Turkcell Iletisim Hizmetleri AS (TKC) 2014 Q4 法說會逐字稿

Good day, and welcome to the fourth quarter and 2014 year-end results announcement conference call. At this moment, I would like to turn the conference over to Nihat Narin, Director of Investor Relations. Please go ahead.

Thank you, Teresa. Well, thank you for all, thank you for your participation today. 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 Ilker, followed by a presentation by CFO Murat, and then of course we will have a Q&A session.

Just before we start the presentation, I would like to just go over the brief notice we have. Please remember that this presentation may contain further statements that are forward-looking. And 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. Please, Ilker Kuruoz, go ahead.

Good morning and good afternoon, everyone. This is Ilker Kuruoz, acting CEO of Turkcell.

As you may all know, Mr. Sureyya Ciliv recently announced his resignation from the Turkcell family. Sureyya had been one of the key figures in Turkcell's history, having led its transformation into a leading regional communication and technology company.

We are grateful for his contributions to both the company and the industry. As he repeatedly remarked, Turkcell's success comes from executing a solid strategy with an excellent team spirit. That same team remains committed to working effectively in what will no doubt be an exciting future.

Having been appointed acting CEO by our Board, I would like to emphasize that I will maintain Turkcell's open dialogue with our investor and analyst community. On one such occasion, I am pleased to be here today, together with my colleagues, to present our fourth quarter and full year results.

In 2014, our group revenues grew by 6% to TRY12 billion, while we recorded EBITDA of TRY3.8 billion on 6% year-on-year growth, thus meeting our guidance. Our EBITDA margin reached 31.2%, while net income fell 20% to TRY1.9 billion. This was primarily due to the fourth quarter net income performance adversely impacted by macroeconomic instability in our countries of operation.

For the quarter, we recorded a TRY383 million foreign currency loss, mainly arising from the devaluation of the hryvnia and Belarusian ruble, and a TRY118 million impairment charge from BeST and Fintur. Given the continued fluctuation in these currencies, we may incur further foreign currency losses in the first quarter of 2015.

Our core business, Turkcell Turkey, recorded 3% growth both at the top line and EBITDA level on the back of strong demand for mobile data. Excluding the MTR impact, Turkcell Turkey's revenue growth would have been 5%. Meanwhile, the EBITDA margin slightly improved to 31.2% on a full year basis.

Our fiber broadband business, Turkcell Superonline, sustained its strong performance on 35% revenue growth and 38% EBITDA growth year-on-year, while EBIT rose remarkably by 63%.

With the 97% yearly currency depreciation in Ukraine, Astelit's revenue and EBIT contracted by 12% in Turkish lira terms, while the company kept its EBITDA margin at 30.6%.

Now I will talk about the performance of our main business segments. Mobile broadband sustained its growth momentum, climbing 44% year-on-year on rising smartphone penetration, growth in data users, and higher data consumption. Mobile service revenues rose 21% year-on-year with a more focused approach.

Despite regulatory challenges imposed on us, voice revenues rose 1%. However, they slightly decreased for the full year due to the MTR impact. Other subsidiaries pace of growth decelerated due to the reduced contribution of international subsidiaries.

Overall, mobile and fiber broadband have remained the key growth drivers, both for this year and for the full year.

The mobile markets remained competitive throughout the year. The competition opted for price oriented offers over service quality. Moreover, the market has shifted towards increased data incentive bundled offers.

The upward price adjustments in some offers in early Q4 2014 did not lead to significant improvement in overall competition. Accordingly, our total customer base declined by approximately 0.5 million from the price sensitive prepaid segment, and ending at 34.6 million.

Meanwhile, our value proposition continued to attract high value postpaid subscribers, which resulted in 2.1 million net additions for 2014, of which 401,000 were in this quarter.

The postpaid base generated 70% of Turkcell Turkey's revenues, with a 3 percentage point increase year-on-year. As a result, the favorable change in subscriber mix, along with higher demand for mobile data, have helped blended ARPU rise by 4% yearly.

The growth momentum of smartphones in the market, which underpins data consumption, has continued. Our attractive contracted offers and success of our affordable T branded smartphones have led to 3.1 million annual additions to our smartphone base, which rose to 12.7 million.

Smartphone penetration, reaching 40%, led to a 34% rise in mobile broadband revenues for the full year. Thus, non-voice revenues reached 32% of our mobile revenues in Turkey.

On the other hand, messaging revenues fell by 23% year-on-year, reflecting the global trend. This is coupled with the 20% decrease in the SMS ceiling price.

Turkcell Superonline, the major growth engine of our group, maintained its remarkable financial and operational performance. Over the past four years, Turkcell Superonline's standalone financial strength has solidified and its revenues double on faster profitable growth.

We continue to work on building scale, resulting in an 8 percentage point rise in subscriber market share over the period through a net increase of 165,000 fiber customers in 2014, 50,000 of which were added in the fourth quarter.

Turkcell Superonline has become the fiber market leader. In-city coverage rose to 2.1 million homes with a yearly increase of 380,000. Having invested over TRY2 billion to date, we remain committed to advancing our fiber business, which underpins our high quality network and delivery of superior products and services.

In fact, the recently launched groundbreaking TV platform, Turkcell TV Plus, has elevated Turkcell Superonline's service offerings through a triple play. This is expected to boost customer loyalty and satisfaction. Moreover, the arrival of the new 4G era will bring additional synergies between our mobile and fiber businesses and strengthen Turkcell Superonline's already successful business model.

Ukraine has been facing political tension since early 2014. In Crimea, which constituted 3% of Astelit's revenues in 2014, operations have been discontinued for reasons beyond its control and are unlikely to resume in the near future.

Additionally, occasional network disruptions in the Donetsk and Luhansk regions have occurred. Despite these difficulties, Astelit has sustained its operation.

Meanwhile, macroeconomic challenges remain. The devaluation of hryvnia reached 97% for the full year, resulting in a 2.7% price point decline in Astelit's revenue contribution to the group. In 2015, the hryvnia devaluation has exceeded 60% year-to-date.

Astelit's regional growth strategy and timely execution has resulted in relatively better top line performance. In the fourth quarter, it delivered 15% revenue growth in local currency terms.

On the operational front, Astelit's customer base continued to grow, with 1.1 million yearly net additions. This expanded its market share, which has climbed almost 4 percentage points over the past four years.

Ukraine is awaiting the arrival of 3G technology, which will ultimately enable us to expand our quality offerings in compliance with the 3G tender conditions. Astelit paid tender guarantees for each three lots, UAH810 million in total, on February 10th, 2015. Thus, overall we maintain our long term view for our international subsidiaries despite continued regional difficulties.

Looking ahead, we anticipate sustained profitable growth based on our strategic focus on superior customer experience, operational excellence, and on productivity. Growth will stem from our fiber and mobile Internet businesses, along with the delivery of new products and services.

Accordingly, we target group revenues in the range of TRY12.8 billion to TRY13.1 billion, and EBITDA in the range of TRY3.85 billion to TRY4.05 billion.

We will increase our investment to prepare our mobile network for the 4G era, further expansion of the fiber network, and the rollout of the 3G network in the Ukraine.

Therefore, we expect an operational CapEx to sales ratio of around 20%. This ratio excludes spectrum fees for the 4G license in Turkey and the 3G license in Ukraine.

Looking further ahead, we eagerly anticipate the exciting opportunities of the approaching 4G era, which will determine the next decade of the mobile industry.

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

Thank you, Ilker. Good morning, good afternoon to all parties. I will now talk in more detail about our financial results.

As highlighted, in the fourth quarter group revenues rose by 8% year-on-year to TRY3.1 million. The growth was due to the strong momentum in mobile and fiber broadband revenues.

For the full year, the declining voice revenue was offset by a 12% growth in mobile growth and in services, while subsidiaries' revenue grew by 17%, mainly due to Turkcell Superonline.

Let me move to page number 14. In the fourth quarter, EBITDA was recorded at TRY917 million, while the EBITDA margin increased slightly to 29.6%. This stems from the higher revenues and positive contribution of G&A expenses, which were partially offset by higher direct cost of revenues.

For the full year, consolidated EBITDA rose by 6% to TRY3.8 billion, while the EBITDA margin was slightly up, to 31.2%. In nominal terms, a TRY636 million rise in revenues was partially offset by direct cost of revenues as well as S&M expenses.

Let me move to page number 15. In the fourth quarter, group net income fell 49%, resulting mainly from currency devaluation in Ukraine and Belarus, along with the impairment charges in international group companies and several one-offs. Excluding one-off items, group net income would have been TRY390 million.

In 2014, group net income fell 20% to TRY1.9 billion, adversely impacted mainly by macroeconomic conditions in the international markets of operation. Without one-off items, group net income would have been TRY2.1 billion.

Let me move on to the final page. Our financial position remains strong, with TRY5.3 billion of net cash on our balance sheet. For the year, the major cash outflow items were primarily CapEx and corporate tax payments.

Accordingly, of total FX debt, 82% belongs to two international operations of the group. Meanwhile, our FX cash balance is higher than our FX debt in Turkey, which covers the currency risk for our local operations.

Please note, in 2014 operational CapEx as a percentage of revenues was around 17% and 20% is expected for 2015, excluding new spectrum fees in Turkey and Ukraine related to 4G and 3G, which are expected to be in an auction this year.

This brings our introductory presentation to an end. Thank you.

Teresa, I think that was the end of our presentation. Please take the lead for the Q&A session. Thank you.

Thank you. (Operator instructions.) San Dhillon, RBC.

Yes, thank you very much. Just a few questions, if I may. Firstly, in a 4G world, do you believe the Turkish consumer will be as sensitive to price or will be more sensitive to the quality of that 4G proposition?

Secondly, on Superonline, what level of homes passed will you get to by the end of 2015 following the investment next year?

And finally, just a quick one on working capital outflows. They remain quite high. Do we expect 2015 to be a year where we can see those slow somewhat, or will they remain at the current levels? Thank you.

I think for the first question, Burak, could you comment on this, our chief consumer business officer?

Yes. Hi. Obviously 4G will be definitely a great opportunity for us and for our customers to experience the higher quality that we provide to our customers, because it will create a lot of opportunity to even -- to further improve our service in terms of fast mobile Internet.

So, I am sure the consumers will be appreciating that, and they will act on that quality. But, of course the price, as any other product in the market, will definitely be an important attribute too. So, what we will try to do is to make sure that we provide a superior service to our customers at a reasonable price.

On the second question, please, Murat.

This is Murat Erkan, Turkcell Superonline General Manager. Actually, in year 2014 we add 380,000 homes passed, to get 2.1 million homes passed at the end of 2014.

For 2015, we would like to have similar level of homes passed and would like to reach around 2.5 million homes passed.

Hi, this is Murat. Regarding the third part of your question, San, the working capital is likely to stabilize, not in 2015 but most likely in 2016 with respect to the increased investment guidance that we have shared with you and plus the contracted sales, which have been primarily on average 24 months. So, your anticipation will be in 2016 to level off. Thank you.

Okay. Thank you very much, guys.

Alex Kazbegi, Renaissance Capital.

Yes, hi. I wanted to clarify on our guidance, please, two things. On your EBITDA guidance, which is basically guiding on a lower margin for 2015, I was just wondering. Again, you had the growth which you are looking at for 2015 which is basically high, mid single digits. The inflation is clearly coming down. What would be the reason why you are so cautious on the EBITDA margin side, if you can maybe give us a bit of color here? Is it the Superonline or Ukraine maybe? But, both of them are actually fairly small contributions to the revenue so it would be great if you can clarify.

And the second thing on the CapEx as well, I mean, basically as I can see it, if I look at your 20% of sales guidance, that's an additional something about TRY500 million spent in (inaudible -- technical difficulties).

Teresa, I think we lost Alex Kazbegi. Could you connect him again, or we can move on?

He appears to have stepped away. We will now take our next question from Herve Drouet, HSBC.

Yes, hi. Two questions as well on my side, maybe just to follow up on Alex's questions. On the CapEx, something I would like to check with you is the second part of the payment for this 3G license in Ukraine. Is it included in your CapEx to sales ratio of 20% you mentioned for 2015?

My second question is on the revenue in terms of the growth profile in terms of the segment. Do you believe the mobile market in Turkey is going to continue to gradually rationalize a bit more in terms of the pricing? I mean, in Q4 it looks like there was big promotions. Do you think that can hold? And how do you see, with 4G coming, how the markets may hold?

And finally, do you have any more specific information on the process for the 4G, especially on the auctions? Do you know more -- has it been disclosed more about what would be the exact process? Thank you.

Herve, thank you. Just a quick answer for your first question. License fee in Ukraine is not included to our guidance.

And now I'm handing over to Burak to answer your second question.

Hi. We foresee the market to be competitive going forward in 2015 as well. We have seen some positive signs in Q4 2014.

But, it is hard to say that they are here to remain and that they will lead to a sustained rationalization in the market. So, we expect a competitive market in 2015 as well.

Obviously, 4G is a good opportunity to provide more value to our customers and monetize that. We will do our best to make sure that we monetize the better service to our customers. But, of course how the market will behave is not only in our control, so it will depend on how our competition will take position as well.

For the third question, the process for the 4G on the auction, still the regulator and the ministry is working on the process, and nothing has been clarified and declared to us so far. So, we are still waiting for that.

All right. Thank you very much.

(Operator instructions.) Ivan Kim, VTB Capital.

Yes, good afternoon. Two questions from my side. Firstly on Superonline, in the fourth quarter there was a lower contribution from wholesale revenue. But, at the same time, the margins -- the EBITDA margin has remained pretty much flat year-on-year. I was just wondering why there was no improvement because wholesale revenues is a low margin revenue.

And then secondly, just a follow up on the LTE frequencies. Do you know the amount of frequencies and which frequencies are going to be auctioned off? Is it 800 megahertz, 1,800 megahertz, 900? I mean, which spectrum? Thank you.

This is Murat Erkan again, Turkcell Superonline General Manager. First of all, I mean, we see a slight improvement on the EBITDA margin in Q4.

But, usually Q4 is a quite interesting quarter for us. We have a lot of one-time spending on our customer. So, this one-time spending has also low margin business in terms of spending.

And I would like to remind that we also launched TV business, so we had a lot of marketing and launch expenses as well. So, we are relatively okay in terms of margin.

This is Ilker for the second question. For the LTE frequencies, what we discussed with the regulator is that 1,800 and 2,600 will probably be in the auction.

And do you know whether operators would be able to get like two blocks of 5 megahertz in the 800s, or more or less? Thank you.

Nothing has been defined yet. We are still waiting for that.

Okay. Thanks.

Thank you.

Alex Kazbegi, Renaissance Capital.

Sorry, it's actually another follow up. I got completely disconnected so I don't even know whether you heard my first one. But, if I may repeat that, I was just talking about the EBITDA margin guidance which, as I said, I mean, it's a high single digit growth. Why, so to say, conservative guidance, if you wish? What's the reasons on that?

The second question was on CapEx, saying that you have basically about TRY500 million additional earmarked for this year. And does that cover, so to say, pretty much, so to say, preparatory work for 4G? Do you expect this to continue, meaning the high levels of the CapEx to sales in next years, or this is basically, so to say, the bulk of it?

And the last one, if I may also quickly, just on the Ukraine. You will have additional investment there, given again that the license will be auctioned there. Have you had also a consent from your partner there that they will do a capital contribution if it's necessary, or is it all, so to say, falling on your shoulders? Thank you.

We will now take our next question from Vera Sutedja, Erste Bank.

Teresa, please let Alex have the answers. Then we can go to the next question, please. Alex, are you on the line?

Just answer the question. He's probably --.

Well, are we having the second question in the row? Alex, are you on the line?

I am hearing you.

Okay. Let's answer the question.

Okay, great. Alex, it's going to be very difficult to get into answering your question. First, regarding the EBITDA guidance, why it is lower than the revenue growth, there are three levels of answers for that one.

First of all, as you have clearly stated, the subsidiaries' contribution to the EBITDA level is less than their contribution to the revenue. The second thing is that the regulatory fees of the company are increasing on double digit level versus the guidance that we have higher single digits. So, our direct cost of revenues has been significantly affected by the regulatory fees.

The third and the most important factor behind the EBITDA guidance is twofold, related with the investments that we are proposing starting from 2014. As you might remember, last year we closed the year with the 15% and then increased it to 17%, which means towards the end of 2014 we have increased -- accelerated our investment.

Then that's going to be meaning that the cumulative effect of our costs, direct cost of revenues, is going to increase. This is the first thing about the cumulative effect.

The second thing is we will also increase our guidance from 17% to 20% for 2015, which is going to be adding further stress to the direct cost of revenues, about -- with the maintenance costs and the radio costs. These are the primary reasons which are the headwinds for our EBITDA margin.

Second question about the CapEx, it is important for us to see how the 4G tender is going to be finalized, about the spectrum requirements of the tender. For the time being, 4G, depends on the expansion plans, might require that this leveling of the CapEx over sales might continue.

We are anticipating to differentiate ourselves with our superior network. So, keeping that into our minds, for the time being I can just mention that we might continue with the CapEx over sales figures going on.

Third question regarding the Ukraine, additional investments, on that perspective we are maintaining our discussions internally at the Ukrainian Board level. For the time being, there is no detail that I can disclose with you at this time.

Okay, wonderful. Thank you very much, and sorry for the mess with the questions. Thanks.

Okay. Keep in touch.

Thank you.

(Operator instructions.) Vera Sutedja, Erste Bank.

Yes. Good evening, everybody. My question is related to the dividend. The AGM is already called. We're just probably wondering how much are you going to propose in terms of a dividend. Is there any dividend policy that you are going to propose with this? And if yes, when would you propose the size of the dividend? We will hear it before the AGM, or what's going to be the next step? Thank you.

Vera, hi. This is Nihat, Investor Relations. Well, as you know that, we did call our general assembly for March 26. And of course that call was taken by our Board of Directors. And there is a number of agenda items since 2010 until 2014, and of course dividends are also included.

But, the Board has not made any proposed, of course, for the time being. But, any agenda item regarding dividend is subject to, of course, decision of general assembly. And therefore, to date there is not anything that I can disclose on top of what we have already.

And by when do you have to disclose the -- I mean, there is the agenda already in the invitation. So, there will be a second agenda before the AGM taking place with the dividend size?

Well, unfortunately I cannot make further disclosure on that topic. Of course, anything can be disclosed will be publicly available through our [AVAP] or any stock exchange disclosure line, but nothing else that I can comment right now.

Okay. And how about the dividend policy itself?

Dividend policy has already been taken. It has been actually wired on our website, which is available. That is still valid.

But, of course, again as we said, we have been having a difficult period since 2010 due to our shareholder issues, and that is partly related. As you said, we are progressing. Anything will be taken by our Board will be disclosed publicly. Nothing on top of that right now. I do apologize for that.

Yes. Just to remind me, the dividend policy is at the 50% payout ratio. Am I correct?

Our dividend policy is at least 50%, but of course based on company's free cash flow projections, business plan, expectations, and of course any other risks can't be foreseen. That is also available on our website.

Thank you.

Thank you, Vera.

Daria Fomina, Goldman Sachs.

Yes, hello. Good evening. I have a follow up question to Alex's question earlier. You mentioned that the regulatory fee is increasing on a double digit level versus single digit you were expecting before. Can you please elaborate on that a little bit, why you were expecting a lower number and why it's faster growing than you were expecting? If you can give a bit more detail, that would be helpful. Thank you.

Hi, Daria. This is Murat again. Just to give you a very specific example, last year moving from 2013 to 2014, the regulatory fees had been increased by an index. And that index has been announced by the government by close to 4%.

So, we had the potential in 2014 that the fee base had been increased by 4%. That similar index has been revised and announced at 10%. So, you will imagine if we are opening the new sites, and for each site and for each business we pay a fee to the regulatory budget. And the index on a yearly basis has been increased by an index, and that index had been announced at a double digit.

So, that is clearly having an effect for us. And that number has been multiplied by the cumulative investments of the company.

That's very clear. Thank you very much.

Thank you. That will conclude today's Q&A session. I would now like to turn the conference back over to the speakers for any additional or closing remarks.

Thank you, Teresa. And of course thank you for all participation. Today is our end of session. Please do visit our website, and of course our audio will be also available.

Any questions for follow up, please get in touch with us through Investor Relations. That will be available at any time. So, have a good day and have a good night. Thank you.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.