Turkcell Iletisim Hizmetleri AS

Ladies and gentlemen, thank you for standing by. I am Maria, your Chorus Call Operator. Welcome and thank you for joining the Turkcells Conference to present and discuss the second quarter 2020 financial results. At this time, I would like to turn the conference over to Mr. Korhan Bilek, Treasury and Capital Markets Director. Please, Mr. Bilek, you may now proceed.

Thank you, Maria. Hello, everyone. Welcome to Turkcells second quarter 2020. 2020 results poll. 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 start, I would like to kindly remind you to review the last page of this presentation for our safe harbor statement. Now, I hand over to Mr. Erkan.

Good afternoon and good evening, everyone. Welcome to Turkcell's second quarter 2020 result call. It was a challenging quarter during which we all felt the impact of the COVID-19 pandemic. I will shortly talk about its impact on our business, but before I do that, I would like to start by mentioning the highlights of the quarter. We recorded solid performance with our strong business model and prudent financial management discipline. On a consolidated basis, we delivered 11.8% revenue growth this quarter. Despite limited mobility during the quarter, we gained 181,000 customers, 144,000 of which were postpaid. Mobile app growth of 14% exceeded the inflation. Our strategy of prioritizing our digital channels has helped us during the period. 11% of our mobile customer sales were through our website and our application. Furthermore, Paycell's outstanding performance once again proved that we are on the right track with our investment in payment systems. Overall, we generated 1.3 billion TL free cash flow during the quarter, strengthening our balance sheet. We improved the leverage ratio by 0.4 points year-on-year reaching 0.8 times at the end of the quarter too. Moving to the next slide. As was the case with all operators, the COVID-19 pandemic has led to a sharp drop in roaming revenues. For us, it was by 2.6 points down to 0.9% of Turkish and Turkey revenues. We expect this factor to continue impacting us in the third quarter. Mobility was constrained, but still the drop in gross mobile subscriber acquisition was at an acceptable level. Customers have continued to choose our service offering and quality thanks to our widespread and convenient channels, including digital. On the topic of digital, we encourage our subscribers to use our online platforms for telco services, top-up and technological product purchases. Accordingly, our digital channel's revenue share rose to 11%, up from 4% a year ago. Going forward, we are motivated to take this to a higher level. As our customers are spending more time at home, we observed an increased time spent on our digital services. This is particularly visible in our TV product with the OTT service reaching 70 minutes a day per user. In addition, we observed an increasing transaction volume on PayCell with digital payments rising by 84% to 215 million TL during the quarter. All in all, This quarter has also been instrumental in driving certain structural changes in our cost base. We expect certain OPEC-saving actions will be there to stay in upcoming periods. As of June, normalization has begun in Turkey. Precautions for the pandemic are maintained, but at the same time, steps towards normal life are being taken. travel bans are removed, flights are partially resumed, and many workplaces are now open. Yet despite normalization action, many of the trends that emerged in the COVID era are set to remain. Remote working, remote education, and remote healthcare services will continue to be key trends of the post-pandemic era. More individuals and corporates will demand to be digital in their lives and during their operation. As Suge said, we are ready to benefit from these trends with our proven solution. Our fixed wireless access product, Sugebox, is even more popular thanks to strong demand for fast and quality connection at home. We expect to serve both customers and corporates with our unique digital service portfolio. The digitalization of business has created further demand and new opportunities for our data center business, cloud and security services, and overall business solutions. In Techfin, our digital and cashless payment solutions are prime for the new era, as evidenced by the over 80% growth in online payment transactions. We can proudly state that all of our strategy focus areas have proven our readiness for the more extensive digital world expected in the post-COVID era. We owe our advantageous position to our strategic foresight, the ability to accurately identify industry and customer needs, and our timely actions. Moving to the next slide, please. Now, some further details on our financial performance. We recorded a 6.9 billion TL top line in the second quarter. Despite the challenging condition of the pandemic, we were able to generate 4% quarterly growth. Our EBITDA reached 2.8 billion TL on a 10.6% increase and EBIT reached 1.4 billion TL with 19.8% margin. Coupled with lower SNM costs and OPEX, our low finance costs on a year-on-year basis lifted our net income to 852 million TL. Hence, our second quarter net income is up 83% versus last year. In the first half, our net profit rose 88% when we excluded the filtered transaction gain recorded last year. Overall, these results were in line with our guidance announced earlier this year. Next slide. Let's take a look at our operational performance. Our total subscriber base expanded by 181,000 this quarter. With this, we already realized 80% of our 1 million target for the year. In mobile, we gained a net 144,000 postpaid subscribers, reflecting our focus on this segment. The postpaid share in total mobile subscribers was at 63%. The monthly mobile churn rate was down to 1.9% from 2% last year at the previous quarter. and the previous quarter. We believe a 2% monthly churn rate in a healthy level. Blended mobile ARP rose to 46.4 Turkish Lira on a 14% increase thanks to rising data and digital service usage and upsell to the higher tariffs. In fixed broadband, we gained a net 36,000 Fiber subscriber, 7,000 ADSL subscriber, and 25,000 IPTV subscriptions. Residential fiber output growth was 9.1% on a year-on-year basis. Next slide. Now, let's look at the performance of our fixed wireless access product, Superbox. Accelerated demand for Superbox continued this quarter, given its convenience. With 91,000 net as this quarter, Superbox subscribers almost quadrupled from a year ago. We are pleased to have marked a half million milestone in July. In July, we launched a new version called Superbox Plug and Play with an easy setup feature, further contributing to its convenience. Next slide. We continued effort to reinforce our bond with our customers. During this period, our primary focus has been on meeting their communication and technological needs with our digital services, communication solutions, and our strong network. We prioritized the segments that will require our service the most, namely healthcare workers, youngsters, and elderly, offering them generous data. We also provided additional benefits from our rich portfolio of digital services, including zero-rated video calls on BIP, live concerts on Fizi, and additional data quota on TVPlus for remote education. All these were possible through the combination of a strong network ability to provide value-added services, and existing convenient online platforms. And these were instrumental in consumers recommending Turkcell over the competition, even more so in challenging times. Moving to the next slide. Over the past few years, one of our priorities has been to increase the revenue share of our online channels. As disclosed on the Capital Market Day in November 2019, our target was to reach 12% by 2022. As at the end of Q2, the level has reached 11% given the demand during the outbreak. Our customer used this channel to make top-ups on their prepaid lines and to buy additional packages, digital service subscriptions, handsets, and wearable technology. In the second quarter, our website had 38 million monthly visits on average and application had 23 million active users. Our ability to provide tailored offers through our digital channel, flash sales campaign, and win-win brand cooperation have also been instrumental in this performance. Overall, The rising popularity and revenue share of digital channels bring us flexibility and speed in reaching customers at lower costs. Moving to the next slide. As to our performance in strategic focus areas, digital services' standalone revenue growth was 23% year-on-year this quarter. We launched the beta version of our own video conferencing platform called Deep Conference. We are confident that we will bring it up to speed with its competitor within a short time frame. Yaani's main solution for corporates and our digital identity management application developed with blockchain technology were the other highlights of the quarter. As part of our standalone strategy of digital services, We have completed the establishment of individual companies for Lifebucks, Fizi, and TV+. Lifebucks, named under Bilo brand, and BIP are now available in the Caribbean market through DigiCell. Our digital business solution registered 15% yearly revenue growth. Our 1.4 billion Turkish lira back-off of contract value is promising for the road ahead. Also, three additional hospitals were introduced, with a fourth one scheduled to open in the upcoming period. COVID-19 has brought about a possible pipeline of remote working and education services. What's more, we contribute to the risk reduction with our smart solution. These include thermal camera system, air quality, social distance measurements. in-store customer count, cybersecurity services. In tech film, PayCell has accelerated its penetration with the rising use of contactless and online payment solutions. App users have more than doubled from the same period of last year, and there were 70% more transactions on PayCell card. Online payment transactions have also increased by 84%. This quarter, we also launched 24x7 money transfer to IBAN on a PayCell application. Moving to the next slide. And now, an update on data usage and for our household subscription trend. Average mobile data usage rose 7% in a year to 11.7 gigabytes per user. This is the highest growth level since the fourth quarter of 2012. The rising data consumption was due mainly to higher content consumption, to growing share of Forerunner House G users and Superbug subscribers. Out of 31.6 million customers signed up for Forerunner House G services, 1 million have Forerunner House G compatible smartphones, still indicating room for growth. In the second quarter, we achieved 79% smartphone penetration, with 90% being foreign-house compatible. There were 2 million net addition of foreign-house compatible smartphones on a yearly basis. Next slide. Let's look at our performance in the international market, which generates 8% of group revenues. Our international operation grew by 17.5% year-on-year. This was mainly on rising data usage and the positive impact of currency movement in these countries. In local currency terms, the top-line growth rate of our Ukrainian subsidiary was 7.7%. Last year, Ukraine recorded its first monthly operational net income in June. Our aim is to continue the trend going forward. Belarus' revenue declined 3.3% due mainly to lower handset sales given limited mobility. Meanwhile, mobile art books grew 10.4% year-on-year in local currency terms with higher data consumption and the demand for digital services. While subsidiary in the Turkish Republic of Northern Cyprus recorded 3.5% revenue growth, mainly reflecting the heat on tourism and education sector. Next slide. I would like to say a few words about another promising investment area, Turkey's automobile project. As we announced a while ago, we are one of the founding partners of automobile company, holding a 19% share. The company was established to develop and produce a range of battery electric cars in This company will be the first non-traditional manufacturer in Europe to produce native battery electric SUV. The start of production is scheduled for the last quarter of 2022. This quarter is July. The company marked a milestone with the groundbreaking ceremony for the environmental-friendly factory. The plan is to complete its construction within 18 months. The factory will have an annual capacity of 175,000 vehicles. The company will own its intellectual property for its authentic vehicle platform, enabling flexibility, creativity, and independence. This initiative is expected to grasp new growth opportunity as being one of the first mover in the electric cars and providing by providing new value-added services around the cars as a smart device within a mobility ecosystem. The project is supported with comprehensive incentives and tax breaks, and our capital commitment, as TÜV said, is capped at €95 million. Considering the benchmark in the field, we believe that this investment has the potential to be valued accretive for Turkish Al-Gurub in the medium term, as e-mobility and sustainable energy continue to be the rising trends. Next slide. We are happy to note that the second quarter results confirm our full year expectation, which were announced on 28th of April. We have been among the few companies to provide visibility to market during such uncertain times. And this confirmation proves how well we were able to analyze the situation and control its effects. As such, we reiterate our full year guidance of 10-12% revenue growth, a 40-42% EBITDA margin, a 19% to 21% EBIT margin, and a 17% to 19% operation CapEx over sales ratio. Although negative pressure is expected to prevail in the third quarter, given the higher share of roaming and the impact of the late corporate project, we see upside risk to this guidance level. We aim to achieve the high end of the top line and the guidance range for 2020. I will now leave the floor to our CFO, Osman.