Turkcell Iletisim Hizmetleri AS (TKC) 2015 Q3 法說會逐字稿

Good day and welcome to the third quarter 2015 results announcement call. 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 to Mr. Nihat Narin, Director of Investor Relations. Please go ahead, sir.

Thank you, Keith. Good morning and good afternoon to everybody, and thank you for your participation.

I would like to say welcome to our call on behalf of the management team here, and we will start today with presentation by our CEO, Kaan Terzioglu, followed by presentation by CFO, Murat Erden, and then we will go have a Q&A session.

Just before we start the presentation, I would like to remind you of the brief legal notice that present on the page 2.

So, thanks for your participation, again. And please, Kaan.

Thank you, Nihat. Good morning and good afternoon. Welcome to Turkcell results call for the quarter ended September 30, 2015.

We have a full house here today. I'm joined by our executive team, including our Chief Marketing Officer, Burak Sevilengul; Chief Financial Officer, Murat Erden; Chief Technology Officer, Ilker Kuruoz; Chief Legal and Regulation Officer, Serhat Demir; Chief Strategy Officer, Ilter Terzioglu; and Chief Business Support Officer, Seyfettin Saglam.

We have taken some major steps in the first nine months of the year, and before getting into the numbers I would like to highlight our continued execution during the quarter, which underlines the harmonious relation between the Board and the management team.

First of all, I am proud to say that we have acquired 47% of the technology-agnostic spectrum at the 4.5G auction, and today we have signed the agreement for the authorization from the regulatory body. I will elaborate on this later on, which actually marks a very important step for the next 13 years of our Company.

Similar to Ukrainian operation Astelit, we have restructured our operation in Belarus, BeST, debt by converting its total outstanding debt to a subordinated loan. Therefore, going forward, our consolidated financials will not be exposed to any foreign currency risk arising from our international subsidiaries in Ukraine and Belarus.

We have applied to the regulator to establish a consumer finance company to optimize our balance sheet through more efficient use of our working capital.

Turkcell in the meantime became the first Turkish company to receive three investment-grade ratings from the world's leading credit rating agencies.

In the meantime, Turkcell completed its $500 million of eurobond issuance on October 15, oversubscribed by almost four times. And this international eurobond was the first and only issuance made by a Turkish company from the [real] sector in 2015. The yield realized at 5.95%, despite a challenging macro environment. This also confirms strong international investor confidence in both Turkey and Turkcell.

Reflecting our strategic priority of improved balance sheet structure to increase our leverage, in addition to the bond issuance we also signed loan agreements with international banks, carrying total funds raised to $2.9 billion.

In short, we have taken steps to optimize our structure while transforming from a mobile to a converged services company and laying the groundwork for high growth and profitability. And so far, we continue to deliver on what we have promised to you in the last calls.

If you move to the next slide, I would like to now focus on the third quarter. The third quarter has been a robust, both operational and financial results perspective.

Group revenues rose 6.4%, to TRY3.4 billion, and EBITDA by 10.5% year on year, to TRY1.2 billion, both all-time highs.

Our EBITDA margin ramped up to 1.3 percentage points, to 34.5%, this quarter, underlining the strong operational performance of Turkcell Turkey and Astelit in Ukraine.

Net income was at TRY630 million, and pro forma net income, which means excluding non-recurring items, rose by 17.8% year on year, to TRY707 million.

For the first nine months, Turkcell Turkey revenues grow by 9.6% and Group revenues by 5.5%. Group EBITDA growth of 8.4% exceeded our estimate, with an EBITDA margin of 32.7%, while Turkcell Turkey registered an EBITDA margin of 32.6%.

The revenues of Turkcell Turkey, which account for 91% of Group revenues, rose by 9.9%, exceeding TRY3 billion for the first time. Turkcell Turkey's EBITDA ramped up by 12.6% year on year, to over TRY1 billion, with a margin of 34.5%, in line with the Group margin. And this is on the back of efficiency measures and our value-focused customer acquisition strategy paying back.

78.1% of Turkcell Turkey's revenues come from the consumer segment, which grew 10.9% year on year, to TRY2.4 billion, due to strong growth in broadband and services and less decline in loss from the expected levels. The corporate business, which generates 18.2% of Turkcell Turkey's revenues, posted 6.5% growth, while wholesale revenues increased 8.5% year on year.

Now, I will mention the performance of key revenue drivers for our business. The key growth driver, data, accounting for 32% of Turkcell Turkey, posted 34.2% year-on-year growth, on higher user number; increased smartphone penetration, of 49%; and increased consumption levels. The rise in both mobile and fixed broadband revenues remain strong.

Meanwhile, the decline in voice revenues slowed down compared to previous quarters, mainly due to our focus on restoring inflationary pricing in the market as well as reduction in the churn.

Service revenues, accounts for 6% of our business, were another key driver of Turkcell Turkey's overall growth, rising 40.3% year on year and compensating for the decline in SMS revenues.

All in all, data and services together generates 37% of our business, with 35% growth.

In line with our game plan, we continued to leverage our wide range of services and solutions, such as BiP, Turkcell Music, and Smart Storage.

Our new-generation instant messaging platform, BiP, with the new features of voice and video calls, reached 1.4 million downloads, including non-Turkcell customers, in 166 countries. Total of 41% of these downloads were non-Turkcell customers. We have active users in Germany and Northern Cyprus, and we will soon launch this service in Ukraine and Belarus. We confidently foresee BiP becoming a global product from this point on.

The most widely used personal Cloud service, Smart Storage, geared up to 1.3 million users, while Turkcell Music reached 1.6 million downloads this year.

I am delighted to mention that the leader position that Turkcell has enjoyed since its inception, based on its superior network in terms of coverage and quality, is now set to continue into the future. As I mentioned in my opening speech, we are now secured the spectrum for the next 13 years, and just like we have been the leader in 2G and subsequently in 3G, 4G will be in the same track.

We have acquired 47% of the total spectrum auctioned by the Turkish government, and we are best placed to provide the best service to our customers in this new year. We have become the market leader in terms of total spectrum holdings, and we will be the only operator to aggregate eight carriers and offer the high speed.

Moreover, the spectrum acquired by us is technology agnostic, and therefore ready for future advances as well as refarming capabilities, whereby no new auction is foreseen within the next 13 years.

As a separate note, we have obtained all remaining available frequencies in the 1,200-megahertz band, which allows us to be the only operator to meet the ever-rising demand for existing 3G services. At the auction, Turkcell's bidding strategy proved to be the most effective, and we paid the lowest price per megahertz per subscriber and the lowest price for the 800-megahertz band.

Significantly, we have secured a balanced spectrum distribution between 800 megahertz and 2,600 megahertz, for the best coverage and highest capacity, which will enable us to provide TV broadcasting for small screens.

In short, as demand for small-screen devices and data consumption inevitably rises, our consumers will be continuing to enjoying our growing benefits of our superior network.

Let's look into the operational performance. Turkcell Turkey's outstanding financial performance was backed by a solid operational result. We gained 271,000 customers, all through postpaid net additions of 278,000, and with the help of improved customer churn in the prepaid segments. Postpaid customers now constitute 47.1% of the total, improving the subscriber mix significantly.

Our ARPU reached the highest level in the sector, up by 9.7%, to TRY26.1, reflecting a larger postpaid base; our upsell strategy; and focus on high-value customer groups' higher data usage, which actually use the 1.6 gigabytes per user per month; and mobile services revenue growth. The inflationary adjustments to tariffs have also had a positive impact on ARPU growth.

On the fixed side, our fiber and ADSL customers in total increased by 74,000 in the quarter, exceeding 1.4 million, supported by a superior network and focus on customer services. We continue to be the preferred operator and added 34,000 fiber and 32,000 TV+ customers on IPTV platform, while fixed residential ARPU rose slightly, to TRY49.1.

Our TV platform, Turkcell TV, has remained the key component of our convergence strategy. Continuing its solid user penetration growth, Turkcell's IPTV platform reached 171,000 customers on 32,000 quarterly additions, while our triple-play ratio in total fiber residential subscribers rose by three percentage points quarter on quarter, to 19%.

Overall, including mobile and web users, TV subscriptions rose to 342,000, advancing toward our year-end target of 400,000.

Moving to the Turkcell International results, Turkcell International revenues, constituting 7% of our Group revenues, were at TRY235 million, impacted by the devaluation, while the EBITDA margin rose 5.3 percentage points, to 29.6 percentage points, year on year.

Astelit, our operation in Ukraine, the major component of our international business, continued its growth despite prevailing challenges, including halted operations in Crimea. With 3.3 percentage points improvement in the EBITDA margin, it's grew to 34.9% EBITDA margin this quarter.

Astelit has the fastest 3G network in Ukraine, with triple-carrier technology, and it's the highest smartphone penetration, of 45%, which will enable Astelit to increase its contribution to the Group, going forward.

In Belarus, the local currency shed a further 15% against the US dollar during the quarter. In local currency terms, revenue rose by 16.7% year on year, with continued improvement in EBITDA.

Our operation in Northern Cyprus recorded TRY33 million revenue in the third quarter, with a 6.7% year-on-year decline due to regulatory changes regarding the maximum price ceiling and termination rates, while the EBITDA margin was at 38%.

Now, I would like to hand over to Murat for the financial review before I share the outlook for the remaining of the year. Murat?

Thank you, Kaan. Good morning, good afternoon.

In the third quarter, Group revenues [rose] 6.4% year on year, to TRY3.4 billion, with a strong operational performance from [Turkcell Turkey] on the back of solid data and mobile services growth.

Consolidated EBITDA rose 10.5%, to TRY1.2 billion, year on year. Better operational expense management, our customer acquisition strategy, higher value generation, and synergies created with our newly integrated structures led to a stronger rise in EBITDA.

Meanwhile, our EBITDA margin reached 34.5%. This was mainly due to a decline as a percentage of revenues in selling and marketing expenses, of 1.6 percentage points, and fall in direct cost of revenues, of 0.3 percentage points. This more than offset the rising administrative expenses of 0.6 percentage points.

Let me move on to page 16 (sic - see slide 15, 15). Net income excluding non-recurring items increased by 17.8% compared to last year, to TRY707 million. Reported Group net income was TRY630 million.

Despite the increase in EBIT by TRY86 million, net income was decreased mainly due to: lower interest income; higher translation loss; (inaudible) inflation accounting in Belarus; and finally, more income was recognized from minority interests of Astelit, with the acquisition of the Astelit remaining shares in the third quarter.

As of end of third quarter, we maintain our net cash position at TRY436 million.

Our consolidated debt was TRY3.5 billion, decreased from TRY4 billion a quarter ago. The decline in debt balance was mainly driven by the payments made to financial institutions in relation to Astelit's debt restructuring.

The debt balance of Astelit was TRY515 million, and the BeST had a debt balance of only TRY8 million, and both debt amounts are denominated in local currency.

Capital expenditures including non-operational items amounted to TRY634 million in the third quarter of 2015, of which TRY506 million was related to Turkcell Turkey and TRY126 million to Turkcell International. In the first nine months of the year, operational capital expenditures at the Group level amounted to TRY1,719 million and stood at 18% of Group revenues.

Now, moving on page 18 (sic - see slide 17, 17). Turkcell become the first Turkish corporate to receive three investment-grade ratings from world's leading credit rating agencies. These upgrades reflect the strong market position of Turkcell, improving corporate governance, a strong financial profile, and clear long-term financial policy targets. Our aim is to sustain our investment-grade level, going forward.

To carry out our infrastructure investments, evaluate possible [new] investment opportunities, and address refinancing needs, we raised close to $2.9 billion in funds within a short period of two months. Our strategy was to raise funding of extended available the period at a reasonable and optimum cost with maximum maturity. We reached all three of these goals.

Of this $2.9 billion, $500 million was raised through a recently completed eurobond sale, which was almost four times oversubscribed. [This] successful sale, which came at a particularly volatile time for emerging economies, is the first and only eurobond sale to be held by a Turkish company from the non-financial sector in the international markets in 2015.

Secondly, we signed a club loan agreement for an amount of $500 million and EUR445 million.

Additionally, we signed two separate loan deals with China Development Bank, for EUR500 million and EUR750 million.

The average maturity of all those total funds we raised is around six years, with an interest rate of around 3.4%.

Let me hand over to Kaan for the final remarks and our final guidance.

Thank you very much, Murat.

So, looking to the first nine months of the year, our year-to-date results, our execution in the last six months, and actually the momentum we have seen in Q3, I would like to provide a revised guidance in a more precise manner.

Our actions for optimizing our organizational structure, cost management, and improved accountability has resulted in a better EBITDA in Q3. This actually allows us to give you a precise guidance on Q4 in a better way.

Therefore, we anticipate an EBITDA margin of 32% to 32.5%, up from the 31% to 32% range, for 2015.

Further, we envisage full-year revenue growth of around 10% for Turkcell Turkey and around 6% for Turkcell Group.

In addition, our operational CapEx over sales for the first nine months realized at 18%. Considering the deployment of 4.5G, we expect to meet our year-end guidance of 20% as stated before.

We would like to remind you that the Turkcell executive team will be hosting a Capital Markets Day in London on November 9, where we will provide further insights into the three-year outlook and further discuss our future growth strategies.

This brings us to the end of our presentation today. Thank you very much for being us here today, and we can move to the Q&A session.

Keith, please open the Q&A session. [Please elaborate] that we can have two questions [in order], and then of course we can (inaudible).

Certainly, sir. (Operator Instructions) Koray Pamir.

Two quick questions. First one, smartphone penetration level. It continues to grow strong, 49% from what I can see in the press release. Do you expect this trend to be sustained at similar levels? Or, should we expect some kind of moderation in the pace of growth at the smartphone level?

And secondly, regarding composition of subscriber mix, the postpaid, [it actually] continues to be pretty much intact, while the prepaid has actually fared quite, I would say, resilient in the quarter. Should we expect that kind of resilience in the prepaid segment, going forward, as well?

Let me first answer your first question. We do expect the penetration levels of smartphones to increase. We expect actually this year to close above 50%. Taking into consideration the 4.5G deployments, I would expect that higher levels of refreshing of the smartphones will happen over the time.

So, I think you can assume that the pace of this change will continue for the foreseeable future.

With regard to the subscriber mix, we are focusing very strongly on high-quality, postpaid customers. Therefore, you will see us actually executing on this trend, as well, in Q4.

Burak, anything you would like to add?

Thank you.

Dalibor Vavruska, Citigroup.

Just a quick question. Obviously, the nature of the telecom markets is changing. And I'm just wondering, you just acquired some very valuable spectrum. Are there any other assets that you think that you're currently missing that will be needed for your medium-term strategy, if you can talk about this?

And how do you --? If so, would you consider some acquisitions or major investments? I think we know roughly you're talking about fiber. But just in general, I just wanted to get a picture of where you think the strategic priorities are and domestically whether you think that there are some assets that you are potentially missing?

First of all, we have acquired, as you said, a significant asset in terms of a balanced portfolio of spectrum in Turkey. If you look, actually, we own 47% of the subscriber base, and we actually acquired 47% of the spectrum at 47% of the total tender value. So, I think this will be an important sustainable competitive advantage for us for the next 13 years.

Now, looking to the capability that we built by acquiring this spectrum in terms of speed and capacity, which will position us the best TV broadcaster for the small screens. Naturally, in the new age of telecommunications, TV business and, therefore, content will be critical. We believe we are very well positioned now to be the delivery channel and distribution channel of the content that will be available in the marketplace.

So, this puts us in a little bit of a (inaudible) in terms of looking for extensive acquisitions on the content side. We will be looking for partnerships in this area in a more aggressive manner.

In terms of growth, we will be looking, of course, for organic growth but when opportunities arise, we will also be looking for inorganic acquisitions.

Now, we will have a very strict and disciplined approach for this. There are three basic criterias that we are looking for in organic growth opportunities. And this is practically in order to replicate the successful business model that we have in Turkey, we will be looking to surrounding markets with cultural and geographical proximity, with assets who has a balanced portfolio of mobile and fixed infrastructure, and with business models which is accretive to our EBITDA.

If we see opportunities that are fulfilling these three criteria, we will be looking for concluding on those acquisitions, moving forward. And this is in line with what we have explained actually in previous quarters.

Okay. Thank you.

Ranjan Sharma, J.P. Morgan.

Two quick questions from my side. If you can share, firstly, any strategy on how your 4G services are going to be priced once they are launched?

And secondly, on the smartphones in the country, if you can share what percent of your smartphones are compliant with LTE services and also [LTE add one] services?

Let me start with the second question. [The] overall compatibility is around 15% of the current [terminals fleet]. So, you can expect actually a high increase of the churn of the telephone fleet in this market. And we will be actively bringing (inaudible) to the market, which will accelerate these changes, including right price points terminals as we move on.

With regard to the 4G pricing, we expect to bring new services, enrich the services portfolio we have, through services just like BiP, which is our instant messaging platform with voice/video calling capabilities; with smart Cloud storage systems for the consumers; as well as music and TV+ services.

We expect to monetize our 4G market through enrichment of the services and higher consumption rates that we expect to see. We do not expect to make price increases just because of 4G deployment, but we will continue on our disciplined approach of putting inflationary pricing in our services portfolio.

Thank you.

Murat, anything you would like to add?

Just a small addition. On the smartphone side, the number that Kaan mentioned about the existing installed base in our network is 15%. But if you look at the new phone sales or the new sales in the stores, more than 90% of the new smartphones sold in the stores are 4G. So, this shows us a quick ramp-up in terms of adoption.

Atinc Ozkan, Credit Suisse.

Two questions, please. The first one is regarding your fiber backbone. Given that in 4G, I presume, that the consumption is usually triple of what you have in 3G, do you believe the current capacity of your fiber backbone is sufficient to carry the surge in data volumes following your LTE launch? If not, are you considering any further investments to expand your fiber footprints?

And my second question is also related to your smartphone [pool]. I notice that you did not really touch base on your plans to launch a consumer finance company. Is this still part of your plans? And if it is, how soon do you expect this is going to change your handset distribution model?

Atinc, first of all, as you know, we have currently 95% coverage on our transmission on our fiber backbone. So, we are well positioned on that. But the need for larger and more widespread fiber backbone access, and especially deployment of fiber in the cities, will be an important element.

It is important to know that the regulatory holiday for fiber access market were given to [Turkcell Telecom] will be coming to an end on 2016. And we will be looking for the next regulation, which will be based on efficient operator cost model. And this, I think, will meet the necessary requirements from the perspective of accessing the fiber infrastructure in the country.

Having said that, the fiber infrastructure in the country overall has opportunities for improvement, as well.

So, I think this would explain our position with regard to the fiber assets.

We see this market still as an important investment area for us. As you know, the revenue streams we have from fiber investments has three-fold advantage for us: from a wholesale business perspective, for residential FTTH business perspective, as well as being our transmission cost reduction capabilities.

So, we will continue to do carefully selected investments on the fiber deployments in the country, as we will be hoping for getting better access to the fiber network in terms of shared usage.

With regard to our consumer finance company, we are executing as discussed previously on our plan. We have got our license. We are now looking forward to getting our operating license. And Murat, if you can give us the update on go-live date for that, that would be great.

We are working on our plan to launch a consumer finance company beginning early 2016, and we are on the licensing period. And as soon as we got that one, then we're going to be deploying the consumer finance in all our sales points.

Thank you for the detailed answer but, just as a follow-up on the consumer finance company, you did not answer the second part of my question. How soon do you expect this to change your handset distribution model? What I mean here is, obviously the handsets receivables has inflated your trade receivables which, in turn, is destroying your working capital so far.

Starting with the launch of the consumer finance, we will be not using the working capital. And the consumer finance company has its own resources. We have a designated capital for that company, and the company is going to be borrowing on its own. And that's why the working capital need for the Group is going to be diminishing over the years.

Okay.

Ivan Kim, VTB Capital.

Two questions from my side, please. Just a follow-up on the question on the consumer finance company. So, can you measure by how much the working capital needs will diminish, roughly? As a ballpark number, maybe?

And then, secondly, this year CapEx to sales is going to be 20%, but given the amount of spectrum that you acquired and probably have some other needs connecting base station to the fiber, et cetera. So, what kind of CapEx to sales do you foresee over 2016/2017? And again, I'm not asking for (inaudible), but just as a direction. Is it going to be significantly lower than this year? In line? Or maybe higher?

Murat, why don't you --?

Regarding the follow-up question on the consumer finance, we have the maturity for the outstanding handset terminals financing for up to three years. Given the outstanding [portfolio], which is going to be coming repaid over the next two years, you can anticipate that in the next two years the working capital is going to [recover]. And then, the new handset is going to be financed by the consumer finance (inaudible). So, overall, you can assume in a one year's average is the right assumption, and the total (inaudible) is going to be within the next two years.

Thank you, Murat. And with regard to the CapEx/sales ratio guidance, as we mentioned, this year you will see us around 20%. Next year is a year of 4.5G deployment. So, you may see a slight increase. But our guidance for next three years actually will be a convergence towards 16%-17% range on CapEx to sales ratio.

Thank you.

Hanzade Kilickiran, Barclays.

My question is regarding your leverage. When you talk about these inorganic growth opportunities and also your CapEx plans, is there a kind of leverage target in your mind? What is the maximum leverage you will try to reach during these opportunities in the CapEx [period]?

Our guidance on EBITDA to debt leverage is maximum 2.0, but we are heading actually for 1.5 as a guidance on that one.

This 2-times EBITDA includes a dividend payment? Or, it's only considering the CapEx and inorganic growth opportunities?

It includes everything. And as I mentioned, our guidance is 1.5. But if there will be acquisitions, our maximum target will be 2.0, from a temporary perspective.

All right. Thank you.

(Operator Instructions) Vyacheslav Degtyarev.

My question is on CapEx. We have seen a trend of upward revisions of investment programs in some of the emerging markets where local currencies have depreciated versus dollar and euro. Do you see same trend for Turkcell? And can you disclose the amount of CapEx of Turkcell Group which is denominated in the hard currency?

70% of our CapEx expenditures is in foreign currency. And as I mentioned, we are currently for the first nine months at 18% of revenues, in terms of the CapEx spending we have done, and this includes both fixed and mobile investments we have done.

Over the next six months, we will see 4G deployment in the country. So, you may see a slight increase with regard to the CapEx spending.

But overall, over the three years, we expect CapEx to revenue ratio to be in between 16%-17% range.

Okay. Thank you.

We have no further questions at this time, sir.

Okay. We have some questions from actually online. I would like to just also cover a couple of those. The first question is: Could you please give us year-end guidance regarding TV segment, both IPTV, web, and mobile numbers?

I will give you an overall target for that. We will be around 400,000 by the end of this year. And this is actually the target we set ourselves quite some time ago, and we are on track delivering that.

Second question: Could you give us an information regarding TV ARPU?

We are not at this stage disclosing this information. As the numbers grow and as we continue on acquisition of customers, we will be more precise on this.

Keith, I think you have no further questions on the line. Am I right?

There are no further questions on the telephones at this time, sir.

Well, I guess this is end of our session, and I would like to again thank you on behalf of the management team here. And please, welcome to make any follow-up question to the IR team or go and visit our web in case that you can listen the audio recording.

So, thanks for participation, and have a good night. Thank you.

Thank you very much. I'm looking forward to seeing you in London, November 9. Thank you.

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