 10%.

So we would like to grow this home pass, but we see significant regulatory challenges and we are not able to get the permits to grow this fiber base. As a result, I think we are going to push for a higher percentage of penetration take-up rates -- [50%] or 40%. But we also look for opportunities to grow in the high priority areas with home passes.

Sure.

Hi, this Murat. Regarding the debt portfolio and our FX hold (technical difficulty). Hi, this is Murat again. Okay, I'm going to give you the insight about our debt composition to give you some flavor about the currency composition of that one.

In our debt portfolio, around 80% to 85% is in hard currency and they are primarily in dollar terms, and they are primarily dedicated for our investments in Ukraine in Astelit. When you look at the local Turkish group companies, I will say 40% of our debt is for our local group companies and one-third of their debt is in local currency and two-thirds in hard currencies. So from thereon, our cash assets under management, one-fourth of it is located in hard currencies, which compromises --

One-third?

One-fourth (multiple speakers) -- 25%. And when you make that calculation you will end up for the dollar Turkish (inaudible) related risk, you have higher FX assets versus the FX debt in Turkish assets.

And rather than deposit our cash primarily you will understand that Turkish banks are primarily having ownerships with the international banks as well. And there is significant higher capital and the capital (inaudible) ratios are significantly higher. So primarily they are in local state banks and [the four] Turkish banks. Okay?

Yes. Wonderful. Thank you very much.

Thank you. There appear to be no further questions. Please continue.

Thank you very much. Would you like to make any remarks or --? No. I guess this is the end of our session. On behalf of the management team here I would like to thank you for participation on the call. And if you do have any follow-up questions, call the investor relations team. And also audio recording will be available for the call in the next two weeks, and thank you for all. Goodbye.

Thank you, this concludes the second quarter 2013 results announcement conference call. Thank you for participating. You may now disconnect.