Turkcell Iletisim Hizmetleri AS (TKC) 2015 Q1 法說會逐字稿

Good day and welcome to the first-quarter 2015 results announcement. 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. At this time, I would like to turn the conference over to Mr. Nihat Narin, Director of Investor Relations. Please go ahead.

Thank you very much and good morning, good morrow, good afternoon to everybody. I just would like to make a short notice before we start our presentation. It's our legal notice. In this presentation, we will make statements that are forward-looking about our future targets and expectations, and these are based on our current views and assumptions, which may, of course, change in the future and our actual results may be different. Please note that all financial data our consolidated, whereas nonfinancial data are unconsolidated unless otherwise specified.

Sir, Mr. Kaan Terzioglu, the floor is yours.

Thank you Nihat. Good morning and good afternoon everyone. I am delighted to be addressing you as the newly appointed Turkcell Group CEO and would like to share with you that I am very excited to lead the Group through the opportunities lying ahead.

Today we have announced our new organizational structure, and now we are here to present our first-quarter 2015 results, together with Turkcell executive team, including our Executive Vice President and Chief Marketing Officer Burak Sevilengul; Executive Vice President and Chief Financial Officer Murat Erden; Executive Vice President and Chief Technology Officer Ilker Kuruoz; and Executive Vice President and Chief Business Support Officer Seyfettin Saglam.

It has been an exceptionally busy month during which I have met with the Turkcell team, our customers, our dealers and business partners, and envision their excitement and energy looking forward to growing our business. We sincerely believe that Turkcell Group's robust financial standing, well invested infrastructure, innovative products and services and highly motivated team position us well to exploit the growth opportunities both in Turkey and further afield.

Turkcell's talented team which has achieved 20 years of success, and with all of our valuable business partners, will together take Turkcell Group to its next growth phase. One of our priorities will be to establish an open dialogue with the investor and analyst community such as yourselves. We would like to interact with you regularly to discuss our business and benefit from your feedback.

Now a few words about our first quarter in 2015. Our group revenues rose 4% to TRY3 billion, and consolidated EBITDA rose 4.5% to TRY927 million, both first-quarter record highs while the EBITDA margin remained flat at Turkey 1.1%. Our EBITDA performance was strong on 9% yearly growth while net income declined by 61% to TRY141 million, impacted by translation losses in our international subsidiaries, lack of monetary gain due to discontinued use of inflationary accounting in Belarus, and one-off provisions booked for commercial agreements. Excluding these impacts, net income would have risen 9% year-on-year to TRY655 million.

Considering our overall performance this quarter, we reiterate our guidance of topline growth of 6% to 9%, and an EBITDA margin of 31% to 32% range.

Turkcell Group took key steps in the first quarter. As you know, the General Assembly outstanding for the past five years, was held. And accordingly, we distributed a dividend of TRY1.78 per share. This amounts to a total of TRY3.9 billion. We have already a dividend policy in place and we will be distributing the dividend subject to the board approved and General Assembly approval as indicated in our website, and no changes according to that.

Moving on to the next slide where we will be discussing the overview of our business lines as Turkcell Group. Before continuing of the numbers, we would like to elaborate on our new approach to the way we conduct, manage and report our business. In the one month since my appointment, we have had time to evaluate group strategic priorities and have taken decisions that reflect our strategy as operating a leading integrated communications and technology services provider. Accordingly, we are focusing on our telecommunication businesses under two major business units, namely Turkcell Turkey and Turkcell International. Our other businesses, which comprise of subsidiaries comprising of non-telecom investments, primarily the betting businesses in Turkey and Azerbaijan.

Turkcell Turkey, comprising of all our telecom operations in Turkey, recorded a 9.5% topline growth and an 8% EBITDA growth, mainly driven by strong mobile and fixed broadband demand. Net income remarkably ramped up to 39.9% due to the foreign currency gain of Turkcell Turkey thanks to our positive foreign currency position.

Turkcell International revenues contracted by 38%, in Turkish lira terms mainly from significant currency devaluation due to political instability and a challenging marketing environment in Ukraine, where the upper retail price adjustments remain limited due to competitive market environments. Net loss of Turkcell International was at TRY656 million due to factors we had mentioned earlier.

Lastly, the performance of our other operations was also negatively impacted by the 34% currency depreciation in manat in Azerbaijan during the quarter.

Moving on to the revenue breakdown of Turkcell Group, as you can see here, within the context of our new strategic approach, we have set a new structure reflecting the way we run our businesses. Accordingly, we will be reporting our Turkcell Turkey business under three segments, consumer, corporate and wholesale. Our aim is to extend our approach and convert services already exercised for the corporate segment to the consumer segment. We will advance customer loyalty and our competitive strength with our converged offers targeting sustainable growth through further operational efficiency.

Consumer business in the telecommunications market faced slightly increased competition for the quarter. Regardless, the consumer segment, the key contributor to our overall business, grew 9.9% year-on-year to TRY2.1 billion fueled by continued growth momentum in mobile and fixed broadband with both growing over 40% range.

On the corporate front, on which we foresee a great potential, a number of factors have nonetheless collectively curbed growth momentum for the quarter. Yet our corporate segment posted a strong growth performance of 9% year-on-year, mainly due to strong value propositions. Our wholesale business in line with our expectations has remained a business enabler and the leverage point for our consumer and corporate segments.

Our International business was mainly impacted by significant currency depreciation, which we will elaborate in the next pages and next slides.

I would like to share with you a couple of solid operational metrics in Turkey. On the mobile side, our postpaid subscribers continue to expand by 313,000 quarterly additions to 15.5 million subscribers. Total mobile subscriber base declined by 370,000, mainly due to losses from price-sensitive prepaid customers.

Meanwhile, our fiber and ADSL customers rose by 41,000 and 39,000 quarter-on-quarter respectively, supported by our continued investment in our coverage and improved take-up rate by 2.2 percentage points, reaching 38% in fiber compasses. In this segment, one out of two every fiber connected homes are Turkcell Superonline customers.

Last but not least, Turkcell TV+ user penetration has reached almost 100,000 within just six months of its launch, which is a promising growth momentum. With the mobile subscriber base, this number is 170,000 already.

Mobile blended ARPU improved by 8% helped by a positive subscriber mix and continued pickup in data usage while fixed residential ARPU remained flat at TRY47.

Moving to consumer and corporate segments as an overall picture, I will briefly mention the performance of the key revenue drivers. Voice revenues, which are representing 54% of our total segment revenues in Turkcell Turkey, decreased 4% in the first quarter, reflecting the competitive pricing environment. The key growth driver, data, accounting for 31% of segment revenue has accelerated its growth base, posted a 46% year-on-year growth on the rise in smartphone penetration rates from 32% to 42% over 12 months. Higher user numbers and increased consumption also helped this happen.

Our smartphone penetration target for the year end is around 50%. 1% in service revenues is actually a combination of 26% growth in mobile and fixed service revenues compensating with a 24% decline in SMS revenues, demonstrating that we have a balanced product portfolio taking care of declining and growing businesses.

In light of the innovative additions to our service offerings and a more dedicated approach, we aim to increase our related revenues moving forward. We upgraded our instant messaging service, which is called BiP, which is Turkey's first all-access instant messaging platform providing an enriched instant messaging experience with advanced qualifications which has reached 0.5 million subscribers active in less than a month and also 1 million downloads. Our machine-to-machine solutions, data center and cloud services supported by the largest sales team and excellent call center services in the industry sustained our mobile services leadership while strengthening our fixed services growth momentum.

A little bit notes in the next slide about Turkcell International operations in Ukraine and Belarus. While the political macroeconomic instability in Ukraine since early 2014 prevails, there have been recent signs of improvement on this space. Our mobile business Astelit, has remained solid in local currency terms with an 18% increase in revenues and for the first three years Astelit has posted a better topline performance relative to its peers and an increased market share to 17%, a 4 percentage point increase.

Hryvnia this quarter depreciated 49% while Belarusian ruble depreciated 24% against the US dollar, which resulted in significant foreign currency losses, as we have indicated in the previous presentation slides.

In February, Astelit won the most efficient frequency band in terms of our investment and provisional high-quality services at the 3G license standard. The Company has already started to invest in the 3G network and our plan to launch 3G service this summer is a proof of commitment to Ukraine and the belief in the potential of the country.

In Belarus, our subsidiary BeST's performance was negatively impacted by the challenging macroeconomic environment and highly competitive mobile market. Our strategy is to become either number one or number two in every market we operate. At the current, we are not at this level in Belarus. We are exploring our strategic options in terms of reaching to this level either organically, inorganically or other potentials.

Thank you. And now I will hand over to our Executive Vice President and Chief Financial Officer, Murat Erden, for the financial review. Murat?

Thank you very much, Kaan. Good morning, good afternoon everyone. In the first quarter, Group revenues rose 4.3% year-on-year to TRY3 billion with sustained growth momentum in Turkcell Turkey. Consolidated EBITDA rose by 4.5% to TRY927 million year-on-year while the margin was flat. The decreasing selling and marketing expenses as well as administrative expenses were offset by increased direct cost of revenues.

Now I am moving onto Page number 12. Group net income was recorded as TRY141 million in the first quarter of 2015. The dollar-hryvnia exchange rate increased by 49% and the Belarusian-ruble-dollar exchange rate increased by 24% during this quarter, and as we recorded in total, TRY700 million translation loss at Group level stemming from our foreign currency denominated net liabilities.

For the first quarter of 2015, the financials of our Belarus subsidiary will no longer be restated to compensate for high inflation, which will be impact the monetary gain or loss for this and future periods.

I will now talk about our balance sheet and cash flow items on the final slide. As of the end of March 2015, our net cash position was TRY4 billion. Our consolidated debt is at TRY4.1 billion. The debt balance of our Ukrainian operations was TRY2.2 billion and debt of our Belarus operation was TRY1.8 billion. During this quarter, the major cash outflow items include capital expenditure of TRY755 million and free currency usage payments in the amount of TRY495 million. Of the total CapEx figure, TRY344 million was related to Turkcell Turkey and TRY408 million to Turkcell International.

This brings our introductory presentation to the end. Thank you very much Nihat.

Thank you Murat. Jeff, we are all done. Right now, please start the Q&A session. We are ready to respond to questions. Thank you.

(Operator Instructions). Alex Kazbegi, Renaissance Capital.

Yes, good afternoon. Two questions from me please. One, on the new structure if you wish, sort of, say, the corporate, the residential and so on, should we expect any additional sort of say upside from this restructuring of the business lines? And where do you see most of it coming? Is it on the cost side, do you see some synergies, or do you additional revenues generated through this? And if you can just even sort of say broadly but quantify those potential upsides would be great.

And the second question is mostly on the so to say licenses side. Could you, A, update us maybe on the situation in Turkey, with the 4G and now potentially discussing the 5G waiting, for the 5G so to say technology to come in, what does that entail and how do you read that, if you wish?

And the second would be on the Ukraine, where you've said you're already planning to launch the network in the Midsummer. I was just wondering again how did you fund the capital expenditure and the purchase? Have you agreed with your partner in the Ukraine to split that? Is it an equity injection from Turkcell's side, or is it locally funded through the local debt? What's sort of the funding side of your additional investments for this year in Ukraine, both on the CapEx and purely on the license side? Thank you very much.

Thank you very much. Let me start answering your first question. The new structure, what is it for? I think I would like to answer it in that way. Our new converged communications and technology services operation really focuses on meeting customer expectations and demand in a way that we have not done it before. So, our business is around voice, both fixed and mobile, and data, both fixed and mobile for consumer business and for corporate businesses will be there to be offered to our customers with much more relevancy as well as specific vertical solutions. So, we do expect to be more relevant to our customer base. We do expect to enrich our services entering into the quarter book play solutions around TV, music, entertainment, both for fixed and mobile voice and data services. Same thing is true on the corporate segment, where we will be bringing our cloud data center hosting as well as our call center services to our corporate customer base. So, we expect actually a positive impact on our revenues as well as, as we align our resources internally, we would like to see additional efficiencies and synergies in the way we conduct our business.

Moving onto your second question about the update on the 4G tender, as Turkcell, we are ready and prepared for the 4G tender that is scheduled for the end of May. And we will be the first company to take the 4G technology, if that tender happens in place, as fast as possible with the biggest and fastest capacity available. So we stand firm on that front. We are following the discussions in the regulatory bodies about how and when to conduct the tender, and I think time will tell how that will proceed.

With regard to Ukraine, we are very glad that we actually acquired the most efficient frequency bands in the Ukraine on 3G for a total of $143 million. And Murat, please help me in terms of stating how we funded the acquisition of the licenses.

Primarily, the license has been funded through a loan from the mother company Turkcell to the Astelit for the time being, but the CapEx (technical difficulty) there are alternatives. The alternative one is we are discussing with the local shareholders about funding the Company on an equity basis. The second is expanding further credit limits to the company itself with the shareholder loans or shareholder guarantees.

Regarding your question, the local sources or the limits in the country itself have not improved yet, so I think there's going to be limited resources from the local market. But we have an additional resource between (technical difficulty) our two vendors can extend vendor financings through the rollout in 2015 and 2016. Thank you.

Just to follow up on two things please. So, on the Ukraine, you're still awaiting confirmation of your local partner will actually contribute some equity. Is that correct understanding and do you have hopes that they're going to happen?

This is matter that we are discussing. This is within our agenda, so I cannot further disclose any detail. But it is on the agenda. Thank you.

Okay. And sorry, to follow up again, too, when you mentioned the positive impact on the revenues as well as the cost side, I understand those are not in the guidance. So presumably those you would expect to come through mostly in 2016 and the years after. Is that correct?

This is my Turkey day. So we are working (multiple speakers) I think we will provide more clarity to you on the second quarter, and we will get back to you on that one. Thank you for asking.

Wonderful. Thank you very much.

Koray Pamir, Deutsche Bank Istanbul.

Thank you very much for your presentation. One question about your smartphone penetration targets. If I understood correctly, you are targeting around 50% by the end of 2015. To my knowledge, the number is around 42% by the end of the first quarter.

My question is regarding if you can provide any color on the networking capital progression relating to the funding of smartphone bundles, and eventually any diagnosis that you can put that on networking capital or sales by the end of the year. Thank you.

Thank you Koray. In the last 12 months, we have seen our smartphone penetration rates move from 32% to 42%. And we expect this rate actually to move to 50% by the end of the year. This is actually a very healthy sign of also our potential growth in the mobile broadband services.

Naturally, the impact of the credit card regulations in Turkey has made an impact in customer buying habits when it comes to a higher ticket item like a smartphone over an extended period of time. We see this as a positive competitive advantage for Turkcell which we can offer these longer-term installment base offers to our customers. And naturally, this also has an impact on our working capital requirements. So, this is a well calculated position that we take where we are not taking a dilutive stance on the return of cash expectations which we have on our balance sheet.

I would like to also ask Murat to add his perspective how he sees this working capital requirements moving forward by the end of the year.

Hi, Koray, again. You know, debt levels (technical difficulty) or question that has been raised by the year end as well. Let me repeat what we have stated in the last quarter, is our revenue going to be seeing the balancing or the increase on working capital usage? As we are approaching to a above 50% penetration, I believe, in 2016, we might be settling the use of additional working capital. But for the time being, there are a number of factors who can affect the working capital usage, namely the number of handsets, the price of the handsets. And in addition to that one, it is the interest rate in the market and their bad debt ratios in the market as well. So thank you very much.

Thank you.

Ranjan Sharma, JPMorgan.

Thank you. It's Ranjan Sharma from JPMorgan. Before I ask my questions, let me congratulate you, Mr. Kaan, and welcome you on board.

Now to my questions. Firstly, can you please share your key objectives and areas of focus? And secondly, regarding the transformation of Turkcell as an integrated operator, when can you start targeting customers with converged services? And also do you envision any technological or regulatory hurdles for this process? Thank you.

Thank you very much. Over the last 20 years, Turkcell has always been bringing first to the market. Our first CEO, Cuneyt Turktan, was the person who built our infrastructure which I think is a very strong basis for today's operation. Later on, [Yulaev Ferve], our second CEO, really brought the brand into the place and made Turkcell a landmark. And Shreya based contributions as making Turkcell a technology oriented company also added a lot to our capabilities.

In the future looking forward, our team will focus on a converged and integrated telecommunications and technology services operation centered around our customer and customer focus. So, I think this is the real impact that we are going to be showing with more enriched and more relevant services to both our consumer and corporate business segments.

With regard to how we can bring these things together, I think we are very well equipped since we have already done this transformation in the corporate segment. We will easily make the same transformation through combining our assets in Turkcell Superonline and our consumer business segment in Turkcell itself. Thank you.

Just one quick follow-up. On the regulatory side, do you have any concerns of introducing -- kind of convert services from, say, regulatory hurdles around single player -- sorry, single bill solutions? Because there might be some concerns in transferring customer information from one entity to another entity. Is that something for concern for Turkcell?

We do not think this is a major concern in the Turkish marketplace, since already one of the key competitors we have in this market, which has already introduced a similar type of converged operations. So as we introduce our new model, I think this will only confirm the position that we have taken is the right one, which will match the similar type of capabilities in the marketplace.

With regard to the single bill, I think we have still some room to improve in that particular area, and I think that will be an area of focus for us talking with the regulatory bodies here.

Thank you. That's very helpful.

[Mamet Aguse, [Yappi Credit]

Good afternoon. Thank you for the presentation. I have two questions please. First of all, if there's any delay in 4G tender, how do you think the existing capacities under 3G will fare considering the robust data growth? What's the current capacity utilization under 3G and how long can you sustain under 3G?

And secondly, as a commerce player, what can you do to better? Which area did you specify you can do better than the existing converged players?

So, answering to your first question about the 4G tendering time, as I mentioned before, we are ready for launching 4G. But in case this has released, we have a no-risk policy in terms of our customer service qualities. We have made various simulations which shows that actually there are some pockets of high dense utilizations in our network. However, we can see that, at least for another 12 to 18 months, we will have no major capacity issues serving our customers with the enriched experiences.

With regard to comparison to the competition in terms of the areas as a converged player, how we can make a differentiation, I think it's really important to state two things. One, on the corporate front, I think our ability to bring combined value with call centers, cloud services, fixed and mobile offers to the corporate base have already shown the important success. And on the consumer front, I think it's really important that new solutions around TV+ solutions like BiP, which is our instant messaging, showing very strong pickup, and we believe that the fact that one out of two every fiber connection in the country is our customer I think positions us very well in terms of creating additional value.

Okay, thank you.

(Operator Instructions). Roman Aberazoff, UBS.

Thank you for taking my question. It's Roman Aberazoff from UBS actually. But my question relates to the country portfolio and the way you think about that. In your presentation, you mentioned that you may consider some inorganic options that relate to Belarus. But then I think going beyond that, I was wondering what you see the most likely change is in terms of the portfolio reshuffling.

And also on a related topic, a question regarding Splinter and TeliaSonera, your partner in central Asia. I think TeliaSonera's view on the potential region are changing, and perhaps the operations there are now viewed as somewhat less strategic than they used to be some time ago. So in relation to that, do you perhaps see potential changes in shareholder compensation when it comes to Splinter at all. Thank you.

I think you asked a question and almost answered it yourself. So all these things are on our radar in terms of exploring our options. We do see an opportunity for Turkcell to export the success model that we have built in Turkey in the region. We also see actually even a global opportunity to take some of our products, such as BiP to the global marketplace. So all these things will be in our strategic portfolio. And again, I would be more comfortable updating you in our next quarterly update looking into these different areas. Thank you.

Okay. So it sounds like you expect things to sort of move quite quickly if you're expecting an update at the next quarter's results. Should we read anything into that?

No. I think that would be a little bit over-reading what I said. I think we do have an intention to look into the regional opportunities, and I think we will reflect our longer-term vision in our next quarterly update and I can commit to that part of my statement.

Thank you very much.

Alper Ozdemir, OYAK Securities.

Hello. Could you update us about your Germany operations, your cooperation with Deutsche Telekom? And secondly, as we are now going through monetary gain in your income statement from Belarus, what are the impacts of discontinued inflation accounting in Belarus can you see your financials going forward? Thank you.

So first of all, I would like to ask our Chief Marketing Officer, Burak, to answer the question with regard to our Germany operations.

As you may know, we have made a business model change in Germany where we are currently like we have a lighter business partnership model with our partner in Germany right now, so we put our brands on the product. But the whole operation is being run by Deutsche Telekom at the moment. So, this is how we go forward with the operations.

And this has actually I think converted the picture from a lossmaking situation to actually a slight profit situation for us, which is on the right side.

Smaller, lighter, but profitable operation.

Now, with regard to the Belarusian situation on monetary again, maybe, Murat, you would like to add something to that.

Yes. In last year in the same quarter we have recorded TRY64 million on monetary gain. And it will be also guidance for you. Last year the total number that we have recorded on inflationary accounting treatment, TRY205 million, has been recorded as a monetary gain in the last year. Thank you.

Hanzade Kilickiran, Barclays.

Thank you. Actually my question is very simple. Maybe you mentioned about this but would you please remind me again your CapEx for 2015? I remember that there was an increase this year, about 20% of the sales. Is this still sustainable? And is it possible to give a breakdown of this CapEx as the Ukraine and Turkey? And if it's reasonable to assume CapEx going to normalize in 2016 to over 16% of the sales? Thank you.

I would like to reiterate our guidance before, which would be 20% of our revenue this year totaling TRY2.5 billion. We expect TRY2 billion of that in Turkey and TRY0.5 billion in our international operations. Irregardless of what basically our tendering process will be, we will stick to this guidance with setting our priorities in the right place as we move on.

Our objective moving onward is I don't want to mislead you with a precise figure, but of course we would like to take this 20% to a more closer benchmark with our peers. But let's not forget that we are in a period where we are building a new network on 4G, so I would like to be cautious on that side.

Thank you.

(Operator Instructions). Vera Sutedja, Erste Bank.

Good afternoon. My question is about Ukraine. How (technical difficulty) impairment revenue in Ukraine considering it was in the first quarter already at such a steep devaluation? So is it more likely than not in the near future that we will see impairment in Ukraine? And as far as I know, you have a dividend policy based on payout ratio on earnings. So this impairment would lead into -- would affect the earnings and therefore dividend as well? Do I understand that correctly? Thank you.

Thank you. Before passing the word to Murat to inform you about the impairment test we do in Ukraine, I would like to reiterate our commitment to the Ukrainian market. This is of course a market in hardship, but on the other side, with a population of 40 million and more than 10 million subscribers, it represents a huge opportunity for us. Murat, could you tell us about the impairment situation that Vera has asked in Ukraine?

Yes. Bottom-line answer is there won't be any impairments recorded and we don't anticipate and we've made the test as follows. The longleaf assets so far steady tested by end of this quarter, and the independent appraisals was opting to determine the recoverable amount of Astelit. And the recoverable amounts based on the values and use of cash generating units was higher than the carrying amount of the cash generating units of Astelit, no impairment was recognized.

Thank you.

Do we have any other questions please?

There are no further questions in the queue at this time sir.

In this case, thank you to all participants. On behalf of the management team, I like to thank you for participation to all. And also please remember that we will have an audio recording, and please also feel free to call the IR team if you have any follow-up questions. And have a good day and have a good night.

Thank you very much. It's been a great pleasure to have the chance to talk to you. I'm looking forward to our next quarter. In between now and then, Nihat and also myself will be available for any time you want to have a question or a conversation. Looking forward to it. Thank you.

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