Turkcell Iletisim Hizmetleri AS (TKC) 2017 Q1 法說會逐字稿

Good day, everyone, and welcome to the first-quarter 2017 results conference call. For your information, today's conference is being recorded.

At this time, I would like to turn the conference over to Korhan Bilek, Director of Investor Relations and Mergers and Acquisitions. Please go ahead, sir.

Thank you, April. Hello, everyone. Welcome to Turkcell's first-quarter 2017 results call. Today's speakers are our CEO, Mr. Kaan Terzioglu, and our CFO, Mr. Bulent Aksu. Our C-level executives and IR team are also participating in the call. We have a brief presentation, and afterwards, we will be taking your questions. Before we start, I would like to provide you to review the disclaimer of our presentation.

Now I hand over to Mr. Terzioglu.

Thank you, Korhan. Good afternoon and good evening, everyone. Welcome to Turkcell's first-quarter 2017 results call. We are pleased to share the steps we have taken towards our goal of digital transformation set in 2015.

Over the past two years, we have evolved into a digital services company, creating our own technologies and providing our services globally while maintaining our leading position in the telecommunication sector.

We continue to reap the benefits of our efforts and our vision. This quarter, we have beaten our previous records at both the top line and at EBITDA levels. In line with our plans, our digital products and services became our gateway to the world. And as the Turkcell family, we have made a strong start to 2017, having transformed from Turkey's GSM operator to a global digital services company with our pioneering technology.

Reflecting this transformation, as the first quarter, 18% of Turkcell revenue now comes from digital services. I will talk more on this in the upcoming slides.

Let me briefly summarize the highlights of this quarter. Following the previous quarter's record results, we saw new highs in revenue and EBITDA growth, the highest of the past 10 years, both at Group and Turkcell Turkey level. We also saw all-time high quarterly revenue and EBITDA at the Group level. An EBITDA margin of 34.5% was the highest since 2009.

In April, we completed the first year of 4.5G and are happy to see that our investments are paying off as the customers' receptiveness to our services remain at very high levels. On the back of our investments and growing customer demand, our data and digital services revenues registered 94% growth from the first quarter of 2016.

The share of multiplay customers using our mobile, voice, data, and digital services doubling yearly reached 42%. Meanwhile, the total downloads of our digital services applications exceeded 53 million.

Our balance sheet focus remained intact and short FX position under control at just USD91 million. In April, our consumer finance company, Financell, made a notable contribution to this focus, achieving the first -- issuing an asset-backed security in the nonbanking center.

Financell also supported our smartphone penetration, which reached 68% on a 4-percentage-point quarterly increase. In short, we have made a strong start and we progress in line with our 2017 targets.

Last but not least, today our Board has decided to propose TRY1.8 billion; to be exact: TRY1.791 billion gross cash dividends to the approval of our upcoming General Assembly meeting to be held on May 25. This figure is perfectly in line with our payout ratio stated in our dividend policy. Please note that the dividend distribution will be subject to the approval of the General Assembly.

Let me get into the details with a brief overview of the first-quarter results. In Q1, Turkcell Group recorded 25.6% revenue and 39.8% EBITDA growth, the highest of the past 10 years. This set of growth rates may also be a world record among the well-established telecom companies of this quarter.

This clearly sets us apart from the rather flat nature of the telco business. Our figures also spell all-time high quarterly revenue and EBITDA in nominal terms at the Group level.

Our net income is TRY459 million, meeting the market consensus. As you are well aware, this year's results include amortization expenses of the 4.5G license and also higher interest expenses. Our capital expenditures remained under control, at 13% of revenues.

Now I will go further into the details of Turkcell Turkey, which constitutes 88% of Group revenues. Moving to the next page. Coming to our Turkcell Turkey performance in the first quarter, our revenues grew by 21.7% to TRY3.6 billion. We recorded 38.5% growth in EBITDA to TRY1.3 billion. Revenue growth, including financial services, was at 25.4%.

In first quarter, we had the TRY65 billion contribution of the Universal Service Project, which is aimed at building and operating infrastructure in unserved rural areas. Contractually, this project is financed by Universal Service Fund on a net cost basis. Net of this impact, our Q1 EBITDA margin would be 35.9%.

Moving to the next page, let's elaborate further on Turkcell Turkey's operational performance. We have seen 496,000 total net adds in Turkey with a balanced portfolio growth. On the mobile side, we registered 351,000 net additions, 298,000 in postpaid and 53,000 in prepaid.

On the fixed side, our customer base continued to grow to 2 million customers on 103,000 quarterly net adds, of which 42,000 were fiber and 62,000 were ADSL. IPTV customers reached 402,000 on 42,000 quarterly net additions.

Mobile-blended ARPU rose to TRY30.5, registering record high year-on-year-growth of 17.3% in first quarter. This performance came on top of a 10% rise from Q1 2015 to Q1 2016, confirming the consistent growth trends.

Mobile ARPU growth was mainly driven by our upsell efforts, a favorable change in customer mix, and increased data and digital services usage enabled by our 4.5G network. This also confirms our strategy of reflecting inflationary pricing to our tariffs. A higher triple play ratio of 42% positively impacted the ARPU rise as well.

Fixed residential ARPU rose 5.6% in Q1, with the rise of multiplay customers with TV to 39% of total residential fiber customers, along with upsell efforts. Mobile churn declined 2.5 percentage points in Q1 year on year, thanks to our value-focused customer strategy and digital-services-driven value proposition that meet customer needs.

Moving to the next page. We have concluded the first year of 4.5G in April successfully with a fast rollout of investments, and we have reached 83% population coverage across all 81 cities of Turkey. Over 21 million customers subscribe to our 4.5G services.

To date, around 12 million smartphones on our network are 4.5G compatible. This picture represents an untapped potential of more than doubling 4.5G customers in our network.

Existing 4.5G users' data consumption reached 5.1 gigabytes in March 2017, boosting per capita data consumption of all users. Our average data consumption per user has reached 69% year on year to 3 gigabytes. Over the past 10 days, we had 3 more record dates in data consumption.

Our smartphone penetration in Turkey continued to rise, reaching 68% at the end of first quarter, while the share of 4.5G-compatible smartphones reached 57%.

Next slide. Our 4.5G-enabled customers could benefit a greater extent from our services. And they started enjoying the experience, digital service take-up rates continue to rise. On the mobile side, the increased penetration of our digital services has led to consistent growth of our triple play customers. To date, doubling the level a year ago, 42 out of every 100 mobile customers uses at least one of our digital services.

The main campaign that introduces our services to our customers is the phenomenal shake-and-win campaign of My Account application. The success of this campaign was evident in Q4 and we plan to continue in 2017.

On the fixed side, our multiplay ratio in total fiber residential customers, which includes voice, data, and TV Plus users, rose 9 percentage points to 39% year on year. This multiplay ratio represents a great potential for a significant ARPU uplift and continued decrease in churn rates. Our triple play customers generates almost three times higher ARPU than single play customers.

Next page. Both OTT TV and IPTV are important components of our convergence strategy, and the number of subscribers actively using both platforms has been rising. In the first quarter, TV users reached 1.3 million, doubling from a year ago. As of April, the Turkcell TV mobile app has been downloaded 2.9 million times.

On the back of our wide spectrum and technology offering, Turkcell TV Plus has cemented its [position] in the TV viewing experience on mobile devices. Mobile TV viewing duration has increased from 7 minutes to 40 minutes since its launch and is steadily rising. In 2017, we continue to expand our rich TV content. TV Plus packages will be enriched with movies and TV shows as well as sports content.

Next slide. Digital services are a key component of our strategy. In the first quarter, total downloads of our core digital services reached 51.4 million compared to 26.1 million the previous year. As of April, total downloads reached 53.3 million.

Our new-generation communication platform, BiP, continues its rapid rise, surpassing 12.9 million downloads to date. In March 2.3 million voice and video calls were made through BiP.

Turkey's largest digital music provider, fizy, broadcasted Turkey's high school music competition and enabled the online audience to watch. The competition boosted daily users in the first quarter of 2017. To date, fizy downloads have reached 9.1 million. On a daily basis, 4.9 million songs are listened on fizy and 1.9 million are streamed per month.

Our customer service app, My Account, has been downloaded 17.4 million times to date with the catalytic effect of shake-and-win campaign. To date our customers have participated 44 million times in the campaign.

Turkey's most widely used personal cloud lifebox rose 4.3 million downloads. Our digital publishing service, Dergilik, which has 300 magazines, has reached 1.3 million downloads.

We have radically change the calling experience with Upcall. This app provides caller IDs even if the caller is not recorded in the user's phone book. Upcall has been downloaded 700,000 times to date.

This app deals not only on our true OTT capability, but also on telco infrastructure. It is one of the cornerstones of our strategy of reinforcing our digital services with our telco muscle, creating a new experience that other digital service providers cannot match.

Next page. Now let's look into the growth engines, data and digital services. Data and digital services revenues, which comprised 67% of Turkcell Turkey's revenues, saw 94.2% year-on-year growth to TRY2.4 billion.

In the first anniversary of 4.5G, mobile data revenues continued their solid growth, rising 89%. Higher smartphone penetration, an increased number of data users, higher consumption per user, and the positive impact of the abolishment of the retail price control have contributed to this result. Meanwhile, fixed data revenues were up 32% due to the rise in the customer number and greater usage.

Revenues from digital services almost tripled to TRY631 million. This growth comes mainly from Turkcell TV Plus, the Turkcell digital publishing service, Dergilik, and our music platform, fizy, as well as personal cloud service lifebox and other mobile services.

Next page. Our evolution into a service company is a continuous process. While adding new digital services, we are also expanding our services portfolio into FinTech and lately to energy.

In the FinTech area, through Financell, active since March 2016, we gave our customers financing options for their smart devices purchases. Financell enables Turkcell to manage cash flow efficiently and boost its revenue stream. And meanwhile, increased smartphone penetration helps sustain the growth of data and digital services.

Paycell gives our customers differentiated payment options. In the first quarter, 3.4 million customers used mobile payment, and we observed close to fourfold increase in transaction volume. We plan to introduce our new-generation prepaid payment card, Paycell Card, following the regulatory approval. Within three years of following this launch, we aim at 10 million Paycell Card users.

Next, I want to elaborate further on our newly established energy company. Let me briefly discuss our plans regarding the energy business. As experts in telecom industry, you may be familiar with the global convergent trends of the telecom and energy sectors.

Once again, Turkcell, with its customer-centric approach, is at the forefront of this trend. With our expertise in customer service and billing and our dynamic sales channel, all underpinned to our strong brand equity, we will leverage our key capabilities to provide superior customer experience in the energy area. This way, we will also be complementing our partners in the energy distribution market.

This model will offer new value propositions to improve customer experience through our smart solutions and uninterrupted services. As a one-stop shop meeting all our customers' needs, we will surely increase loyalty while attracting new customers.

Moving to the next slide. On the first anniversary, our consumer finance business, Financell, continues its steady growth. We have made available TRY3 billion of credit lines to our customers. Financell upheld Turkey's long market leader tradition, granting 85% of total loans, number of loans, in the consumer finance sector.

Thanks to Financell, there was a strong demand for contracted smart devices. This enabled the rise in the smartphone penetration of our subscriber base, and we expect the high demand for smartphones to continue, coupled with more frequent replacement. This will support our loan volume as well.

In order to find this expected growth in line with our active balance sheet management focus, we started securitizing our receivables in April. We will further discuss this in the financial section Bulent will explore further.

Bulent, it's yours.

Oh, sorry. For the Turkcell International. Now we turn to the Turkcell International, which comprises 6% of our Group revenues. Our international operations grew by 26% year on year to TRY248 million for the quarter, with an EBITDA margin of 24.3%.

Lifecell in Ukraine is the major component of our international business, with a 64% in sales. Lifecell revenues rose 24.3% in TL terms, positively impacted by the rise in mobile data revenues, enabled by higher data usage on the 4 -- 3G network.

Where lifecell is the leader in geographic coverage in the country, favorable foreign currency rates also contribute to the top-line growth in TL terms. The EBITDA margin came in 27.1%. Excluding the impact of the tower business sales and leaseback operation, the margin would be 30.1%.

In the first quarter, Belarus operations were impacted by one-off items, mainly inventory cleaning. Excluding this, revenues grew 50.6% with an EBITDA margin of 7.5%. BeST continued to offer 4G services in Minsk while adding Vitebsk and Grodno to its coverage area at the end of the quarter. Parallel to Turkcell's digital services strategy, BeST launched its mobile TV and gaming services.

Our Northern Cyprus operation recorded 12% year-on-year growth, with 36% EBITDA margin. The users of digital brand lifecell in Cyprus with 1% penetration generate 45% more ARPU than a postpaid customer. And customers who switch to lifecell packages increase their data consumption by 25%.

Now I will hand over to Bulent for our financial section.

Thank you, Kaan. Good afternoon and good evening to all participants. Let's take a closer look into the financials. In the first quarter, Group revenues rose by 26%, corresponding to TRY827 million in nominal terms.

This growth came mainly from the strong ARPU performance of Turkcell Turkey, driven by solid data and digital services. Turkcell International added an incremental TRY51 million to our revenues. And Turkcell consumer finance company is one of the strong contributors to growth with an additional TRY114 million (sic - see slide 15, TRY116 million).

EBITDA rose by 40% year on year to TRY1.4 billion. This was mainly due to a solid drive in revenues and an effective OpEx management program. As a result, the EBITDA margin improved by 3.4 percentage points to 34.5%.

Moving on to the next page, the first quarter contributed net income of TRY459 million. TRY398 million higher EBITDA was partly offset by a TRY174 million higher amortization expense related to the 4.5G investments. Additionally, net income was negatively impacted by increased interest expense related to loans and the TRY102 million rise in translation losses, including the impact of [select] contracts.

Fintur's contribution to our net income was TRY15 million in quarter 1 of 2016, yet, as expected, it made no TL impact in this quarter. That is why we see a negative TRY15 million change from last year on the chart.

Moving on to the next page. Now I would like to talk about our balance sheet and leverage details. In the first quarter, our net debt position was at TRY4.3 billion. Compared to the previous quarters, this represents a rise of TRY551 million, almost fully led by the increase in our customer finance company's debt.

In line with our active balance sheet management, we securitized TRY100 million of our receivables in [apro] as Turkey's first asset-backed security of a non-bank institution. This will augment our cash generation capability at the Group level and manage our working capital requirement more efficiently. And there is more to come, which will further boost cash generation. With improvement in EBITDA, we maintained a low net debt to EBITDA ratio of 0.9 times in the first quarter.

Moving on to the next page. During the quarter, our cash position rose to TRY6.5 billion. The major cash flow items of the quarter include an EBITDA of TRY1.5 billion; capital expenditure of TRY571 million, of which TRY533 million was related to Turkcell Turkey; decrease in trade receivables of TRY698 million; increase in trade receivables of TRY277 million; prepaid subscribers frequency usage fee payment of TRY309 million; and the positive impact of TRY293 million change in other working capital items.

Moving on to the next page. Now I will go into the management of foreign currency risk. We continue to reduce our short FX position, currently below USD100 million, which is negligible when compared to the size of our balance sheet. As a hedging mechanism, we hold 69% of our cash in hard currency.

Our short FX position of USD91 million also takes into account the advance payments for (inaudible) asset purchases and assumes payment of the final 4.5G license installments in TL terms. In fact, today we made the final installment payment for our 4.5G license.

In addition to our existing hedging strategy, we have taken important steps towards diversifying currency risk in our capital expenditures. Over the first quarter, we have signed contract in Chinese RMB instead of US dollars with one of our major suppliers. We are planning to increase the share of trade agreements in local currencies, which will help us manage our currency risk more efficiently.

This is the end of our presentation today. And we can start the Q&A session.

April, we are ready to take the questions.

(Operator Instructions) Roman Arbuzov, UBS.

Thank you very much for taking my questions. I have actually three, if that's okay. The first one is just a simple one on the guidance. You are presenting today very impressive results.

I'm just wondering why are you not perhaps being more positive on the guidance? And if -- could you share with us if there is anything in particular that is making you concerned in terms of the remainder of the year. That's the first one.

The second one is just an observation on market share dynamics. So if you look over the last couple of quarters or even three quarters, you are taking in customers and stabilizing and even growing a little bit your subscriber market share.

This has not been the case historically. So I was just wondering if you could share, please, some thoughts on what has allowing you to reverse and to reverse those trends and stabilize your market share.

And just thirdly, on OpEx, please, that's one of the key reasons why your profitability performance is very strong this quarter. So can you please elaborate a little bit more on what exactly you are doing to keep your OpEx flat, please? Thank you very much.

Let me start with your first question, about the guidance. We have really, as you say, a very strong start to the year. We would like to actually see the rest of the year in terms of making changes to our guidance. At the time, we would like to be cautiously optimistic about the process, and we are thinking that we are in line moving onwards with our plan.

In terms of market share, we are actually seeing all-time low churn rates. And I attribute to these digital services pickup in our customers. So both from intake perspective in terms of number of customer additions as well as ARPU increases, both from a subscriber base perspective and revenue share perspective, we are steadily increasing our market shares and we are happy to see that. This is a combination of higher customer adds, the all-time low churn rates, and ARPU increases in the mix.

With regard to the OpEx, we are really having a very strong OpEx reduction program. And we are progressing on the plans that we have set in the beginning of 2016.

Bulent, anything you would like to add there?

As you mentioned that we established a project management office and approached this topic structurally. We run a Company-wide project for OpEx management to include all areas of potential improvement. These areas range from head of these processes to operating costs in the field. We reviewed all main procurement and OpEx items to create synergies among the businesses.

Thank you so much.

Thank you, Roman. Actually, as Bulent said, this Company-wide program has contributions over 1,000 people in the Company in terms of saving ideas. And I am very happy to see that it is turned into a Company-wide initiative. Really a good execution on that side.

Thank you very much.

(Operator Instructions) Herve Drouet, HSBC.

Thanks again as well for taking the questions. I've got three quick questions as well. The first one, just on the regulation, I was wondering if -- do you perceive any change in regulations in the short term, especially on [wholesale towers] looking forward?

And do you think it will be just on the broadband fixed line? Or can it be, as well, on the mobile? As well, can we see any potential change there to come in the future as well on taxes, and especially telecoms tax?

The second question is on your FX loss you posted and your reduction of your FX exposure short in USD you have reduced. I was wondering -- looking forward, obviously depending on the currency movement, should we expect gradually this FX loss that has been booked to gradually disappear or being less and less sensitive to currency movement?

And finally, just on the dividend proposed, you still have this policy of 50% of distributional income. What prevents you to propose a higher percentage of distributable income than 50%? Is it linked with your balance sheet gearing? Currently you are on net debt to EBITDA of 0.9. And I was wondering, if you securitize a part of your loans book, could that push you to increase as a percentage of the distributable income in dividends?

Let me start with the regulation question. As you know, Turkey is the highest taxed country in terms of telecoms industry. I do expect certain regulatory changes, especially on the fixed side, with regard to the port transmission costs. And I think the regulatory office is looking into cost-based pricing models on that side. And this will be potentially a positive change to our cost structure.

With regard to others' regulatory changes, I do not want to speculate. But given the nature of very high taxation of the telecoms industry and government policy in terms of fiscal relaxation, I do expect, if any, changes in the positive side.

With regard to the foreign currency losses, as you know, we have an active hedging strategy. We have borrowed in foreign currency long term and we have swapped these loans into Turkish lira. So actually, our foreign currency position as of end of quarter is only USD91 million.

But maybe, Bulent, you can add some more color to that.

Yes. As you mentioned that we have a very, very limited low FX short position. And due to this reason, we did not affect it for the FX loss in this quarter. This is directly related with the cost of converting our FX loans into the TL loans, and this will be classified in foreign -- classified as interest expenses. Yes, there is a very limited amount of FX loss in this quarter. We expect that this amount will be decreased in the coming terms.

And with regard to your question about dividends, we believe economically and operationally we are a growth company. And so the amount that we believe (technical difficulty) the payoffs in terms of dividend.

Of course, we need to underline that this is a proposal for the General Assembly, and any decision that can come out from there is not under our capability to impact. But I think this is a sound and in-line policy proposal to our General Assembly.

Thank you very much for all the answers.

Did you have anything further?

No. I think that's fine. Those were the three main questions I had. Maybe the only thing I was -- maybe just a bit of a follow-up. I will say just on the dividend is I was asking if, if in the scenarios where your net debt to EBITDA reduced, do you think there is room to increase the proposed percentage of distributable income to be put in cash dividend. It's currently, I think, about 50%.

I was wondering if your net debt to EBITDA is reduced, can it lead you to propose in the future a higher percentage? So, i.e., is it linked to your balance sheet currently gearing or not?

Well, we are -- as I mentioned, we are in an important investment cycle both in Turkey and in the other operations in Ukraine. We are about to consider launching 4G in Belarus and Ukraine.

So we consider our free cash flow positions and we believe applying the current policy in terms of dividends is the right thing to do for the Company. I do not want to speculate how this can change in the future as long as the policy is set as 50% of net income.

Okay, well understood. Thank you, thank you.

(Operator Instructions) It appears there are no further questions at this time. I'll turn the conference back over to our presenters for any additional or closing comments.

On the online questions?

Yes, we have a question from Roman.

Yes, Roman has signaled for another question.

Just a quick follow-up, just taking the opportunity. Any update on Fintur, please? Anything you can say on that side?

And also just a question, a bit more technical, on working capital, please. So thinking about working capital for 2017 overall, what should we be looking for from that line? And also maybe going forward, as well, if you can comment, that would be very helpful.

Sure. Fintur is -- as you know, we classified Fintur as an asset for sale. And we are in the process of jointly selling with our partner, Telia. And we will be informing you about the progress. But there is no change in terms of our position there. And I hope that during this year, we will come to a conclusion on that process.

Bulent, on the working capital?

On the working capital side, as we mentioned in OpEx management side, we focus on the working capital side. And working together with different departments and different business units to effectively manage the working capital. And we are expecting more efficient working capital in 2017.

Okay, so it's a positive working capital inflow in 2017. And is that how you think about the medium term as well? I appreciate your currency comment with precision, but anything you can say as to how we should think about the working capital generally, given how quickly the consumer finance company is growing?

But then, on the other hand, you are experimenting with the securitization instruments. So balancing those two things off, do you think you can continue to have positive working capital?

As you know, we have successfully done our first asset-backed transaction of TRY100 million. This was a starting point. I do expect this trend to continue, actually. I think this is a very positive trend from my perspective in terms of keeping the asset-light position as well.

But what's important is our OpEx reduction focus is now also focusing on inventory efficiency. And all these will have a very positive impact on 2017, based on our plans.

Maybe we can add that the main reason of establishing a consumer finance company to manage the working capital side efficiently and to sell or securitize our receivables from the consumer finance side. And we achieve one important milestone and we will continue the next deals for securitizing our (technical difficulty).

Thank you so much.

(Operator Instructions)

So I guess if no other questions, I want to thank all of you for -- okay, Herve, one more question.

Absolutely. Herve, please go ahead.

Just a very quick one. Just back on the securitization of your book of loans, looking forwards, do you have any timeframe on what you can securitize? Or any ideas on when that can happen and for which amounts?

We are planning to realize the next one in the second quarter. And for the amount, we cannot give a specific amount at that stage, but it was higher than the first ones.

Okay, thank you.

And there are no further questions at this time.

Well, thank you very much for your participation and also providing the guidance in terms of our operations. I appreciate all the questions and also feedback. Thank you very much.

That does conclude today's conference. Thank you all for your participation. You may now disconnect.