Turk Telekomunikasyon AS

IST:TTKOM.E

Earnings Call Analysis

Strong Growth in Revenue and EBITDA Margins

In Q2, consolidated revenue rose by 4% year-over-year to TRY 33 billion, with Mobile and Fixed Internet driving growth. EBITDA grew 22% to nearly TRY 13 billion, pushing the EBITDA margin to almost 39%, up 550 basis points. For the first half, revenue was TRY 61 billion, up 8%, aligning with their 11%-13% guidance. The company plans for a strong back-to-school season to further boost revenue. Despite some cost increases, they maintain their EBITDA margin guidance of 36%-38% for the full year.

Revenue Growth and Market Performance

For the second quarter, consolidated revenues increased by 4% year-over-year to TRY 33 billion, bringing the first half figure to TRY 63 billion, up 5% year-over-year. This growth was driven mainly by the Mobile and Fixed Internet segments, which combined accounted for almost 75% of the second quarter operating revenues. Mobile revenue saw an impressive 20% increase, driven by a 2.4% growth in average subscribers and a 15% growth in ARPU (Average Revenue Per User). On the other hand, Fixed Internet revenue grew by 8%, thanks to a 2.3% increase in subscriber numbers and 6% growth in ARPU. This performance is in line with the company's annual revenue growth guidance of 11% to 13%, as they anticipate a strong second half impacted by inflation dynamics and recent price adjustments.

EBITDA and Margin Improvements

Consolidated EBITDA rose 22% year-over-year to almost TRY 13 billion, with the EBITDA margin improving by 550 basis points to nearly 39%. This strong performance was driven by a decline in direct costs by 7%, particularly a 29% reduction in interconnection costs and a 22% decrease in equipment and technology sales costs. This translated into an EBITDA margin guidance range of 36% to 38% for the full year. Network expenses remained low due to subdued energy costs and lower maintenance costs, although there may be a pickup in these cost items starting the third quarter. Despite these changes, the company feels confident in maintaining the upper end of its EBITDA margin guidance.

Net Profit and Financial Health

The company posted a net profit of TRY 1.4 billion for the second quarter, a significant improvement from an operating loss of TRY 0.4 billion in the same period last year. This took the first half net profit to TRY 2.5 billion, also comparing favorably to a TRY 2.3 billion net loss from the first half of the previous year. This turnaround was aided by a 33% year-over-year drop in net financial expense, although this was tempered by a 78% increase in the first quarter. The effective tax rate for the period was about 18%, which also contributed to the positive bottom line.

Subscriber Base and Market Strategy

At the end of the second quarter, the company had a total of 52.6 million subscribers, slightly down by 110,000 from the prior quarter. This was largely due to a 213,000 loss in the Fixed Voice segment, while Fixed Broadband saw a modest addition of 20,000 subscribers, stabilizing at 15.2 million. The Mobile segment added 125,000 subscribers, closing the quarter with 26.3 million customers in total. The focus remained on acquiring postpaid subscribers, which saw a net addition of 438,000, achieving a historic record of over 1.9 million postpaid net adds in the last 12 months. The company's proactive churn management strategies have also played a crucial role in maintaining subscriber numbers.

Investment and Capital Expenditure

Capital expenditure normalized from the prior quarter's low, totaling around TRY 7 billion for the second quarter, and TRY 12 billion for the first half, representing a 19% CapEx intensity ratio. The company anticipates an uptick in CapEx spending in the third and fourth quarters. The guidance for CapEx intensity remains at 27% to 28% for the full year. The company maintained a healthy balance of debt, with net debt-to-EBITDA continuing its downward trend towards a one-time multiple, supported by stable currency and improving operational performance. Cash and cash equivalents were at TRY 7 billion, boosted by a TRY 260 million equivalent in FX-protected time deposits.

Future Outlook and Competitive Landscape

For the rest of the year, the company expects strong revenue growth driven by price adjustments and a high inflation environment. The second-quarter average inflation was around 72%, the highest in the last six quarters, but this is expected to decrease, potentially benefiting revenue growth. The company maintains its revenue outlook and anticipates narrowing the growth gap between Fixed Broadband and Mobile segments. The competitive landscape remains challenging, with operators heavily focusing on subscriber acquisition through promotions, which could affect ARPU growth. However, the company’s strategic focus on rational competition is aimed at sustaining long-term market leadership and profitability.

Concession Renewal and Regulatory Environment

The company continues to make significant progress on the renewal of its Fixed Line concession agreement, which is expected to be finalized within 2024. The comprehensive due diligence process conducted by the Privatization Administration has been beneficial, and the company is optimistic about the outcome. Additionally, 2025 and 2026 target dates have been set for the 5G tender and service delivery, respectively. The company is preparing accordingly and expects this to further boost its market position and capabilities.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Costantino, your Chorus Call operator.

Welcome, and thank you for joining the Türk Telekom Conference Call and Live Webcast to present and discuss the 2024 Q2 financial and operational results.

[Operator Instructions]

We are here with the management team and today's speakers are CEO, Umit Onal; and CFO, Kaan Aktan.

Before starting, I kindly remind you to review the disclaimer on the earnings presentation. Now I would like to turn the conference over to Mr. Umit Onal, CEO. Sir, you may now proceed.

[Ümit Önal, executive]

Hello, everyone. Welcome to our 2024 Second Quarter Results Conference Call. Thank you for joining us today. Statements from large central banks and economic data as well as either complete or upcoming elections have been in close watch of financial markets. Varying macroeconomic data triggered risk on and risk off move several times as markets struggled to calculate the probability of hard landing in developed and emerging economies.

At home, the CBRT kept its policy rate at 50% since the last hike in March and maintained year-end inflation forecast at 38%. The year-end inflation expectation inched down to 43% in the latest survey though. Nevertheless, the long-awaited disinflation process has started and the CPI has gradually dropped to 52% in August after peaking at 75% in May. The pace of decline in the next couple of months will likely be critical in reshaping 2024 and '25 inflation expectations.

Although recent signs have been encouraging, inflation environment remained challenging in the second quarter. Still, we have secured a performance that broadly mimicked our revenue target but run ahead of our EBITDA margin target for the first half. Subscriber acquisition remained in center focus for mobile operators as the sector entered its high season, which was further stimulated by a rich variety of tariffs and summer activities in lack of any price revisions until late June -- early July.

In Fixed broadband, we revised our retail prices around mid-June and wholesale prices at the beginning of July as planned. We continue to feel the impact of widening price parities in our retail acquisition and churn dynamics over the second quarter. Data consumption moved with routine seasonal factors but stayed generally strong across the Board.

Usage per LTE subscriber grew by 22% in Mobile and contracted slightly in Fixed internet year-on-year. The latter being affected by two long national holidays in the quarter. While mobile data usage picked up by 80% Q-on-Q, it dropped by 7% in Fixed internet, both depicting the typical trends of summer months.

Starting with second quarter financial and operational overview on Slide #3. Consolidated revenue increased to TRY 33 billion with 4% annual growth. Excluding the IFRIC 12 accounting impact, revenue growth was 7%. Consolidated EBITDA grew close to TRY 13 billion at a solid 22% rate annually. EBITDA margin expanded by an impressive 550 basis points year-on-year to nearly 39%. We generated TRY 1.4 billion net income in the quarter.

With TRY 7 billion CapEx spending, investment activity normalized from prior quarter's low level, which was driven by seasonality and Ramadan. Unlevered free cash flow rose to TRY 3.2 billion on a great momentum Q-on-Q, driven largely by the progressive operational performance. Finally, net leverage has continued its drop towards the onetime mark.

Slide #5, net subscriber additions. We closed Q2 with 52.6 million subscribers in total down 110,000 from prior quarter end. Excluding the 213,000 loss in the Fixed voice segment, the subscriber portfolios were broadly stable. Fixed broadband base remained flat around 15.2 million with near 20,000 net additions in Q2. Subscriber activity was quiet in Q2 due to low seasonality, the impact of -- which was amplified by two long national holidays.

Activations remained short of our expectations both in the Retail and Wholesale segment. Churn rates declined both annually and quarterly. The year-on-year decline in the number of churning customers can largely be attributable to last year's earthquakes and the Q-on-Q declined this seasonality and lack of new price revisions in existing customer studies, customer tariffs since January. Our retail tariff price revision in December '23 and June '24 versus competitors' late and unmatching actions affected first half of '24 activation and churn performances.

We aim to mitigate the slower than expected net add performance so far with a strong back to school season. Mobile segment added 125,000 subscribers on a net basis closing the quarter with 26.3 million customers in total. The postpaid base secured 438,000 net additions meeting prior quarters strong performance of 398,000. This was thanks to a visibly stronger-than-expected activation performance.

Accordingly, in excess of 1.9 million postpaid net adds in the last 12 months touched a new historic record. Though staying on a declining trend, prepaid base lost 313,000 subscribers on a net basis, lower than prior quarters 414,000 but still a net higher than we expected. We successfully managed churn with a flat performance year-on-year and only a seasonal pickup Q-on-Q. As a result, the ratio of postpaid subscribers in total portfolio touched its highest level of 74%.

Slide 6, Fixed broadband performance. We revised our retail prices in mid-June and wholesale prices at the beginning of July as planned. We also modified the retail contracts to 3+12 structure for new acquisitions from 9+9, which was introduced in December '23. We observed other ISPs updating their prices in July and August but typically large price gaps that emerged since mid '23 persisted. Nevertheless, the sector has more or less completed its price revisions ahead of the back to school period. We aim to take advantage of high season and make up for the lower than expected net add performance in the first half.

The contracting and upsell performances were in line with our expectations with recontracting higher both year-on-year and Q-on-Q, thanks to powerful churn management. 50 megabits and above packages made more than 60% of new sales in the second quarter compared to 51% in Q1 and 35 megabits and above packages made 66% of re-contracting compared to 64% in Q1, both confirming the strong trend in demand for high-speed packages. Average package speed of our subscriber base increased by 43% year-on-year to 55 megabits as of Q2. With that, 59% of our subscribers are now on 35 megabits and above packages compared to 44% a year ago.

A similar comparison shows that 41% of our subscribers now use 50 megabits and above packages compared to 28% a year ago. ARPU growth moved up to 6% from 5% in the prior quarter in an anticipated trend. We expect to see a visible leap up in Q3 fixed internet ARPU growth following June/July price revisions. It is important to note that the new prices become effective for new and re-contracted customers in retail segment but they become effective immediately for the wholesale base. Revenue growth moved up to 8% with a 2.3% expansion in average subscriber base annually.

Moving on to Mobile performance, Slide #7. Mobile continued its relentless right with another set of very strong numbers. But before diving into the details of Q2 drivers, it is important to note that the first half performance is not simply about strong numbers but full of qualitatively assuring futures in competency, resilience and customer engagement which grant us a flexible structure and large room for maneuver in managing our business and shaping the sector, we believe. Surely, this is a result of long years of investments and know-how accumulation in this area, which we will continue to leverage and further growing our Mobile business.

Q2 has been the third quarter in a row, we observed a fierce race for subscriber acquisition this time filled by the high season. Similar to Q1, we pursued a balancing act between ARPU and subscriber growth in an environment of all quarter around promotional activity. After we initiated the 2024 price revisions in January, it took Mobile sector to complete the first round of pricing till mid-February. And it was month before and June, early July, the second round of pricing has kicked in. This time, all operators completed their tariff revisions in a short period of time though. Additionally, the widely distorted price parities have more or less converged back to levels that prevails by the end of 2023.

Postpaidisation continued to be the trend with both customers reference and operators focused heavier for postpaid tariffs. Although most of the campaigns were short-lived and technical, one followed the other regional thematic and seasonal alternatives throughout the quarter. Though attracting less interest, varying prepaid tariffs also hit the market to further enrich offerings in mobile high season.

The MNP market slightly contracted year-on-year from a relatively high base, but stayed nearly Q-on-Q. Following a 1-quarter pause, we reclaimed our leadership in the MNP market, as the price parities have resettled on more meaningful levels.

Mobile blended ARPU secured a healthy 15% growth with respective 9% and 14% increases in the prepaid and postpaid segments. That combined with a 2.4% average subscriber growth held the way to 20% mobile revenue growth year-on-year. Although we see regular pricing actions in Mobile sector, we have been highlighting the shift in competitive landscape towards much heavier promotional activity over the last few quarters. Continued into the July-September period even more aggressively, this trend, which is driven by competition rather than demand conditions, cannibalizes the implied impact of pricing actions and sector's overall potential to grow ARPU in our view.

We have a clear preference for rationality in the sector, which is only attainable through a shared responsibility by all players, of course. We are extremely pleased to see significant improvements in our operating profitability and cash flow in the second quarter affirming the precision of the measures we have put into effect over the past few quarters. Even more pleasing is to have the confidence that our performance will excel in the second half of the year, to help us comfortably achieve our full year targets.

We managed to secure the momentum we have been looking for in our businesses this year and we will make every effort to maintain this strength over the coming years, both in the core and adjacent areas we operate in.

Finally, we continue to make important progress in the concession renewal process. The privatization administration, which has been mandated by the Turkish government for the task has conducted a comprehensive due diligence process with us and submitted its special report to the Ministry of Treasury and Finance. We believe the whole exercise was utterly beneficial and fruitful. Hence, maintain our view that the renewal of the Fixed line concession agreement can be completed within 2024 in growing confidence. This concludes my part. Thank you, Kaan. Over to you now.

[Kaan Aktan, executive]

Thank you very much. Good afternoon from Istanbul. We are now on Slide 8 with financial performance. Consolidated revenues increased by 4% year-over-year to TRY 33 billion in Q2. We're taking the first half figure to TRY 63 billion, up 5% year-over-year. Mobile fixed Internet and call center were the main contributors to this quarter growth excluding the IFRIC 12 accounting impact. Second quarter revenue was TRY 31 billion, up 7% year-over-year, with increases of 8% in Fixed broadband and 20% in Mobile versus contractions of 16% in Fixed voice, 3% in corporate data and 13% in international revenues.

The gap between consolidated and operational revenue growth within the quarter was once again owing to the low IFRIC 12 revenues. Excluding the IFRIC 12 accounting impact, first half revenue was TRY 61 billion, up 8% year-over-year in a trend we consider compatible with our 11% to 13% guidance for the full year, along with expected second half financial performance, which will be highly affected by inflation dynamics and the price adjustments we have recently implemented.

Preliminary July results also confirm that our view on revenue outlook is well grounded. Fixed Internet and Mobile together made almost 75% of second quarter operating revenues. The two lines of businesses together made significant contribution to growth with more than TRY 3 billion higher revenue compared to same period last year.

Corporate data revenue improved 11% quarter-over-quarter. The decline in international revenue year-over-year was mainly driven by the change in exchange rates remaining well below inflation in the period. Contraction in voice revenue also continued into the second quarter, slightly offsetting the growth in data revenue. The 8% increase in Fixed Internet revenue was driven by respective 2.3% average subscriber growth and 6% ARPU growth in second quarter. The 20% impressive increase in Mobile segment revenue can also be decomposed into similar 2.4% average subscriber growth but higher 15% ARPU growth.

Moving on to EBITDA. Starting on the OpEx side. Direct cost declined 7% year-over-year with contractions of 29% in interconnection and 22% in equipment and technology sales costs, whereas commercial costs and other costs rose 6% and nearly 1% respectively. While commercial costs continued its upward trend annually in the second quarter, the pace of growth slowed significantly from 28% in the first quarter. Flattish look in other costs year-over-year was driven by personnel and network costs, the 13% year-over-year increase in personnel cost was largely mitigated by a 17% decline in network cost.

As such, OpEx to sales ratio up to 61% compared to 67% in the same period of last year. As a result, consolidated EBITDA rose 22% annually to TRY 13 billion with EBITDA margin expanding by 550 basis points year over year to almost 39%. Excluding the IFRIC 12 accounting EBITDA margin slightly exceeded the important 40% mark. Looking into half yearly number, OpEx to sales ratio dropped to 62% compared to 68% million in the same period of last year, paving the way for a 530 basis point improvement in EBITDA margin year-over-year to 38%.

First half EBITDA picked up by 22% year-over-year to TRY 24 billion. All the EBITDA and EBITDA margin evolution has been stronger than our expectations so far. We maintain our guidance unchanged, mainly because of the personal salary adjustments that we implemented effective from August. The move was driven by recent market practices and our motivation to remain competitive in talent management, although the decision comes as a deviation from our earlier plans, it is well manageable within our existing budgets, thanks to the EBITDA outperformance so far.

In addition, all the network expenses remained subdued, so far, thanks to lower energy costs in lack of electricity tariff increases as well as to lower maintenance cost, it will be fair to assume some pickup in these cost items starting from third quarter following an electricity tariff hike introduced in July. Nevertheless, we feel rather comfortable with our full year EBITDA margin guidance range of 36% to 38% as the first half performance hovered around the high end of our target. In addition, we aim to maintain this performance and stay closer to the high end for the full year.

Down at the operating profit level, the figure was TRY 2.6 billion in the second quarter, comparing favorably to TRY 0.4 billion operating loss in the same period last year. That brings us to TRY 3.8 billion on a half yearly basis, again comparing much higher to TRY 2.3 billion operating loss in the first half of last year. This was largely suppressed by the earthquake impact.

Coming to the bottom line, TRY 6 billion of net financial expense dropped 33% year-over-year in the second quarter, swinging from an increase of 78% in the first quarter but remained more or less stable quarter-over-quarter as we expected. In other words, while first quarter had a negative impact of last year's low base in the same period. Second quarter conversely enjoyed the positive impact of a high base. The widely known shift in monetary policy was the obvious reason behind the large swing in the first and second quarters, the rates of change annually. As such, net financial expense dropped slightly to TRY 12 billion in the first half, thanks to stabilizing financial market in annual comparison and successful management of financial risks in this environment.

Finally, with about 18% effective tax rate, we recorded to TRY 1.4 billion net profit, which took the first half figure to TRY 2.5 billion comparing favorably to TRY 2.3 billion net loss in the same period of last year.

We are now moving on to Slide #9. CapEx spending normalized from prior quarter's low level, which was driven by seasonality and Ramadan and materialized around TRY 7 billion, up 7% year-over-year. At TRY 12 billion, first half investment spending pointed to 19% CapEx intensity ratio for the period, well behind our full year guidance rate of 27% to 28%. Typically, our CapEx spending picks up in the second quarter with particular acceleration in the final quarter of the year. Therefore, our CapEx intensity guidance also remains unchanged at this point.

Moving now on to Slide #10 with debt profile. Net debt-to-EBITDA has continued its downward trend towards one multiple, thanks to stable currency and improving operational performance. Cash and cash equivalents of which 44% is FX base totaled TRY 7 billion. This excludes the $260 million equivalent of FX protect time deposits that we book under financial investments. The share of local currency borrowings within the total debt portfolio was 19%. The FX exposures included U.S. dollar equivalents of TRY 1.7 billion of FX-denominated debt, TRY 1.6 billion of total hedge position and close to TRY 100 million of hard currency cash. The hedge amount also includes a $260 million equivalent of FX protected time deposit, which stayed flattish quarter-over-quarter.

In this quarter, we issued a 5-year $500 million sustainability bond through an extremely successful transaction in May. At the same time, we tendered back $300 million of the February 2025 Notes. That means that outstanding '25 Notes is now only $200 million. Also, we secured two separate long-term ECA facilities for respective $120 million from Citibank and EUR 80 million (sic) EUR 83 million from Exim Bank of China in May, April and May. As such, we attained a more balanced debt for debt maturity profile as of the second quarter, as you will see on the top right chart. For the near term, we remain comfortable with the existing debt portfolio, especially given the reinstated strength in our cash flow, which is set to further enjoy progressive EBITDA generation and the high season ahead.

Admittedly, we may be in need of fresh financing next year or so, if there is concrete progress in the outgoing process for the renewal of fixed line concession of the official -- or the official 5G rollout plan.

We are now moving to Slide 11. Our short FX position was close to $70 million by the end of the quarter, excluding the ineffective portion of the hedge portfolio, namely participating cross-currency swap contracts, foreign currency exposure was $260 million for FX position. The expected PCCS portfolio significantly contract following the maturity of June '24 Notes as several transactions expired together with the hedge bonds. According to the sensitivity of the P&L statement to exchange rate movements, 10% depreciation of lira, we'll have TRY 700 million impact on Q2 profit before tax, assuming all else constant.

Finally, second quarter unlevered free cash flow was TRY 3.2 billion compared to TRY 2 billion a quarter ago in a progressive trend that took the first half unlevered free cash flow to TRY 5.2 billion compared to near TRY 0.5 billion in the first half last year, underlying robust operational performance in addition to low base holding to last year's earthquake and macro volatility. This will conclude my presentation. We can now open up the Q&A session.

[Operator]

Ladies and gentlemen, at this time, we will begin the question-and-answer session.

[Operator Instructions]

The first question comes from the line of [indiscernible] with HSBC.

[Unknown Analyst]

I have a few. So just the first question is on your margins, given that in second quarter, you had actually very good performance, very close to 40%, I think, which was the trigger for you to think about dividends again. So if you could update us on that, if you do indeed cross to 40%, would you be resuming dividends? And what would be the timing of all that after reaching the 40% level? And related to that is whether you would prioritize further deleveraging or even happy with the current leverage in all levels?

And then second question is on your options around infrastructure assets. You have, I think, very good fiber asset as well as towers. So any plans to monetize any of these assets, what are the options we are considering around it? And then final question is on state of competition currently, which operators are aggressive? Are we comfortable around being able to pass on the price hikes to consumers without affecting either market share or the usage levels at the customer level?

[Kaan Aktan, executive]

Well, let me start with first part of your question, which was around margin and impact on potential dividend payout. So as you mentioned, we had a very good progress in the margin improvement. That was actually an important factor in our beginning of the year story line. We said it's going to be a year with a revenue growth, assuming, I mean, the inflation scenario takes place as we predicted.

And also, we should be seeing margin improvements compared to last year. I think it's happening. It's moving in the right direction. It's reflected in the second quarter results. One factor when we look at the outlook for the second half of the year in terms of the margin. So one factor to take into account, as I mentioned in my part during the presentation, we made a salary adjustments in August. So that wasn't part of the beginning of the year plan for us. But we shall be seeing, again, excluding that adjustment, normally, we will be seeing further improvement in margin. But even with that, we should be staying within our guided range of 36% to 38% converging towards the high end of the margin.

But when we try to translate this performance into the potential dividend payout scenarios. Obviously, operating margin is not the only component to decide on the dividend payout. So we should be closer to the year-end in order to understand, especially what should be expecting the financial expenses effects different FX losses line to see the bottom line. And also, we should probably be looking at next year's investment requirements. So it looks like it's going to be a bit busy since we started discussing as our CEO mentioned potential extension of the fixed asset -- extension of the fixed-line concession and possible the 5G tender at some point maybe next year.

So I think the year-end when we announced the numbers, there will be more clarity about the time line and the calendar of such substantially large-scale investments. And also, we will definitely have the year-end numbers with the financial results. So it will be really too early to make an assessment on the dividend payout, especially for next year. So our CEO will take the second part.

[Ümit Önal, executive]

[Interpreted] We have been seeing that the main focus of the Mobile market for the last 3 quarters has been shifted to the subscriber acquisition, not solely the subject of this quarter.

We have been observing that the price gaps are occurring because we have been increasing the prices of our tariffs but the other operators are following with lower rates and also with later dates.

We have been observing that the market and increasing its competitive environment with campaign intends to focus for subscriber acquisition. Of course, this occasion is definitely reducing the ARPU growth potential of the sector generally.

I'd like to repeat that our preference in the Mobile sector is for competition to continue on the rational condition. Acting with our responsibility of price leadership on the fixed side, we did not compromise on inflationary pricing and we have revised our retail prices. So we would like to see the same to occur in the Mobile market as well.

Let me start my explanation with an example. We have added 109,000 net adds this quarter, and the other operators, I mean one other has added 413,000, the other added 474,000 net adds. So this actually puts forward the fact that we are not actually playing the game over subscriber numbers. We try to stay on the rationale and the realistic side of the market.

The numbers I have just shared were recorded within the first half of the year. Also, I'd like to give another example in the last quarter, we have increased our service revenue market share by a 1.5% of the telecom, another operator has come down 2 points down and the third operator only added 0.4 points to their service revenue market change.

[Unknown Analyst]

Sorry, and the question on the infrastructure asset monetization options, if at all?

[Kaan Aktan, executive]

Yes, I was about to open my line to answer this. Yes, I mean, you're right. There are such cases across the world through which operators try to create cash by selling and leasing back their assets, but it's not going to be part of our short to midterm projects. We will be focused on working on the license extension agreement, defining the conditions on it. And from a regulatory perspective, there is also the fact that our regulatory environment is significantly different than the rest of the world when it comes to ownership of the network infrastructures.

So government has a strong say in defining the temporary or permanent ownership of the asset. So that's also complicates the picture, so considering everything together. So it's not going to be within our immediate plans.

[Unknown Analyst]

But would you be open to infrastructure sharing, especially on the mobile side, if not monetization?

[Kaan Aktan, executive]

Definitely. I mean, as a late entrant to the market, which -- in the older days, we had difficult time to create coverage in our mobile network. Fortunately, we brought our network into a very good coverage level but we also always pushed for sharing at least the passive infrastructure element with other operators. It didn't work always as smooth as we expected but we are always open to have a better sharing of mobile network assets, especially towers. And Turk Telekom will be needed in that if the other operators to be more open to share their network as well.

[Operator]

The next question comes from the line of Madaci Ece with Unlu Securities.

[Ece Mandaci Baysal, analyst]

I have a couple of questions. The first one is a follow-up question regarding your revenue growth performance. Since you have maintained your guidance for 2024, I calculate that for the second half, there should be some double-digit maybe revenue growth on a year-over-year basis. So what will be the main driver for that? You have already mentioned about the price adjustments, but you also highlighted the increase in competition in the market. Could there be any possibility of additional price hikes in the second half? Or do you expect some normalization or rationalization going forward with the back to school. Additionally, I'm seeing that your corporate revenues were lower on a year-over-year basis in second quarter. So will this continue? And what's the main reason for that?

And another question is about the working capital. In the last 2 quarters, we are seeing an increase in your working capital needs, is this the new normal now? Should we take into account this new working capital over sales ratio? Or could there be any possibility for improvement going forward with the increase -- with the increase in your revenue base. So thank you in advance.

[Kaan Aktan, executive]

Thank you very much. Let me start with the revenue outlook for the rest of the year. Obviously, we now have in our lives, the reality of the inflation adjustment. So when I -- when we look at the operating performance and when I say operating, what happens in the revenue, the historic revenue and the drivers behind it. So we see a strong second half of the year, which is also being confirmed by the first 2 months of the second half since we see the number.

But the other factors which impact the growth rate, obviously, is now the inflation -- level of the inflation because we are adjusting both last year's numbers and also this year numbers in line with the inflation indexes of the relevant period. And the inflation index for the quarter when we reported quarter is mainly the average inflation of that quarter versus the average inflation of the same quarter of last year.

So when we look at the second quarter's average inflation, we have around 72%. So that's what -- this is the highest of the last 6 quarters. And when we completed the quarter, now we start seeing the decrease in the headline inflation, which is the point-to-point of 12-month inflation. And we are still keeping our inflation estimate for the full year at around 42%. So these quarterly numbers, quarterly averages, we should expect under this scenario come down from 70 plus. There was of second quarter, first to 50%-plus numbers and then 40% plus numbers in the last quarter of the year.

So mathematically, that will push our revenue growth inflation, the adjusted revenue growth up and very visibly. So this is why we stay strong on our revenue outlook for the second half of the year. And we should also see the gap between our -- between the growth rate of the Fixed broadband business and Mobile business to narrow. So that will be very strong. We expect to see a strong revenue growth or keep the revenue growth strong in the Fixed broadband operationally and the gap will get narrower compared to mobile. That will also help us operationally to generate strong revenue growth in the second half.

Again, operationally, we have better clarity. But the other component, which is the inflation, as I said, we expect to see it at 42% when it comes to the year-end. If there is a deviation from that number, obviously, that will also impact the real revenue growth versus last year when inflation -- adjusted with the inflation. So the competition is high as you mentioned. So there will be probably changes in the way we manage the business by looking at the competition. We will mainly try to keep the discipline in place without getting too much involved in this game of getting more customers at a lower price but whatever we do, operational, there is a limited time left until the year-end.

And in our world as a telecom operator, it's not easy to positively or negatively impact the remaining few months even you start doing radical price movement. In that sense, we have more confidence on the full year outlook.

For the corporate revenues, as you will probably remember from prior discussions, especially on the Fixed broadband and partially on mobile, we are operating on Fixed price contracts. Fixed price contracts are a bit longer in the Fixed line business. We started with 24 months is the industry standard. We are now at 15 months and mobile is 12 months. The reason why we see a bit late acceleration in Fixed broadband is exactly the reason why the contracts are longer in Fixed broadband business. And now the Fixed broadband growth will start catching up with mobile growth.

But when we look at the corporate, especially corporate data business, the contract terms are even longer. So these are big customers generating sizable revenues in one single contract. Some of them are our government-related entities and their contract turns are even longer than 24 months going up to 3, 4 years. So once we reprice those loan contracts, there is immediate and very sizable visible revenue uplift. But from one year to another, sometimes we have just the same revenue generated from those bigger comps. And since it's a game of small number of customers creating most part of the revenue stream. We are a bit -- start with lower revenue growth in that line. So as I said, we are now -- we started even this quarter repricing some of the big contracts and growth rates should be improving going forward. And what was the can you remind me the last part of the question?

[Ece Mandaci Baysal, analyst]

About working capital [indiscernible] working capital?

[Kaan Aktan, executive]

Yes. I mean obviously, we are going through a very sizable revenue growth period. One impact is definitely a higher level of receivables when we have such a high growth rate in our revenues. But some of it is also related to temporary issues like I remember that in the prior quarter, in several quarters, we had long bank holidays where we had to make delayed the payment cycle to the next quarter and suddenly, that changed the accounts payable level for both quarters.

And then we repeat in the years to come, then certainly it gives us a different working capital outlook. Most of it will be temporary, I would say. So when those factors are adjusted especially in the full year -- when we look at full year, it's going to be a more normalized level. But all in all, not only for the working capital but overall, for the cash flow performance, I would expect to see a healthy growth in full year in the operational cash flow that we generate. I think margin improvement, revenue performance will definitely have that and there will be real growth and sizable real growth in the cash that we generate at the end of the year.

[Operator]

Mr. Mandaci, have you finished with your questions?

[Ece Mandaci Baysal, analyst]

Yes. Thank you.

[Operator]

The next question comes from the line of [indiscernible] with Barclays.

[Unknown Analyst]

Congrats on results. I have just three questions. So my first question, you mentioned that with the potential concession extension as well as 5G tender you could evaluate your financing options and maybe require some more financing. Are you considering coming back to the market? Or is it going to be a bank loan in your opinion?

Then my second question is with regards to the 5G tender. Could you provide any comments with regards to the time frame that you're expecting there?

And finally, my last question is with regards to the comments that were made this morning about a potential merger with Turkcell as well as joint infrastructure for the broadband as far as I understand. I was just trying to understand what is the background or the grounds for these types of comments.

[Ümit Önal, executive]

[Interpreted] Let me start by answering your last question about whether it is -- are we considering any? Is it possible to have any merger with Turkcell or any other institution. There is no such thing and it is not possible to consider such a merger or anything with any company, including Turkcell and also joined infrastructure company kind of things are also totally out of the table. So they are not a possibility for us.

I mean it's not possible to do for many reasons. First of all, we are both under sovereign wealth fund of Turkey, and our shareholder structure bears drastic differences. And also, it is not possible to do technically as well because strategically and the strategic plans are -- it's not aligned, so it's not possible to do it. It's not on the agenda.

Recently, the Ministry of Transport and Infrastructure stated that they are aiming for 2025 for the 5G and 2026 for to be service delivery. So we are getting prepared accordingly.

Also, Ministry of Transport and Infrastructure also made statements related to the concession renewal of Turk Telecom, and that is planned to be completed within 2024. And just recently, the privatization administration, which was assigned to the [indiscernible] comprehensive due diligence process with us, and they submitted their report to the Ministry of Treasury and Finance. So we believe that in the upcoming period, there will be a heavy traffic related to the terms and conditions and everything and the decision process will come to the floor.

Related to 5G, the price, the financing and the type of the tender and auction, so we are all following the relevant authorities and preparing accordingly. Again, for the Fixed concession renewal, we believe that the framework of its the payment and everything will be mainly focusing on the sustainability of our company. So we will definitely consider the healthy turnover of our company and also to continue to ensure the continuity of the investments accordingly.

[Kaan Aktan, executive]

Let me add the first question, which was about the potential financing of next year's investments. So let me start from where we are as of today. So in total, I mean, including this currency protected accounts and everything, we have close to $500 million equivalent of cash and as I mentioned during the presentation, we recently signed several ECA deals agreements through which we have $400 million signed committed but non-utilized balance.

And also, we are now approaching to almost one multiple in terms of the leverage. So we see that gives us from a balance sheet perspective more relaxed way of considering potential large-scale investments but I think which is really important as we experienced during our latest issue of Eurobond. Now we have full availability and also is a way to access of different finance structures because the regulations have been changed and the outlook of the country has improved significantly, which also -- which we also benefited as a large corporate in this market. We have easier access to anything that we want to be part of either its financing transaction or it's a hedging transaction.

And there is also liquidity availability in those instruments. There is also supply in those instruments. I think it shouldn't be wrong to say that if there is in the same year, an extension of fixed-line concession plus 5G tender, we will be look at it different options. And which maybe one of the options. As you know, we have repayment of the '25 in February, which is now down to $200 million. When we make the repayment, we will only have one tranche left and we always said two of them in our balance sheet. So there is -- that will clearly be room for accommodating another one, plus any type of other financing structures including ECAs, club loans or anything similar? So I hope that will answer your question.

[Operator]

The next question comes from the line of [indiscernible] Asset Management.

[Unknown Analyst]

Can you give us any hints that might put some light on the structure or the potential concession deal. And my second question is about if you see any signs of affordability problems on the customer funds maybe related to that, you can give us some hints about the MNP activity after a series of price increases -- I mean considering the nominal levels of the tariffs, I want to understand. So how long can you sustain above inflation revenue growth?

[Ümit Önal, executive]

[Interpreted] Let me start by answering your second question. We are continuing with our inflationary pricing actions. And so far, I can clearly state that we haven't seen any affordability issues or any resistance on the consumer side and we have followed the consumer behavior. We have analyzed them. So we haven't seen [Technical Difficulty]

Of course, we know that there is an economy program that is in place and implemented. It has some effects in all sectors and maybe even that it can affect, but so far, we have not been affected I can see.

About your first question related to the possible terms of the concession renewal. So I can tell you that the main model for us and the main number for us will be within the framework of considering our company is owned by the government directly or indirectly, it's 87%. And so we believe that our stakeholders and shareholders will always consider the healthy balance sheet structure and ensure the investment continuity of our company. So this is the main understanding that we expect from the model and the number in terms of the money to be paid. And then we discussed with the Privatization Administration and when we shared our documents and information with them, we have felt that we are understood well on this.

[Kaan Aktan, executive]

And mathematically -- let me just one thing. If you go back to earlier days like when this high inflation period started back to 2020 to '21. I mean, as we just started to catch the consumer inflation. So I mean, it's not a secret. Our industry was not prepared to accommodate such high inflation, especially that impacted our cost items because everybody knows we used to operate on fixed price contracts with most of the customer base. So we were lagging behind the inflation when it came to revenue growth. This is just only catching up the consumer price index. And when you look at the producer price index, which is a better indication of the impact of inflation on our cost base, we are even -- we have still a way to go there.

So we had to provide fixed price for a very long period. And during that period, we had to absorb very high cost inflation in our cost base and it's also short in our margin story. So last year, a year before that, those also were the years that we lost margin due to this factor. Now it's getting back to where it was. So it's not about getting additional or incremental price adjustments on some inflation but catching up the cumulative negative impact in inflation for a longer period of time.

[Operator]

The next question comes from the line of Campos Gustavo with Jefferies.

[Campos Gustavo, analyst]

Congratulations on the results. Just a few questions on my end. The first, in light of the 5G tender, the potential concession renewal, where do you expect CapEx as a percentage of sales to be in 2025 relative to 2024? That's the first question.

[Kaan Aktan, executive]

You mean including the cost of the extensions and new license or excluding those factors?

[Campos Gustavo, analyst]

Including those, if possible.

[Kaan Aktan, executive]

Well, that will be extremely speculative. So because the 5G package is not even defined in terms of what type of frequencies will be included into that given the term of the contract in terms of how many years will be covered is not even defined. So with all those unknowns together, it will be very difficult to say something about it.

[Campos Gustavo, analyst]

No worries. No worries. And if it was excluding those expected investments and then what would be your -- if you have like any estimate, that would be helpful?

[Kaan Aktan, executive]

Well, normally, again, anything that will come from those new big-ticket items, we should be around a peak level in a long-term trend this year. So we get closer to 30% in terms of CapEx to revenue intensity for this year. We guided for something lower than that. And the revenue growth is also supporting the reverse trend in terms of CapEx intensity. Clearly, that was the factor that pushed those numbers to our 30% last year and the year before that because I mean the cost inflation on the investments that we made was much higher than the revenue growth.

And at some point, we try to rationalize our -- the amount of investments we did up to a certain point but still it's impacted and it gave us a much higher CapEx intensity. Going forward, I would also expect to see a reverse trend in those parameters, revenue growth being higher, the cost of the investments staying lower than the revenue growth. And even with a similar number of units into which we invest, we should see a lower percentage. And we should be slowly and slowly converging to low 20s going forward.

[Campos Gustavo, analyst]

That is very helpful. My second question is on your hedging policy. If you could provide any updates whether you're planning to obtain a new PCCS contract for the new bond? That's the second question.

[Kaan Aktan, executive]

Well, not for the new bonds, but for the existing bonds, actually, there's only TRY 200 million left until February. We tapped that market with participating cross-currency swap contracts, just to have a feeling of how it's working, whether there is availability there. And we also acquired almost a number similar to the exposure that 2025 maturity. And for the longer -- for the new one, we see -- we will expect to see even better market and see lower rates. And then we may have a plan around hedging this new $500 million bond. Until that time, we are hedging the total exposure, which also include the new bonds with short-term contracts and keep the exposure at around $200 million to $300 million short position level.

In the foreseeable future, we will continue implementing that strategy. Again, mostly by using local market supplied short-term hedge contract. But the good news is there is availability even in the local market for participating cross-currency swap contracts.

[Campos Gustavo, analyst]

Understood. That's crystal clear and very helpful again. My last question will be on the New Bank of China Citibank facilities you recently signed. Do you have an expected use of proceeds? And is my understanding correct that they're fully undrawn and available at the moment?

[Kaan Aktan, executive]

Partially, but all in all, total unutilized portion of everything that we agreed and signed with under ECA agreement, it's close to $400 million equivalent.

[Campos Gustavo, analyst]

Okay. And now what is the expected use of proceeds? Are you planning on drawing those facilities in the near future? Or are you just planning on leaving them available for a rainy day?

[Kaan Aktan, executive]

Yes, it will be fully aligned with the amount of procurement that we have from related suppliers. So they are backing the purchases through Nokia, ZTE and Huawei. So these are our big suppliers in terms of major equipment. It will be a smooth process in line with the way we invest into our core business.

[Campos Gustavo, analyst]

Understood. So the Bank of China Citibank facilities will be mostly for working capital purposes?

[Kaan Aktan, executive]

Fully used to finance the CapEx that we have in our balance -- in our numbers.

[Operator]

The next question comes from the line of [indiscernible] Invest.

[Unknown Analyst]

Congratulations for good operating results. My first question is about the inflation accounting figures. Could you share some metrics like margins and net income [indiscernible], if possible. And going forward, in the industry, you're operating, do we have any ROE guidance, not a guidance, but maybe indication going forward what could be the ideal ROE for a company like you? That's my question also. And the last question is about following years in terms of inflation accounting impact. If we are assuming that inflation will come down and the interest rate will come down. What would be the effect on your financial ball part, just see how the real growth side and the margin side will be affected in case of transition from high inflation to lower inflation.

[Kaan Aktan, executive]

Well, disclosing the [indiscernible] inflation adjustment numbers, I think our current standing is that already complicated to even understand the adjusted numbers when we do such as we did in the prior quarter, just to make a transition to the new era but if we continue doing that, I think it will be very difficult for all of us to analyze the numbers and it will be confusing to compare those two sets of numbers and come up with an idea on the business that we are managing. So this is why we stop but we took or not. So if there are more requests around this -- so we will evaluate and we will also share this with the capital market contract to see whether we should continue on anything like this.

So if the -- change in the inflation, I mean, overall, so obviously, in the short term, it impacts the real growth in the revenue line. So if suddenly we see a dramatic change in the short term, again, I'm underlining this since we have a limited ability as a telecom operator, this is because how we operate is a large telecom operators since it's a bit difficult to impact the money that we are charging to our customers. So the short-term impact, obviously, gives us a lower than or higher net growth in the revenues. But it's not aesthetic -- there is nothing static here.

So if you see that influence is moving in a different direction, then we took the necessary operational actions to really follow the inflation trend. And in the mid to longer term, obviously, we should get closer to the inflation and try to deliver yield growth. But in terms of margin, especially operating margin, not the level or the number that we report, but the margin that we report, the inflation has very limited impact. So it changes the growth numbers, either we deliver real growth in the margin but the percentage margin that we report is not being very much impacted.

And ROI, I mean it's a very good question. I think since we are using a very large capital, the ROI should be a good indicator. But again, there are other complexities in doing that first with inflation and then the other with the ownership of the assets. So as all operators, we are operating with assets that are owned by the government at the end of the day. And we revalue those assets and included difference into our equity pool because of the inflation adjustment. So it will be very difficult to now measure properly as other maybe operators around the world will do to give a return on those on the equity numbers. First, as I said, because of inflation adjustment and the second ownership of the asset.

Let's consider this, let's try to come up with something maybe similar that will at least give us how we can -- how much benefit of real value we generate for the equity owners. But I may not be the best case in our situation. It may not be the best solution in our case.

[Operator]

The next question comes from the line of Lima Felipe with Banco Finantia.

[Lima Felipe, analyst]

Congrats on the results. So just following up on your need for additional funding for the concession renewal and the 5G tender, how much should we expect leverage to increase? Or what is the leverage that you are comfortable with?

[Kaan Aktan, executive]

I mean, again, that's really have the details of the conditions in both the agreements, I mean, the concession and 5G. But again, as I mentioned, we came down to almost one multiple. And again, the -- both the cost of funding is coming down. Also the availability is being stronger and stronger every day. So I would rather focus on the conditions of those extensions rather than the possibility to finance those instruments. So the first part will be more important and more definitive for the business. I will be more relaxed on how we will finance the CapEx requirement.

[Operator]

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

[Ümit Önal, executive]

[Interpreted] Well, thank you, everyone, for being with us today. [indiscernible], thank you.

[Operator]

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]