Earnings Call Transcript - TKC Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. I am Constantino, your Chorus Call operator. Welcome and thank you for joining Turkcell's Conference Call and live Webcast to present and discuss Turkcell's Fourth Quarter and Full Year 2020 Financial Results Conference Call. All participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. At this time, I would like to turn the conference over to Mr. Ali Serdar Yagci, Investor Relations and Corporate Finance Director. Please go ahead.

Ali Serdar Yagci, Investor Relations and Corporate Finance Director

Thank you, Constantino. Hello everyone. Welcome to Turkcell's fourth quarter and full year 2020 results call. Today's speakers are our CEO, Mr. Murat Erkan; and our CFO, Mr. Osman Yilmaz. We will have a brief presentation and afterwards we will be taking your questions. Before we take off, I would like to kindly remind you to review the last page of this presentation for our Safe Harbor statement.

Murat Erkan, CEO

Thank you, Serdar. Good morning and good afternoon. Welcome to Turkcell's fourth quarter and 2020 results call. We have concluded the year marked by challenges and uncertainties resulting in a permanent change in everyone's life. Our results confirm that we have successfully weathered the storm. This was possible due to our diversified business model proved by our core competencies. Accordingly, we concluded the year on 15.8% revenue growth, generating TRY 19.1 billion with our 42.2% margin and exceeded our guidance level. Overall, we generated TRY 3.4 billion free cash flow in 2020 mainly through strong operational performance. All this was possible on the back of solid growth in subscriber base of 1.1 million strong ARPU growth and rising contribution of our strategic focus area. It is also worth highlighting that we exceeded our targeted 1 million net subscriber addition for 2020 despite the pandemic. I am glad to see that the focus on our digital strategy is paying off, both for our results and for the benefit of our customers. Next slide. Let's take a closer look at our fourth quarter performance. With good execution of our customer-centric strategy, we delivered our best quarterly revenue growth for the year 2020 at 17.8%. This corresponds to revenue of TRY 7.9 billion. EBITDA growth later was similar, resulting in a 41.2% EBITDA margin. Our mobile subscriber base continued to grow in favor of postpaid with 464,000 additions. We have seen solid momentum in our fiber business with all-time high net additions in a quarter with 65,000. Our digital channels gained wider use this quarter, with over 14% of customer sales of Turkcell Turkey generated through our website and digital operator application. Overall, we generated TRY 780 million of free cash during the quarter on continuous full platforms. Next slide. I am glad to see that we delivered full year results that are in line with our initial guidance in February, beating our revised guidance as well. As has been the case with many companies, we had to revise our guidance in April with a more cautious approach as the pandemic brought about significant uncertainties. Yet, by November, we had greater visibility for the year-end revising our guidance upwards, having displayed a healthy performance. We owe this performance to our diversified business model built on the future where the demand lies. Our readiness to capture the rising demand for digital services and our ability to swiftly adapt to changing dynamics were integral to this success.

Osman Yilmaz, CFO

Thank you very much, Murat. Now let's take a closer look into our financials. Our performance in the fourth quarter has been robust, with this growth of full year revenue and profitability levels above our initial guidance. We recorded a TRY 7.9 million top line with an increase of 17.8% year-on-year in this quarter. Full year growth was 15.8% on the back of our diversified business model, suggesting resilience and flexibility in addition to the contribution from ever-increasing data demand. Our EBITDA reached TRY 3.2 billion on a 17.8% increase with a 41.2 margin. The bottom line rose to TRY 1.3 billion due to strong operations and effective financial risk management. Excluding the one-off items related to Lifecell Ukraine's deferred tax income of TRY 690 million and provision for legal cases, organic net income was around TRY 1 billion. For the year 2020, our net income reached TRY 4 billion at 39% growth when one-off impacts are excluded. We concluded the year with an operational CapEx to sales ratio of around 18.5%, in line with our guidance. Next slide. In the fourth quarter, Group revenues rose an incremental TRY 1.2 billion. Of this increase, TRY 1 billion comes from Turkcell Turkey, thanks to a larger postpaid subscriber base, high growth in the corporate segment, and strong data demands. Higher equipment revenues backed by sales through the digital channel and corporate projects were the other catalysts of growth. Turkcell International revenues increased by 33.2% to TRY 750 million, mainly due to the contribution of our Ukrainian operations and the positive impact of currency movements. For the full year, Group revenues rose 15.8% year-on-year to TRY 21 million. Looking at the details, Turkcell revenues increased by 17.1%, contributing TRY 3.7 billion. International subsidiaries contributed TRY 540 million. Consumer finance revenues contracted by TRY 333 million given the decline in loan portfolio. Excluding consumer finance and our sports betting business that we exited last year, Group revenue yearly growth would have been around 18.4% in 2020. In the fourth quarter, EBITDA rose 17.8% year-on-year to TRY 3.2 billion, thanks to strong revenue increase and lower G&A expenses. Increasing low margin equipment sales led to a flat margin on a yearly basis. For the full year, EBITDA increased by 17.7% to TRY 12.3 billion with a margin of 42.2%. The EBITDA margins saw a 0.8% improvement. The factors contributing to this increase include a 2 percentage improvement in OpEx with lower overhead costs, travel, and marketing expenses, and a 0.2 percentage point improvement in doubtful receivables against a 1.5 percentage point decline in gross margin, impacted by the rising cost of goods sold mainly due to higher costs of new growth business. Turkcell International also contributed positively to the Group with a 0.9 point improvement in its EBITDA margin. EBIT rose 17% year-on-year to TRY 6.3 billion, with a margin of 21.6%. Next slide. Now more details on our free cash flow generation. On this slide, you will clearly note the positive trend and strengthening of our cash flow generation over the years. In 2020, we registered TRY 3.4 billion in free cash flow, mainly supported by rising EBITDA generation. Strong operational performance was the key driver of this success, while the declining consumer loan portfolio also contributed on a working capital basis in a yearly context. The major items of the TRY 3.4 billion cash flow increase include EBITDA of TRY 12.3 billion, acquisition of tangible and intangible assets of TRY 7.3 billion, a change in working capital of positive TRY 300 million with improved collection performance and higher payable days, payment of lease liabilities around TRY 1.3 billion, and income tax payments of TRY 634 million. Our aim is to continue free cash flow generation this year as well. Next slide. Now, some highlights from our balance sheet and leverage. As of the end of 2020, our total cash position decreased to TRY 11.9 billion from TRY 13.5 billion in Q3 mainly due to a dividend payment of TRY 800 million and currency appreciation. In Q4, a 6% decline in dollar-TRY and a 1.3% decline in euro-TRY led to around TRY 500 million in our total cash position. As of 2020 year-end, Group net debt was around TRY 9.7 billion with a 0.8 times leverage ratio. Excluding the tax in business, this was at 0.7 times the same level as the previous quarter and the lowest in the sector. Next slide. Let me provide you with some color on foreign currency risk management and our liquidity strength. Our balance sheet remains robust with some $1.6 billion equivalent cash in hand and a long FX position of US$132 million. We continue to hold the bulk of our cash in hard currency as a natural hedging tool. This is sufficient to cover our repayments until 2025. In addition, we have secured committed lines of around $700 million in total this year, which may be utilized in euro, dollar, or RMB over the next three years. With hedging instruments in place, the share of FX has declined from 78% to 43% as of the year-end. Our average debt maturity is around four years. Next slide. Now let's take a closer look at our Techfin company's performance, starting with consumer finance business and Paycell. In the fourth quarter, financial stability declined by 28.1% to TRY 145 million on a shrinking loan portfolio. EBITDA fell under 3.8% to TRY 96 million. The EBITDA margin was up almost 4% year-on-year, thanks to an improving bad debt ratio this quarter. In 2020, the very challenging environment led to fluctuations in the cost of risk ratio, although it ultimately declined to a normalized level of 2.4%. For the full year, net income increased by about 29% to TRY 241 million, thanks to recovery on costs of risk and lower expenditures on the back of process improvements. Next slide. Paycell's remarkable performance has continued in Q4, monetizing the rising preference for e-commerce and cashless payment methods. Three months of active users of Paycell highly used for its convenience and secure payment infrastructure reached 4.7 million, generating revenues of TRY 80 million in the fourth quarter. Paycell ended the year at TRY 285 million with a 13% annual growth rate. With 62% growth, the non-GAAP revenue share reached 66% in total. Paycell EBITDA margin was at 52% in 2020. The largest revenue generator, mobile payments business, more than doubled in volume in the fourth quarter. The number of active Paycell cards doubled to 473,000. Accordingly, transaction volume tripled. Ready-to-Use limit service has gained traction. Our customers have made purchases by transferring their mobile payment limits to their Paycell cards. On the merchant side, Paycell POS is set to grow over the coming period. Merchants will benefit from cost advantages and efficiency by managing processes such as collection, inventory monitoring, and e-invoice over a single platform using the Paycell POS device.

Murat Erkan, CEO

I would like to end my presentation by recalling our approach to value creation at Group level. As our results have shown, our business model plays out well under different macroeconomic cycles. This diversified business model is built on growing individual businesses, which today not only generates a strong free cash flow but also unleashes a strong potential for actions towards unlocking hidden values. These businesses have the potential to generate their own funding for future growth. For now, we see our fiber business, our payment service business, and our travel business as likely candidates to take on the spotlight for strategic actions, as we have already mentioned at our Capital Markets Day in London in 2019. Superonline is a unique diversified fiber company suggesting strong growth potential. Given its size and potential, it stands out as the most likely candidate for an equity capital markets action, as long as market conditions remain favorable. As we plan to start working on this in the upcoming period, we will keep the market informed on developments in this regard in a timely manner. This concludes my presentation. We are ready for your questions. Thank you very much.

Operator, Operator

The first question is from the line of Ondrej Cabejsek with UBS. Please go ahead.

Ondrej Cabejsek, Analyst

Hello and thank you for taking my questions and congratulations on a strong year. I have a question around CapEx mainly and probably going into fiber, but you are guiding for increased CapEx and sales intensity for 2021. Can you just break down for us a bit what part of that is driven by the fiber plan to pass another 0.5 million homes, and what part of that would be driven by some of the ICT initiatives that you've been highlighting over the past couple of quarters? And then on fiber itself, is this an indication of you going into more, rather reaching more homes say inorganically rather than through regulatory means? So is this the kind of new normal for Turkcell to grow home passes over the next couple of years? Thank you.

Osman Yilmaz, CFO

Ondrej, thank you very much. For the CapEx side, there are multiple elements to the CapEx. Let us start with the mobile side. We will invest in capacity increase in Turkey. We continue to see strong demand for our data and digital services. This is driven by the increasing consumption of data by our household users. We will continue to provide high-speed and quality household internet services over Superbox in 2021, which is well appreciated by our customers. Please note that Superbox service will lead to additional TRY 1 billion in annual revenue. We will also invest in our 4.5G network in Ukraine, while expanding our network deployment in Belarus. Furthermore, fiber penetration in Turkey is too low compared to other developed markets. The majority of the broadband connections in the country are based on ADSL technology. That is copper. It is not sufficient to meet the quality connection needs of customers, especially in this pandemic era. As we believe that there is additional need for fiber investment, we will increase our fiber footprint in 2021 by 500,000 home passes. Meanwhile, as you mentioned, for the ICT investment, we will continue to invest in our data centers in 2021 as part of the CapEx and the CapEx portfolio. Regarding fiber footprint, actually, instead of calling them inorganically, we call it an organic approach. So, obviously, joint fiber investment is important for Turkey to be able to reach every place in Turkey. While this joint fiber company is going to establish, we would like to invest in our fiber area and this is going to be organic, and obviously, what you say is the new normal for Turkcell; we want to continue adding more home passes year-over-year, especially over the next three to four years.

Ondrej Cabejsek, Analyst

Thank you very much. And can you maybe just elaborate a bit on the 0.5 million and what kind of homes are these? Are they untapped entirely currently or are they where there are some kind of networks already in place that you will be pricing for market share in these areas, and is 0.5 million per year the kind of run rate that we should be expecting over the next four years as you say?

Murat Erkan, CEO

Yes, first of all, we would like to expect a 0.5 million run rate. If we exceed 0.5 million, it's very welcome. Regarding what kind of home passes, there are three types of home passes. One of them is the existing zone that we invest in, which expands our existing zones where we have already deployed. There will be totally new Greenfield areas, but probably at least half of them will come from existing zones. Maybe one-third of them will come from the new Greenfield area, and the other will involve using new technologies, which we call e-home passes. That means we have fiber at the base station level, meaning mobile base station, and we can expand this through base station area with an e-home pass investment.

Osman Yilmaz, CFO

If I may, I would like to give you some more breakdown into our coverage. Probably 35% of the investment will go to fiber, 5% for the data center, 50% for mobile, and 10% for other.

Ondrej Cabejsek, Analyst

That's very clear. Thank you very much.

Operator, Operator

The next question is from the line of Nikhil Mishra with HSBC. Please go ahead.

Nikhil Mishra, Analyst

Yes, thank you for the presentation. A couple of questions. First is on your back-end device e-commerce platform Pasaj. Can you give us your ambitions regarding that? How big do you see it becoming, let's say in the next three to four years? And secondly, again on asset monetization, apart from the three key areas you mentioned, like Global Towers, ADSL, and Superonline, which other areas do you see in the future? Which other assets do you see yourself monetizing in the future?

Murat Erkan, CEO

Okay, first of all, regarding our e-commerce platform, we would like to establish a marketplace for electronic and technology markets specifically, because this is where we have expertise—where our customer has strong trust in us. So, we would like to be the number one player in this technology and IoT area of the marketplace. This is how big we can be. During the pandemic, we see strong demand and increase. We were planning to have 12% of total sales coming from the digital side, but what we see is that it has already reached 14% by the end of 2020. So, we're going to revisit our targets. We want to achieve as much as we can. In this aspect, I think the sky is the limit. We'll push more on the e-commerce platform on the marketplace side. As for asset monetization, we have already declared a couple of years ago what we can do with Superonline, but there are other potential areas. As I said before, we have a diversified business model, comparing operation, driving growth and strong cash generation. We believe that the growth business in our portfolio has the potential to finance their operation. In this context, we may consider strategic options including capital market actions as well as private equity. For now, we see our fiber business, our payment services business, Fintech, and our power business as likely candidates for such strategic actions. The payment services business is probably the next candidate for this. We will keep the market informed about the development in this regard in a timely manner. We also see that established companies from digital services like BiP, Lifebox, fizy, and TV+ are also potential for further possibilities.

Nikhil Mishra, Analyst

Okay, thank you. Is there any timeline for the monetization of Superonline, particularly regarding these three assets?

Murat Erkan, CEO

I mean, the timeline is not definite yet, because we are discussing with our Board and our shareholder the best timing for this. So, as soon as we finalize the timeline with management and the Board of Directors, we will come at the right time. Obviously, market conditions strongly depend on this timing. So, we will see, but we want to have something in this year.

Nikhil Mishra, Analyst

Okay, thank you.

Murat Erkan, CEO

We are going to get ready anyway, but it depends on market conditions as well.

Operator, Operator

Next question is from the line of Jonathan with J.P. Morgan. Please go ahead.

Unidentified Analyst, Analyst

Good afternoon. Three questions from me, if I may. Could you comment on potential impacts of continued upsell opportunities on Turkish ARPU growth? Obviously, there was very strong ARPU growth last year, just trying to understand if, as the economy is opening up, we could expect ARPU growth ahead of inflation again. And then, second of all, could you comment on how much CapEx is required to support Superonline as it stands at the moment? And then finally, perhaps if you could comment on some of the developments in the prepaid pricing markets and how that is developing from a competitive perspective?

Murat Erkan, CEO

Okay, thank you, everyone for the first question. Inflationary pricing is a key pillar of our strategy and business model. Our price actions are reflected in pricing with a lag due to the contracted nature of our business. We expect our ARPU growth to be in a reasonable range around inflation level. As everybody knows, inflation is trending downward. So, while inflation is in a decreasing mode, it is really difficult to increase pricing levels. But we would like to be in line with plus or minus a couple of percentage points around as the upcoming quarter. So we don’t want to be above inflation too much or too much below it. So we are going to stick to inflation and pricing as a strategy. Our upsell performance has been remarkable so far, and we had the right action on raising the price with customized offers using our analytical capabilities. This resulted in solid ARPU growth in prepaid segments in the fourth quarter as well. It is also worth noting that the collection of inactive scripted lines had a positive impact on prepaid ARPU growth. Hence, there is demand, especially when the economy improves. It creates opportunities to increase upsell and other things as well. Regarding Superonline, how much CapEx is required, approximately 35% of the total CapEx in 2021 will be allocated to support our Superonline fiber business in total CapEx. I believe I have already addressed the prepaid pricing market in the first question.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Turkcell management for any closing comments. Thank you.

Murat Erkan, CEO

Thank you. Thank you, everyone. This is the end of our call. Thank you all for taking the time to participate in our call. Thank you very much.

Osman Yilmaz, CFO

Thank you very much. Bye-bye.

Operator, Operator

Ladies and gentlemen, the conference has now concluded and you may disconnect your telephones. Thank you for calling and have a pleasant evening.