Turkcell Iletisim Hizmetleri AS (TKC) 2015 Q4 法說會逐字稿

Good day and welcome to the fourth-quarter and full-year 2015 results conference call. At this time I'd like to turn the call over to Mr. Nihat Narin, Director of Investor Relations and Business Development. Please go ahead, Sir.

Thank you, Alex; and ladies and gentlemen, 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 a presentation by our CEO, Kaan Terzioglu, followed by presentation by CFO, Murat Erden; and then we will go into the Q&A session.

Just before we start the presentation, I would like to remind you of the brief legal notice. In this presentation we will make statements that are forward-looking about our future targets and expectations. These are based on our current views and assumptions, which may, of course, change in the future; and our actual results may be different.

So now I hand over to Mr. Kaan Terzioglu. Sir, please go ahead.

Thank you, Nihat. Good afternoon and good evening, everyone, and welcome to Turkcell's fourth-quarter and full-year 2015 results call. We have a full house here today. I am joined by our executive team, including our Chief Financial Officer, Murat Erden; Chief Marketing Officer, Burak Sevilengul; Chief Sales Officer, Murat Erkan; Chief Technology Officer, Ilker Kuruoz; Chief Legal and Regulation Officer, Serhat Demir; Strategy Officer, Ilter Terzioglu; and Chief Business Support Officer, Seyfettin Saglam.

The year 2015 ended up a strong quarter building up the momentum. We have closed the year with 9.5% growth in Turkcell Turkey and 6% growth in the Group overall, with Turkey 2.4% EBITDA margin and TRY2.1 billion net income. Q4 was extremely strong, with a revenue growth of 7.5%, EBITDA margin of 31.7%, and a net income of TRY584 million. I have provided some updates to you during the year, but before going into the details of the number, I would like to do a quick recap of 2015 in terms of the critical events.

As you know, we had a major year in terms of transforming our organization into a converged platform. We have combined two of our operating units, Turkcell as the mobile operator, and Superonline as the fixed operator into one operation with one management team, allowing us to create synergies around network as well as our channels organization, marketing, and sales teams.

We have followed the year with a strong performance on our 4.5G spectrum tender, where we have acquired the largest spectrum, with 47% of the available spectrum in the market. And over that spectrum we have concluded our tests, reaching up to 1.2 gigabit speeds last month. We have later on improved, as we have promised, our globally relevant services portfolio. Reflecting this strategy, we have launched a couple of digital services including BiP, which is our communication platform downloaded in more than 180 countries and more than 6 million users. We have also progressed with our disciplined mergers and acquisitions approach, where we acquired 100% of lifecell in Ukraine and also announced our intention to acquire the remaining stake in Fintur where we have already holding 41.45% stake.

This year also saw important developments in the way we managed our balance sheet. We have achieved three investment-grade ratings from three major international agencies. We have concluded on debt restructuring in Ukraine and Belarus. We have raised funds up to $2.9 billion; established our consumer finance company, which will improve our working capital; and as well as we have settled our ongoing disputes with Turk Telekom, clearing the ground for an effective and efficient way of managing our markets.

Let me go back to the financial highlights. 2015 has seen a robust performance, both operationally and in terms of financial results, where we have delivered on our guidance. Again, our Group revenues grew 6% to TRY12.8 billion, while we have recorded and EBITDA of TRY4.1 billion on 10.1% year-on-year growth. Both are record levels for the Company.

Our actions to optimize the organizational structure and focus on cost management resulted in 1.2% improvement on EBITDA margin after many years. Our pro forma net income rose by 18.3% year on year to TRY2.6 billion, while net income according to IFRS increased to TRY2.1 billion.

Moving on to the next page, I would like to also give you some highlights from our domestic operation in Turkcell Turkey. Turkcell Turkey was our main growth driver. The revenues of Turkcell Turkey, which account for 90% of our Group revenues, rose 9.5%. The EBITDA ramped up by 13% year on year to TRY3.8 billion, with a margin of 32.7%.

In Q4, EBITDA margin was up by 2.1 percentage points. This comes on the back of efficiency measures and our value-focused customer acquisition strategy, which has increased more takeover of valuable customers while decreasing the churn rate. Turkey's pro forma net income rose by 17.9% year on year to TRY2.3 billion, and net income according to IFRS increased to TRY2.5 billion.

Moving on to the solid growth numbers in terms of the operations, Turkcell Turkey accelerated during the year to double digits due to our value-focused customer acquisition strategy and restoring inflationary pricing. Overall this led to 9.5% annual growth, with a 1 percentage points rise in EBITDA margin.

The consumer segment, generating 80% of Turkcell Turkey, grew 10.2% year on year due to a strong growth in mobile and fixed broadband and services, reflecting ever-rising demand. Corporate business posted 6.5% growth, while wholesale revenues increased 9.4% this year.

I will now mention the performance of key revenue drivers. Data, generating 31% of our business in Turkey, continued to grow, rising 38.1% in 2015. Quarterly strong performance continued in data terms in both mobile and fixed broadband. The growth pace in mobile broadband came from the rise in smartphone penetration to 52% by the year-end, the increased number of users, and higher consumption of 1.7 gigabits per user.

In line with higher penetration of innovative services and key digital services, revenues rose 38.5% year on year. Although we have seen less than 50% contribution in Q4 on a yearly basis, voice revenues generated for the entire year 52% of the total. For the first time in Q4, voice revenues represented 49.9% of the total revenues. The decline in voice revenues slowed down compared to the previous year, mainly due to our focus on restoring inflationary pricing in the markets.

In 2015, in line with our new structure and strategic priorities, we redefined our target market as the total telecoms market. We are extremely happy and comfortable in terms of 45 point percent (sic) revenue share in terms of the progress of market shares, and this has seen an improvement over the last two years.

Going forward, in line with our convergence strategy, our focus will be on profitably increasing our market share to take the leading position. We believe we are best positioned to monetize convergence in Turkey. We are ready for a new year of convergence, and this will create a new opportunity for us.

We are number one in spectrum. We are number one in mobile subscriber base. We are number one in fiber market share. We are number one in customer care, as well as we are number one in postpaid customer penetration. We have already the highest quality mobile and fiber networks, and 4.G (sic - 4.5G) will widen the quality gap even further.

Organizational transformation being completed and being integrated all relevant business lines, now we have also integrated our best-in-class exclusive sales channel to meet our customers' communication needs. This resulted in 4.5 grading for our owned franchise, whereas for the exclusive we are leading by 4.2 out of 5 customer satisfaction ratings.

Moreover, as of February, our consumer finance company started its services in flagship stores. And as of March 1 it will be available nationwide. We have the largest premium customer base with the highest loyalty in the market, and we are most successful in terms of increasing our postpaid customer base.

In 2016 and onward, our customers will experience a more converged Turkcell in our retail and active sales forces. We have a strong subscriber growth. Turkcell Turkey's outstanding financial performance was backed by solid operational results, where we had the highest net additions in the market for postpaid fiber as well as IPTV. We have added the highest number of postpaid customers by 1.4 million. We have also added the highest number of fiber-to-the-home customers with 164,000. Our IPTV customer base increased by 164,000, and the smartphone penetration increased by 12 percentage points from 40% to 52%.

The Turkcell TV platform has added a record 216,000 subscribers in the last quarter, reaching a total of 558,000. This was the highest increase in the market and exceeded our year-end targets. In fixed marketplace, we have increased by 329,000 in 2015, again exceeding 1.5 million on the back of our expanding fiber network, strong sales force, and customer care efforts.

Monetizing multi-play will be at the core of our operations next year and onwards. If you look to our single-play, double-play, and triple-play customers on mobile side -- and also single-play, double-play, and triple-play customers on fiber residential side -- we see a healthy growth of the penetration of more services per customer. This is a major component of our convergence strategy, and we will be focusing on penetration of the multi-play offers in this year and onwards.

On mobile side, share of double- and triple-play offers has been increasing. And this is a great potential for ARPU uplift. In light of this, along with the higher postpaid share, data and mobile services growth, and inflationary adjustments, mobile ARPU increased by 9.1% to TRY25.1.

On the fixed side, we focused on increasing penetration of multi-play offers through various campaigns. Our triple-play ratio that includes voice, data, and our TV offering in total fiber residential subscribers rose to 23% at the end of the year. Going forward, with the increase of our scale, we expect to see ARPU lift with double- and triple-play offers also on the fixed side. Overall fixed residential ARPU improved 4.6% year on year to TRY50.3, positively impacting the growth in triple-play customers.

Our focus on digital services is continuing. In line with our game plan, we continue to leverage our wide range of services and solutions, such as BiP, Turkcell Music, Smart Storage and the Goals on your Mobile services continuously. Our new-generation communication platform, BiP, with differentiated features of voice and video calls, continued its rapid rise, surpassing 6 million as of today.

Within a short period, global downloads have increased to 302,000, which is encouraging. Of the total, 36% of BiP users are non-Turkcell users. Recently, BiP has been attached to our roaming packages as an initial step to monetize its potential. BiP being the first OTT product properly backed by a licensed mobile operator sets a new stage in this marketplace. BiP has been also launched in the Ukraine, Belarus, and Germany.

The most widely used personal cloud service, Smart Storage, geared up to 1.7 million users, while Turkcell Music reached to 5.4 million downloads since the launch. Every day more than a million songs is being listened on Turkcell Music. The best sports app in this sector, Goals on your Mobile, basically putting videos of the scores on an every-week basis, downloaded by 1.8 million times users and 500,000 downloads in the last quarter. As highlighted, our new-generation TV platform, TV+, continued its solid performance, increasing its subscribers to more than 600,000 Web, mobile, as well as on IPTV platforms.

We are setting the stage for the new 4.5G experiences as well. In 2016, the most important focus area will be the 4.5G launch. We will continue our investments and be the first and only operator to offer 1 gigabit 4.5G speeds, with the availability of supporting terminals in the near future. That will also mean for households faster deployment of fiber-like speeds by utilizing this network.

As an initial step to redefine TV experience, we've recently launched the 4.5G-supported projector-based TV in our shops. Our customers will enjoy high-quality TV watching experience wherever they are, anywhere through their smartphones and tablets, at every affordable payment plans offered by the consumer finance company. It is critical to monetize the transition from big-screen TV experience to small screens.

Looking to our international business, Turkcell international is improving its profitability. Turkcell international revenues, constituting 7% of our Group revenues and 6% of our EBITDA, were at TRY856 million with the impact of currency devaluation, while the EBITDA margin rose up 4 percentage points to 28.7%, reflecting cost efficiencies.

Recently our Ukrainian subsidiary launched its brand -- the new brand lifecell, bringing it closer to brand identity of Turkcell as well. Lifecell is the major component of our international business, and it's continued double-digit growth in local currency terms despite the continued macroeconomic and political challenges in the region. The EBITDA margin rose 2.7% to 33.2% year on year.

In Belarus, the local currencies shed 57% against the US dollar during the year. In local currency terms, the revenue rose by 13% year on year, with continued improvement in EBITDA. Our operation in northern Cyprus, comprising 15.3% of our international revenues, recorded a 7.6% year-on-year decline due to regulatory changes regarding maximum price ceiling change and termination rate cuts. EBITDA margin continued to be strong with 38.4%.

As highlighted, the overall 2015 performance of Turkcell Group has realized at the higher end of our revised guidance. As communicated before, we expect 8% to 10% revenue growth, both for Turkey and the Group, mainly driven by growth in data and service revenues as well as improved contribution from international business. We also target an EBITDA margin of 31% to 33% and operational CapEx-to-sales ratio around 20%.

In light of these, we reiterate our midterm ambition levels of 10% to 14% growth; 32% to 35% EBITDA margin; and, over the midterm, 17% to 16% CapEx-to-sales ratios. Now I would like to hand over to Murat for the financial review. Murat?

Thank you very much, Kaan. Good afternoon and good evening to all participants. I will now talk in more detail about our financial results.

In the fourth quarter of 2015, Group revenues rose to TRY3.3 billion, with a strong operational performance from Turkcell Turkey due to solid data in mobile service and solutions growth. For the full year, Group revenues increased 6% year on year.

The main growth driver is, again, Turkcell Turkey, mainly due to the 52% yearly devaluation in hryvnia against US dollars in Ukraine, and 57% devaluation of Belarusian ruble against the US dollar in Belarus. Turkey -- Turkcell international revenues contracted 24.8% year on year. Other subsidiaries' revenues, comprised of our information and entertainment services and call center revenues, grew by 1.6% to TRY432 million.

Let me move on to page 19. In the fourth quarter, consolidated EBITDA rose by 15.4% year on year to TRY1.1 billion. EBITDA margin improved by 2.1% to 31.7% on the back of efficiency measures and our focus on higher value-generating customers, which resulted in a decline in S&M expenses by 1.9 percentage points and the direct cost of revenues by 1 point -- 0.5 percentage points.

For the full year, consolidated EBITDA rose by 10.1% to TRY4.1 billion, while the EBITDA margin was up by 1.2 percentage points to 32.4%, driven by mainly higher revenue generation and lower S&M expenses. This marks the highest full-year EBITDA margin [print] of the past five years. Let me move on to the next page.

In the fourth quarter, pro forma net income increased by 28.7% to TRY671 million; whereas, as per IFRS, net income was TRY584 million. Net income increased mainly due to higher EBIT by TRY155 million, higher contribution from Fintur, and translation gains of TRY45 million in the last quarter as opposed to the translation losses of TRY383 million in the same period last year. And this is despite lower interest income resulting from lower cash balance of the dividend payment and higher interest expense on loans and several one-off items.

In 2015, Group pro forma net income was TRY2.6 billion. Net income as per IFRS increased 10.9% to TRY2.1 billion, mainly due to higher EBITDA, low FX translation losses, and higher contribution from Fintur. Let me remind -- no monetary gain recognized as inflationary accounting -- no monetary gain recognized as inflationary accounting was discontinued in Belarus in 2015. One-off items in Q4 and full-year included settlement costs, includes regarding the disputes with Turk Telecom Group; payments for commercial agreement terminations; and discontinued impact of 4.5G VAT receivables, according to IFRS rules.

On the next page, let me talk about the balance sheet highlights. As of the end of 2015, total debt rose to TRY4.2 billion. We issued a euro bond with an aggregate principal amount of $500 million and utilized EUR500 million of debt under our loan agreement with China Development Bank. Meanwhile, following the debt restructuring of lifecell and BeST, $700 million repayment was made in this quarter.

Consequently, by the end of last year 2015, total debt of our international subsidiaries are all in local currency. With this strong and more efficient balance sheet structure, our net debt to EBITDA ratio was 0.3 times, changed from a net cash position of 1.4 times a year ago. Current levels are far better than the industry average and in a safe zone of investment grade that we received from all three of the world's leading credit rating agencies.

Now moving on to the next page, I would like to briefly discuss about our FX breakdown and our main balance sheet and P&L items. We set a balanced FX cash and debt position, which in general registers currency exposure. All of the FX debt position is related to Turkcell Turkey. In Turkey, around 70% of CapEx is in foreign currency. Meanwhile, around 4% of our revenues and around 10% of our OpEx is in foreign currency.

This brings us to the end of our presentation today, and thank you very much for being with us here today. And let us move on to the Q&A session.

Thank you, Murat. Alex, we are done. And now please initiate the Q&A session. Thank you.

(Operator Instructions) Roman Arbuzov, UBS.

Thank you for taking the question. So two questions, please. So the first one is on towers. There was an announcement on the Ukraine that has just come through. So it seems like you're preparing for a tower sale in Ukraine. So could you please explain your intentions there?

But perhaps more importantly, could you please elaborate on some recent speculation or the possibility of you potentially IPO'ing or otherwise monetizing your tower assets in Turkey, please? That's one sort of set of questions.

And secondly, on Fintur please, could you just give us an update sort of where you are in that process? And perhaps, as part of that answer, could you please confirm that you have the right to tag along and you have the right of first refusal when it comes to Fintur? Thank you very much.

Thank you very much. Let me start with the towers question. Yes, you're right. Today we announced the sale of towers owned by our lifecell subsidiary to Ukrtelecom, which is an 100% owned subsidiary of Global Tower. We are very much inspired by the asset-light approaches in the industry. And we would like to make sure that we get the best shareholder value for our assets. So you can consider this as part of the preparation for monetizing our passive infrastructure as Turkcell Group. So this was a first action on that. We are exploring our options of understanding what is the best way to create shareholder value in this area.

Following on with the Fintur question, as it is known, we have provided a nonbinding offer to TeliaSonera to actually acquire the remaining shares in Fintur. We already own about 42% of Fintur, and we are interested in buying the remaining shares to make sure that, first of all, we protect and maximize the value of Fintur for our shareholders. We do have tag-along and first right of refusals, as you asked. And the due diligence process is progressing as we speak.

Could you please tell us how many towers you have in Turkey, please?

We are not disclosing that number. But if further developments happen, we will make a public announcement about that.

Thank you very much.

Ivan Kim, VTB Capital.

Two questions from my side, please. Firstly, on the mobile pricing in Turkey -- so have you started to implement the inflationary pricing this year? And what was the response of your competitors to that?

And then secondly, on the share buyback: so apparently the Board has sort of allocated TRY200 million for the share buyback from the Company's resources and cash flow. I was just wondering whether you can use leverage as well for the share buyback? Or should we expect the total amount of buyback at TRY200 million this year? Thank you.

Thank you very much. This year we have a very clear focus on getting more high-end value customers and postpaid customers. And I believe the telecoms industry over the last three years, with the penetration increases in smartphones, has become a vital element of our customers base. This actually positions us to make sure that we deliver more service, higher-quality services, and also demand for the right prices for the services we deliver. Our focus has been profitability and making sure that we increase our high-value customer acquisitions and lower the churn to make sure that we make the best margins in the business.

We are not a market-share-focused company, and we are not going to be on the price competition. And the inflationary pricing decisions we have taken has paid back this year. We -- therefore, I won't make specific comments about the competition. I suggest that you ask the question to them.

With regard to the share buyback decision, we have, as you know, announced a three-year midterm plan. As announcing the three-year midterm plan, you will also notice that in our announcements this quarter we have also announced, maybe as one of the leading first companies, to announce a long-term incentive plan. For the time being, the share buyback agenda item for the general assembly that we have announced is regarding the long-term incentive plan and basically the necessary hedging that we may need to do on that regard. We do not intend to leverage the Company to buy back our own shares.

Thank you very much.

(Operator Instructions) Koray Pamir, Deutsche Bank.

Two questions, if I may. First, the postpaid sub additions in the first quarter has been quite strong. Can you share your expectations for the year-end for 2016 postpaid to prepaid mix and smartphone penetration on your network, specifically?

And secondly, you have voiced necessity over your fiber infrastructure pools ahead of the 4.5G launch. Over the past month, do you think -- or what is your view in terms of the regulator taking an action in that regard?

Let me first of all pass the question of the postpaid additions and the strong additions performance to Burak.

As Kaan mentioned earlier, our focus on adding more high-value customers in our subscriber mix continues. So we expect to keep our strong growth trend in the postpaid subscriber going forward in 2016. We believe we will be finishing the year slightly above 55% postpaid market, postpaid share. And also around 60% smartphone penetration.

And Koray, can you repeat the second question again? The regulatory issue you mentioned?

Yes, terms of the 4G fiber infrastructure in Turkey, you have voiced the necessity of creating a unified pool, in effect combining -- the combination of your competitors' networks and yourself to lower the overall CapEx. Do you think or do you see a probability that regulators may take an action in that regard, i.e., going forward, and in essentially maybe not forcing but incentivizing the operator to combine their fiber network?

Sure, now I understand. Thanks a lot for the clarification. You know, moving on with 4G and 5G over the next couple of years will require a robust fiber infrastructure. If you look to this requirement, it means that the operators in Turkey will need to invest heavily in fiber networks. We have strongly stated our position that doing this without a coordinated way will be waste of investments in Turkey. And we believe that the operators should consider joining their forces to deploy fiber to increase the capacity in the entire country.

So we have indicated this offer. And I think this has been -- also being reviewed and positively supported by the latest comments of the Minister. And we consider this not as a specific competitive advantage for us, but as something that needs to be done for the Turkish economic vitality.

Thank you very much.

Alex, we have another question; it's coming from the actual webcasting. Harish Kumar from JPMorgan is asking. The question is: what is the Turkcell strategy following the end of the Turk Telekom's regulatory fiber holiday in 2016? So I hand over to our CEO to respond to the question, please.

I actually will refer back to the answer I have provided a minute to go. The new requirements of 4G and 5G networks and the consumer patterns basically require a widespread fiber deployment in the country. And I think this will require a coordinated approach, and it will be essential that the right regulatory environment for the competitive landscape be addressed by the regulator and the Ministry of Telecommunications. Thank you.

Alex, we may have following questions. Please go ahead.

(Operator Instructions) Roman Arbuzov, UBS.

Thank you for the opportunity. I was just looking at your guidance for 2016 as well as the medium-term guidance. So I think the 2016 guidance within the context of 2016 to 2018 looks perhaps a little bit less ambitious. So I'm just wondering, what gives you most confidence that you can accelerate growth in 2017 and 2018 versus 2016?

And also, just a follow-up on CapEx: what are the risks, do you think, to your medium-term CapEx spend, given that some of your peers have recently stepped up their CapEx ambition?

As you can imagine, this year we're going to be deploying 4.5G infrastructure in Turkey as well as 4G in Belarus and 3G in Ukraine. So this is going to be quite an investment year for us, and that's why we expect this year's CapEx will be around 20% -- maybe slightly 20%, 21% ranges for this year, which is very normal. And I would not be worried about this, considering that this is an investment that we need to put in place in a timely manner. Over the long term, I expect this to go to 17, 16 ranges, actually, and normalize at those levels. We expect over the next three years, including the license payments, a CapEx investment around TRY13 billion and this includes all the license payments as well.

With regard to guidance for 2016 and midterm, we believe our operations in international markets as well as increase of triple-play and double-play customers, both on mobile and fixed, will give us the right growth momentum. And for 2016, our EBITDA margin in between 31% to 33% simply reflects the launch of 4.5G and potential additional expenses on launch and the customer acquisitions [pre-4] we will see in the first quarter.

Okay, thank you very much.

Thank you.

As we have no further questions, I would like to turn the call back to the speakers for any additional or closing remarks.

Well, thank you very much for being with us on this call. We are very, very glad to report to you 2015 and looking forward to 2016 first-quarter results in three months from now. Thank you.

Thank you, that will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.