Turkcell Iletisim Hizmetleri AS (TKC) 2014 Q1 法說會逐字稿

Welcome to the first quarter 2014 results announcement call on the 25th of April, 2014. (Operator instructions.) I will now hand the conference over to Nihat Narin. Please go ahead, sir.

Thank you, Christina.

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

Just before we start to the presentation, I would like to just go over the 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 risks and uncertainties which may cause actual results to 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. Ciliv, please go ahead, sir.

Good morning, good afternoon, and welcome to Turkcell's first quarter of 2014 results call. Before we start, I would like to share that we are celebrating our 20th year in Turkey.

During these 20 years, with investments in our brand, technology, and superior customer experience, we have created a leading communication and technology company that makes a difference in people's lives. I take this opportunity to warmly thank everyone who has made this possible.

So, now let's focus on the results of the first quarter. Turkcell group revenues rose by 6% to TRY2.9 billion. Please note that, excluding MTR cut impact, revenue growth would have been 10%.

We also maintained our profitable business model. Consolidated EBITDA rose by 10% year-on-year to TRY887 million, while EBITDA margin increased to 31.1%.

In this quarter, our net income impacted by a TRY464 million translation loss recorded in the Ukraine, having a bottom line effect of TRY255 loss in our financials, which I will elaborate more later on.

Moving to page five, in the first quarter mobile broadband and subsidiaries were the key revenue growth drivers. Turkcell Turkey's mobile broadband revenues rose by 26%, which offset the 3% decline in voice revenues due to MTR cuts. We expect the growth in our mobile broadband business to accelerate in the next quarters in line with our focus.

Meanwhile, we welcomed the performance of our subsidiaries, the revenues of which rose by 33%, mostly driven by Turkcell's Superonline and Astelit. Overall, our subsidiaries' contribution to revenue increased to 23% and EBITDA to 25%.

In line with the consistent rise in our revenues, we also achieved a sequential improvement in our EBITDA margin, delivering a 31.1% margin in the first quarter.

Moving to page six, macroeconomic conditions, along with aggressive competition, led to a weak quarter for the market overall. This added to the already seasonally slow environment.

Following the regulatory decision on minimum on-net prices and extension of this decision on campaigns, we experienced worsening price competition. As a result of this, our total customer base declined by 389,000 to 34.8 million, with losses in the price sensitive prepaid segments.

However, we continued our focus on providing a superior and differentiating customer experience, and accordingly our postpaid customers continue to grow, with 93,000 quarterly net additions. Meanwhile, ARPU remained flat, mainly due to regulatory decisions.

Moving to page seven, in the quarter our smartphone base expanded by 711,000 to 10.3 million, despite the macro challenges and the regulatory change, and in credit card installments for handsets. This was achieved through our contracted offers and promotion of our affordable T40 model, lifting penetration to 32%.

The growth of mobile broadband and service revenues was 8%, constituting 30% of Turkcell Turkey revenues. Mobile broadband currently accounts for the bulk of the non-voice business. This was up 26%. The pace of growth was decelerated due to competitive offers with low prices for data.

Messaging revenues, reflecting global trends, fell year-on-year due to falling prices and to ICTA's decision to decrease the maximum price. Going forward, Turkcell will continue to lead mobile broadband in Turkey, and we expect growth to accelerate in the coming quarters of 2014.

Moving to page eight, Turkcell's Superonline, an important component of our growth, posted a 38% revenue growth, exceeding our expectations. Its EBITDA rose by 34% while the margin slightly declined to 26.7% year-on-year, with increased selling and marketing activities compared to a year ago.

With continued investment in our fiber backbone, we have reached 1.8 million home passes and 614,000 fiber customers. During the quarter, we continued to focus on more profitable residential and corporate segments.

The residential segment grew by 51% on the back of continued subscriber additions, its share in the total reaching 39%. In the meantime, the corporate segment grew 34%.

Moving to page nine, a challenging macroeconomic and political environment continues in Ukraine. Following the decision to adopt a floating currency regime in February, the hryvnia depreciates against the dollar.

Further currency devaluation, coupled with increasing inflation and decreasing consumer confidence, may put some pressure on Astelit's operational and financial performance in the next quarters.

We sincerely hope for a normalization of the current worrying situation in Ukraine. We believe in its future and remain committed to our presence there.

We are closely monitoring developments and assessing the potential consequences for our business. At this time, it's too early to tell what these might be.

In the first quarter, we did not actually see any major impact on our operations. Astelit continued to execute on its growth strategy. It delivered 13% top line growth in local currency through a 1.1 million net rise in customer base and increased mobile data revenues.

Revenues remained flat in dollar terms. Operational profitability remained strong with a 32% EBITDA margins.

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

Good morning and good afternoon. Let me continue from page number 11.

As highlighted, in the first quarter of 2014 group revenues rose by 6% year-on-year to TRY2.9 billion, with the softening growth momentum in the mobile broadband business and higher contribution of Turkcell Superonline and Astelit businesses.

Consolidated EBITDA in nominal terms climbed 10%, mainly on strong top line growth, while the margin was up by 1.1 percentage points. In nominal terms, the TRY167 million increase in revenues was partially offset by a TRY58 million rise in selling and marketing expenses.

Now moving on to the next page, 12, group net income declined by 36% to TRY359 million year-on-year, mainly related to FX loss recorded in Ukraine. National Bank of Ukraine adopted a floating currency regime in February.

The dollar denominated exchange rate increased by 37% during the quarter. Thus, we recorded a TRY464 million translation loss stemming from our foreign currency denominated net liabilities.

The higher other income includes minority effect of FX loss from Astelit. And so, the translation of Astelit had a negative bottom line effect of TRY255 million. The improvement in EBIT and greater net interest income, recorded mainly on the time deposits, netted off by the increased translation losses.

I will now talk about our balance sheet and cash flow items on the following slide. Our financial position remains strong, with a net cash position of TRY4.5 billion at the end of March, 2014.

Our consolidated debt is at TRY3.5 billion. The debt terms of our Ukrainian operations was TRY1.43 million, and the debt of our Belarus operations was TRY1.35 million. [Sic -- see page seven in press release.]

During this quarter, the major cash flow items include capital expenditures of TRY340 million and the frequency usage fee payment in the amount of TRY345 million.

Of the total CapEx figure, TRY230 million was related to Turkcell Turkey, TRY70 million to Turkcell Superonline, and the remaining TRY40 million to other subsidiaries.

This brings our introductory presentation to the end. Let me hand over to Nihat.

Thank you, Murat. At this point, we are ready to have a Q&A session. Christina, if you could please initiate the Q&A session?

Thank you. (Operator instructions.) Cesar Tiron, Morgan Stanley.

Two questions, please. First, you mentioned that the competition was the key explanation in the deceleration of the growth in mobile broadband, but you also said that you are confident that growth is going to pick up in the next quarters. Can you please explain a little bit what makes you so confident about that?

And then, I would like to understand vis-a-vis the margin improvement that we've seen in Q1. So, margins were up 1 percentage point, and it seems to come mainly from the gross margin level. It seems that your direct cost of revenues were not increasing that much in the quarter. Can you please explain that, and explain also the quite substantial increase in sales and marketing expenses versus Q1 last year? Is that mainly advertising, or is it dealer commissions? Thank you so much.

Hi, this is Burak. Regarding the first question on mobile Internet, yes, there is a negative impact from the competitive situation. But, we have taken some actions that will offset this effect in Q1 and so that we see better growth rates in the remaining quarters.

And these are mainly actions towards increased penetration of mobile Internet, increased penetration of smartphones, and also some pricing actions that we took in Q1 that will increase our data ARPU. So, we believe that we will have a better growth rate in the remaining quarters.

Regarding the second part of your question, the improvement in the EBITDA margin, there were two main reasons, one of them mainly the cost management that we still continue in the overall operations.

And on the controllable expenses such as in the marketing expenses, we made some improvements. So, that has been a positive impact on the EBITDA margin. And I can also add the interconnection costs due to the MTR cuts has also had a positive effect.

It seems that your sales and marketing expenses have gone up quite substantially versus Q1 last year. What was the key driver? Was it advertising or dealer commissions?

It was mainly on the -- not only the advertising side, but mainly on the dealer activities including the commissions, but also some activities that have been conducted by the individual and corporate segments.

San Dhillon, Barclays.

Two questions, if I may. What's the strategy in subscriber market share? Kind of are you happy to -- can you continue focusing on the more valuable segments to the detriment of your market share figure, or will you change strategy to focus on preserving subscribers? And what does that mean for your pricing strategy and also your advertising dealer commission strategy, I guess?

And secondly, how many base stations today have fiber backhaul? Thank you very much.

Regarding the first question, of course keeping our valuable customer base is an important priority. But, we are always trying to have the right balance between having a sound, profitable, healthy customer base as well.

So, we are kind of -- we still do our best to keep our customer base, but we have a special focus and special attention on our valuable customers. So, I would say our postpaid focus will continue in the next quarters.

And on the second part, of our base stations currently not a large portion of them are connected, but we are working on connecting more of them to the fiber backhaul. But, I do not want to give percentages for competitive reasons.

(Operator instructions.) Alex Wright, UBS.

So, I have two questions, please, the first one on regulation, if you could update us what your expectations are there with regards to the minimum on-net pricing and also any other potential changes you may see going forward, just really because, if it was the regulators' intention to try to stimulate some recovery in profitability in the sector through setting the minimum on that pricing, then it doesn't really seem to be achieving that effect so far. So, I just wondered if you could give your thoughts on that, please.

And secondly, you've announced a number of management changes and changes in the structure of some of the reporting lines today. Given the several changes and resignations there, could you elaborate on the background to that, please, and what exactly those changes are targeted to achieve? Thank you.

On the regulation front, we agree with you. And we think -- this price floor for Turkcell, we think it is not fair. And we plan to communicate with the regulatory body, like we did in the past, in the near future also to make a correction to this.

So, this is an issue that makes us pretty unhappy, and we don't think it is healthy for the market. And as you mentioned, it does not result in profitability improvement either.

On the management changes, our company has gone through an organizational change according to our strategic priorities and our productivity initiatives. And this was a decision of our management team and our Board. Do you want me to go into detail of each of these changes?

I mean, really I was just interested in the general background and what the key targets of these changes were, because obviously we can see from the announcement which members of management have left and which members of management are taking up new roles. So, I don't know whether it's necessary to go into each one individually, but just precisely what it is that you're looking to achieve through these changes.

What we were trying to achieve is, first of all, consumer marketing and consumer sales reports to our consumer business, and there is one P&L for this. This is how we manage the business.

So, we thought that it would be -- it was our actually plan -- it was like this a year ago, and then we had one personal change. And then, when the person left the company, we had them both reporting to me. Now I think Burak Sevilengul is ready to take on managing all of the business.

The consumer sales channel and consumer marketing, they need to be very close to each other and we need to create the maximum synergy. So, on a temporary basis we had them separated, reporting to me directly. And we felt that now was the time to merge them back again, since they are part of the same P&L.

And on the corporate communications side, again, in this day and age communication has to be 360 degrees. And blending together all of the marketing communication, public relations, and sponsorships together we thought would be more synergy. That's the reason for that.

Vera Sutedja, Erste Bank.

My question is related to the debt position. Was there any considerable change in terms of US dollar debt that was held in Belarus, Ukraine, or the net cash in Turkcell Turkey and the Superonline, if you can give us the numbers in US dollars rather than in lira?

The second question is related to the shareholders. Was there any new update in terms of the court's decision or potential new deadlines, either from the US or from pricing controls? Thank you.

Let me answer the first part of the question related to the outstanding debt portfolio of the company. The majority of the debt is coming, as you clearly stated, from the two operations abroad in Ukraine and in Belorussia.

When you look at the overall figure, the total size is TRY3.5 million equivalent as of end of this quarter. And from there on, then you look at the Ukrainian side.

As I stated in my presentation, the total Turkish lira equivalent is 1.4 million, and this is 654 million dollars. And this is denominated in hard currency. Only a small portion is in euro. The majority, 95%, more than that, is in dollars. We do not have any plans for the time being, due to the local market availabilities, to convert into the local currency.

And related with Belorussia, the size in Turkish lira base is 1.35 billion Turkish lira. And the dollar denominated part is almost 100%, which is 617 million dollars.

And a similar case applies to Belorussia. The economic market is very tiny. The banking sector is not available -- is not offering local currency funding yet there. On the contrary, the local operations in Turkcell Turkey and in Superonline, we have a position of around 346 million dollar equivalent of debt for the Superonline.

And from there on, the percentage is we have -- increasing our local currency level on the total debt for the Superonline. And similarly, in Turkish lira basis, the market is available for us. In the coming months, we will be increasing the debt portfolio there.

For the Turkcell, we only use foreign currency debt for our capital expenditures, which has been offered by [Exane] Bank. So, I believe that will be my answer for the first part of the question.

Can you repeat the second question again?

Yes. The second question is related to shareholder dispute, whether anything new or regarding the court decision in the United States, or regarding updating the pricing controls, those two mainly, if you could.

If you asked this question five minutes ago, I would say I had no new information, but in the last five minutes something popped up. And so, I will read the news from Bloomberg.

It says Sonera Holdings was barred from enforcing a $932 million Swiss arbitration award in U.S. courts against Cukurova Holding over a sale of Turkish shares. And the same news says US courts lack jurisdiction over Cukurova.

So, basically I guess there is a decision by the US courts in the last five minutes.

Ranjan Sharma, JPMorgan.

The question from my side is that you had such a strong -- broadband was coming through. How happy are you with the capacity of the networks, or is there any CapEx requirements in that regard? Thank you.

Are you asking on the fiber side or on the mobile broadband side?

On the mobile broadband side.

On the mobile broadband side, we keep adding capacity but the volume of traffic is also increasing rapidly. And so, I think -- and we do have investment plans to increase our capacity. And we look forward to also, in the next 12 months, start moving towards LTE with the -- obviously licensing or frequencies awarded by the government.

So, I mean, mobile broadband traffic is increasing very rapidly, so we match -- we have plans to meet this large increase in traffic with the best network capacity through ongoing investments. And today, we believe we offer the best coverage, best quality, and the fastest mobile broadband service in Turkey.

Thank you. We have no further questions. Please continue with any other points you wish to raise.

Thank you, Christina.

On behalf of the management team here, I would like to thank you for your participation. And if you do have any follow up questions, please do call the IR team. And also be aware that audio recording is available for the next couple of weeks. Thank you, and have a good day. Bye.

Thank you. This concludes the first quarter 2014 results announcement call. Thank you for participating. You may now disconnect.