Turkcell Iletisim Hizmetleri A.S. (TCELL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Maria, your Chorus Call operator. Welcome, and thank you for joining the Turkcell's conference call and live webcast to present and discuss the Turkcell Investor and Analyst Conference Call. [Operator Instructions] and the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Ali Serdar Yagci, Investor Relations and Corporate Finance Director. Mr. Yagci, you may now proceed.

Thank you, Maria. Good morning, and good afternoon, everyone. Welcome to Turkcell's investor and analyst update call. Today, initially, our CEO, Mr. Murat Erkan, will be providing a short 2-slide update mainly covering our businesses in Ukraine and current status there. We will then have a Q&A session with the participation of our Group CFO, Mr. Osman Yilmaz, as well. Before we kick off, I would like to remind you that we postponed the Capital Markets Day event planned for April, as we disclosed last week. The current macroeconomic and political environment has deteriorated by the war in Ukraine unfortunately brings significant uncertainty for the future. Given the impracticability of making certain macro assumptions and our exposure in Ukraine, we no longer believe it is feasible to make a 3-year business plan under these circumstances. Therefore, we decided to postpone the event and remain focused on looking after our plans for this year. Now I hand over to Mr. Erkan for his update.

Thank you, Serdar, and hello, everyone. Thank you for joining us today. My [indiscernible] are for those who are affected by the dramatic situation in Ukraine. We deeply sympathize with the Ukrainian nation. Our thoughts are with them and our team on the ground. We do hope that ongoing negotiation between 2 nations can bring peace to the region. Before summarizing the current status on our exposure in Ukraine, I would like to begin with some key highlights of 2021 and contribution of our Ukrainian operation into that. In the end, we are going to have a Q&A session with our CFO, Osman. As you may recall, in 2021, we delivered a strong performance, thanks to our well-executed diversified business model, and achieved a top line growth of 23.4%. Our top line growth was mainly driven by a large subscriber base, thanks to 2.7 million net adds and improved ARPU performance in Turkey. The top line was also supported by our international operation, mainly thanks to the robust performance of Ukraine operation in 2021. The International segment accounted for 10% of group revenues, of which around 8% belongs to Ukrainian operation, including Lifecell, UkrTower and Global Bilgi. Moving to next slide. Let me provide some more detail about our business in Ukraine. Ukraine is home-only subsidiaries of Turkcell, first, the Lifecell and mobile telecom service provider. As we all know, the second is UkrTower, which provides towers dominant for Lifecell. And lastly, Global Bilgi Ukraine, which is our call center business in Ukraine. Amongst those, Lifecell is the largest operation, which generated 8% of group revenue and around 10% of EBITDA in 2021. The military operations targeted some major cities of Ukraine. Since the second week of the invasion, there have been negotiation for ceasefire and permanent peace, yet more than 3 million people fled the country, immigration to the neighboring countries. First of all, despite the extreme condition, we continue to provide our service across the country. As of today, we have not reported any damage or outage in our core network. We had already moved some of our core networks to the Western Ukraine and also established backup outside Ukraine to ensure business continuity. For the radio network, around 10% of our base station are temporarily down on average on a daily basis due to the energy cutoffs. However, as national roaming has started among 3 operators in Ukraine, operation continue mostly uninterrupted. Our operations site, as it is a fully prepaid market, we do not have any major collection risk. Refills are innovatively affected, despite a step increase in the first week of the invasion. Almost half of the stores are open, on average, yet is changed on a daily basis. None of our employees lost their life or were injured so far, and majority of them moved to safer locations. On the financial side, the banking systems collection and payment continue to operate within the country, and we have no loss in basic ICT system, such as billing and CRM. We have sufficient liquidity to sustain our operations, and local banks are able to refinance maturing loans with no additional funding. Our debt is fully local -- fully in local currency with around 1.5 year average time to maturity as of year-end. And our cash is almost fully placed in the creditor banks. Even though we have not seen a major interruption in our services so far, the outcome and the impact of the situation cannot be fully foreseen as of now. We shall note that any significant impact on the Lifecell financial could pose a risk for our 2022 guidance. We are closely following the situation and expect to provide a clearer picture with our Q1 results. This concludes my presentation, and we are ready to take your questions.

[Operator Instructions] The first question is from Kennedy-Good, Jonathan with JPMorgan.

I see you note that the cash position in Ukraine is conducive to sustain the operations at the moment. And if that were to change, and say you moved into a negative free cash flow position presumably with many people leaving the country, would Turkcell support the operation through cash injections into that market? And then secondly, can you give us a sense of the -- what the actual exchange rate is like in Ukraine? Is it close to what we see on screens on Bloomberg? Or is there a dislocation at which you can exchange local currency for dollars?

Let me give the floor to Osman to answer both questions. Thank you, CFO, by the way.

Thank you very much, Murat. Jonathan, thank you for your questions. For your first question on cash position, fortunately, we entered this unfortunate situation with ample amount of cash. We have about $45 million equivalent cash on balance sheet. Part of it is in hard currency. And in addition to that, we still generate cash flow from our operations. About 20% to 30% of daily revenues have fallen compared to the pre-conflict period. And this shows that still there is an activity going in the market and people need connectivity. And given that only about 10% of our sites are dysfunctional, we expect -- unless the situations get worse, we expect to generate a similar amount of cash in coming periods. But there are huge uncertainties. There are 2 important things, which might impact our cash position negatively. First is debt service. We have about $100 million equivalent debt all in local currency in Ukraine, but we had extended the maturity of these loans to beyond 1 year before this situation. Normally, in Ukraine, local currency loans are typically for 1 to 3 months maturity, but we have extended to 1 year to 3 years maturity. And for sake of safety, we hold cash in the banks that we have loan obligations to, so we don't have credit risk in any banks in Ukraine. And the banks that we are doing business in Ukraine are international -- mostly international banks. We don't have local bank risk in Ukraine. And second risk is capital expenditures because this is FX-related risk. But as you may guess, we are not doing any CapEx at the moment, and we have not been processing FX payments to outside the country. It is prohibited, by the way, by the central banks. So far, we have managed cash situation successfully. And we don't expect a free -- negative free cash flow generation. Well -- so given that we have about $80 million net debt position in Ukraine. We are not expecting any cash injection in the short term, but it is early to call for the worst. We don't base our scenarios for the worst case at the moment. But our baseline scenario requires no additional cash injection from Turkey at the moment. And the second question is about actual exchange rates. On Bloomberg screens, you see dollar [indiscernible] apparently at about Turkey, but there is no transaction in the market -- official market. Central bank has suspended the FX operations since the conflict started. But from the banks and from our colleagues in Ukraine, we hear that in gray market, in OTC market, dollar [indiscernible] is trading around [ 34 ] to [ 36 ], depending on the day, which implies about 15% depreciation from the last prints that we see on Bloomberg. We are discussing which currency, which exchange rate to use with our auditors when disclosing our Q1 financials. Our preference is to be more prudent and use depreciated exchange rate. But to be able to use this currency, it must be tradable. There must be a reference in the market. So we are still discussing with auditors to use. We have about 20 days to finalize Q1 financials. So we will see how it happens, and we will disclose which exchange rate we use in financials -- in Q1 financials. We will give the transparency on this issue.

The next question is from the line of Demirak, Kayahan with AK Investment.

For your current guidance, where did you see the -- and what was the expected contribution from the Ukraine in terms of EBITDA and the CapEx? And also is there any significant damage to your infrastructure currently in Ukraine that might, I mean, require higher capital expenditures, maybe when things get settled down?

First of all, let me take the guidance part. I can promise that we are progressing in line with our plans as part of our local operations. And Turkcell Turkey's result for the first 2 months of the year were in line with our guidance. Obviously, as we discussed in Ukraine operation, it constitutes around 8% of our revenue and 10% of our EBITDA. And the development in Ukraine will be critical for our 2022 guidance. And we may consider providing a guidance excluding international operation, depending on the developments in the upcoming weeks. So we're seriously considering how to divert the guidance. So to be able to have a guidance in Ukraine is difficult. And for the second question, I think maybe Osman can take the second question.

Actually, as I try to disclose in the first question, we have about 10% of our total infrastructure inoperable at the moment, but it is not 100% due to damage. It is mostly due to electricity shortages and infrastructure deficiencies in the country. So in the current situation, we are not expecting additional CapEx due to these functionalities. But we will see after this dust settles what is required. But our original CapEx plan, we had an aggressive CapEx plan to meet our increased demand in the country. But we will have a modest CapEx than going forward, even after the dust settles and things go back to normal.

Plus, to be -- to add on this one, since national roaming is onboard in Ukraine, so we may need to wait for this -- the war goes away and then see what is left over. So -- but as of today, our infrastructure is quite well conditioned.

Understood. And about the guidance, you were saying that if the thing gets a bit more uncertain, you will provide guidance maybe without the international operations.

Exact, exactly.

That's the plan.

Okay. As also a final confirmation, as I understand also there's a lot of uncertainty, but you think that in the short term, the decline in the revenues and EBITDA will be compensated by also decline in CapEx. And so that -- there won't be any significant cash need for the operations, at least at the current picture.

This is right. So probably, we will see some decrease on the top line level due to the international revenue side and a bit on the EBITDA side as well. Because Ukraine, as I mentioned, it is 8% of the top line, 10% of the EBITDA. So depending on the impact on Ukraine, we'll see some impact on this side. That's why we're going to revisit our guidance based on without international market.

[Operator Instructions] The next question is from the line of Mandaci Ece with Unlu Securities.

I have 2 questions. If there would be the need of any impairments in your P&L, would we see that effect as of first half with audited financials or earlier in the first quarter financials regarding this Ukraine operation and the depreciation of the local currency? And secondly, could there be any change in the dividend policy in 2022 given this recent political conflict? Could you just please provide more insight on that?

Let me start with this impairment part. Maybe Osman can add additional things. As of today, current circumstances, there is no requirement for such an action to be honest. We don't have any damage or outage in our core network. So vast majority of our readiness will be up and running and just 10% of down. So I don't see any reason to do immediate impairment actions as of today. For -- maybe Osman want to add additional things. On the dividend policy, we don't have any plan to change our dividend policy. It's going to be probably -- it's going to be on track with the plan as well for the dividend side.

Maybe a few things to add. We don't have reasons for an impairment to be able to impair in Ukraine. Either we have -- we need to see a significant depreciation in Ukraine [indiscernible], which is not the case at the moment or we have to see a significant loss of business in the country. Also that's not the case. We only lost about 20% to 30% of our daily revenues in the country. There is still activity, and we don't see significant damage loss in our fixed assets in the country so far. So Q1 would be very early and over prudent to impair our assets in Ukraine. We will -- but we are continuously closely following the situations. There are still 8 days until the end of Q1 and 15 days beyond that to finalize the financial. If we see a material change in the direction of the war in Ukraine, we will take the required actions. And even though we don't impair in Ukraine nor in Belarus in Q1, we still have to be very cautious in terms of net income, cash flow situation of the company, profitability for the group. Not impairing in Q1 does not mean that we will not impair in the coming quarters. So we will have to be more prudent going forward.

[Operator Instructions] We have a follow-up question from Mr. Demirak, Kayahan with AK Investment.

Again, this is not related with Ukraine, but about the recent developments. So we will probably tell I can act. So my question is that you were advocating for a common traction for a very long time. And now, the Turkish Wealth Fund, also the controlling shareholder of Turkcell is about to acquire [ 2 ] telecoms. And as I understand from the public statements that the extending to telecom privileges, not the privileges, but the contracting terms is on the chart. So where do you stand in terms of this infrastructure shares at the return picture? I mean, do you see that happening in the short run?

Thank you very much. To be honest, it's fair to state that as the investment arm of the state Turkish Wealth Fund is a value creation oriented entity seeking for return on its investment portfolio. I believe that this acquisition might be a catalyst for the infrastructure share, which has the potential to create additional value to the overall industry. We find the current market structure in the fixed segment quite inefficient. The absence of widely accepted infrastructure sharing initiative limits the return on fiber investment and the speed of infrastructure deployment. We believe that Turkish Wealth Fund may play a key role here by accelerating the process, and we will definitely support such an approach.

Okay. And I understand from your perspective, the telecom can have a fixed like -- privileges for a longer period of time, but it will not prevent to have a common infrastructure.

It might help for the common infrastructure sharing as well because if the structure has changed, it would definitely put into the picture this common infrastructure sharing perspective. Without this, I don't think anything is possible. So I do believe that common infrastructure sharing is #1 priority should be on the Turkish Wealth Fund's mind.

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.

I would like to thank all of you joining this conference call. As I mentioned at the beginning, I hope that things get better, and peace will win the situation. All our hearts are with Ukraine and our colleagues over there. And thank you very much for joining.

Thank you. We hope to see you in our Q1 results.

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling, and have a good afternoon.