Turk Telekomunikasyon AS

IST:TTKOM.E

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Costantino, your Chorus Call operator. Welcome, and thank you for joining the Turk Telekom conference call and live webcast to present and discuss the 2023 full year and Q4 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 2023 fourth quarter and year-end results conference call. Thank you for joining us today. Geopolitical risks have taken the center stage in the final quarter of '23. While the large central banks set the level of tightening class satisfactory, they also send frequent warnings against in mutual cuts. At home, the CPI has continued its upward trend, closing the year slightly below 65%. The Central Bank delivered a surprising 500 basis points hike in its March meeting, taking the policy rate to 50%. We achieved robust results in Q4 following a seasonally strong Q3. We maintained a solid top line and EBITDA performance in the final quarter. Strength in data consumption, recontracting and upselling that prevailed in prior periods remained similarly robust in the final quarter in mobile and fixed Internet, strongly supporting ARPU growth in both lines of business. Starting with 2023 financial and operational overview on Slide #2. Consolidated revenues surpassed TRY 100 billion with 10% annual growth. Excluding the IFRIC 12 account impact, revenue growth was 11%. Consolidated EBITDA dropped by 8% annually, closing the year at TRY 33.5 billion versus about TRY 36 billion in the prior year. Full year EBITDA margin contracted by more than 600 basis points on an annual basis to 33.5%. Net income rose 138% year-on-year to TRY 16 billion with the help of a sizable deferred tax income. Total CapEx spending was a tad below TRY 26 billion. Net leverage improved to 1.7x. Moving on to Slide #3 for quarterly performance, which is presented in historic figures. Quarterly consolidated revenues increased to TRY 26 billion with 68% year-on-year growth. Excluding the IFRIC 12 accounting impact, revenue growth was 74%. Consolidated EBITDA grew by 52% year-on-year in the final quarter to TRY 8.5 billion with 33% margin. CapEx spending was TRY 9 billion. Slide #4, net subscriber additions. We closed the year with nearly 53 million subscribers. Our total net subscriber gain was 146,000. Excluding the contracting fixed voice segment, have TRY 1.2 million net gains on an annual basis or a 2.8% growth in a challenging year reinforces not only the attractive prospects of the Turkish telco sector, but also our distinguished ability to take advantage of the opportunities in the market with our effective and delivering strategies. Fixed broadband base increased to 15.2 million with 82,000 net additions in Q4 alongside the seasonal slowdown 2-on-2. Another revision to retail tariff prices at the beginning of December affected our quarterly performance. 365,000 total net additions in full year '23 was largely shaped by the combined impact of the February quake, a strong back-to-school performance and pricing actions. Mobile segment added 84,000 net subscribers in the quarter, reaching 26.2 million in total. Postpaid base recorded a massive 611,000 additions, well ahead of the competition, marking in historic high quarterly performance. Prepaid pays reversed course from prior quarter to contraction with a sizable 528,000 net loss. As such, we added a total of 724,000 mobile subscribers in '23 with a 1.6 million surge on the postpaid side and a total of 890,000 decline on the prepaid side. Accordingly, annual postpaid net adds also hit a historic record performance. As a result, the ratio of postpaid customers in our mobile portfolio climbed to its highest level of 71%. Slide #5, fixed broadband performance. In line with our plans shared earlier, we have changed our retail tariffs contract structure to plus 9 from 12 at the beginning of December. At the same time, we revised prices simultaneously. Similar to several rounds of pricing. We have been true in the past 2 years, we have seen some ISPs making relatively smaller adjustments to their prices and following suit significantly. As such, we have seen the same price parity in balance we observed in Q3, repeating itself in the FPB markets starting from December. Although the activation performance held slightly behind our expectations in Q4, we achieved our net add target with a stronger churn performance than we expected. Recontracting performance once again exceeded our quarterly expectation and reached the highest level of the year. Demand Plus brought forward a little ahead of the price revision in the contracting portfolio introduced in January. Demand for higher speed maintained its robust trend in the last quarter of the year. 35 megabits and able packages made 49% of Q4 new sales. The same ratio was 54% in recontracting the highest quarterly levels seen in the year, thanks to an upsell performance that exceeded our expectations. Having increased by 41% year-on-year, average package speed of our subscriber base was 46 megabits as of year-end. 51% of our subscribers are now on 35 megabits and above packages. While fixed internet ARPU contracted by 1% year-on-year in '23, segment revenue growth landed on the positive territory, thanks to 2.7% yearly expansion in average subscriber base. Quarterly momentum in ARPU remained intact with the help of July and December '23 pricing actions, which should also support a strong start to '24. In line with our high-speed fiber sales growth strategy, we have raised the entry speed to 50 megabits for new sales and the minimum speed to 35 megabits for existing customers in FTTH packages. We expect our actions to positively support ARPU evolution in the coming periods. We aim for above inflation FPB ARPU growth this year on the back of continued pricing, subscriber growth and obsess. Similar to last year, we will be aligning 2024 pricing actions with competitive dynamic subscribers' appetite to absorb new price levels and the course of inflation. On Slide #6, we share our flight with you. Thanks to Turk Telekom's persistent investment in fiber. Turk has moved up one step to second position by a number of FTTH FTTB Homepass according to the FTTH Conference September '23 reports covering 39 countries. Turk added 2.3 million FTTH FTTP Homepass in the 12 months period to September '23, thanks to Turk Telekom's 1.5 million contribution in this growth within the same period. In addition, the country has been named third fastest-growing market by adding 1 million FTTH FTTB subscribers in the same period, of which close to 800,000 came from Turk Telekom alone. Moving on to mobile performance. Slide #7. Despite the campaign-intensive marketing strategies of the operators, dynamic pricing dominated the entire mobile market in '23. Operators in unit, they are tariffs with similar price revisions almost simultaneously every quarter, the last of Fitch took place in October. Yet following a bottling summer, mobile market entered Q4 with increased appetite of the operators for subscriber acquisitions, a typical trend seen in the final quarter of the year. As such, the promotional activities, which turned fiercer from October to November and only normalized in December were more aggressive compared to prior quarters. In this environment, the MNP market recorded growth both only and quarterly, reaching its largest size since Q4 '20. Still, we preserved our position in this domain as the most preferred operator for the ninth consecutive quarter. While the activations in postpaid significantly exceeded what our expectation and the performance of last year's same period, both in the prepaid segment stayed behind in similar comparison. Oral churn rate was higher Q-on-Q, but flattish year-on-year. Competitive dynamics largely explained the quarterly trend, but continued quake related line closures and the activation of expired test lines also contributed. Driven by successful pricing, recontracting and upselling performances, blended ARPU growth was 15% for the full year, with respective 25% and 9% increase in prepaid and postpaid segments. That, combined with a 4.2% expansion in average subscriber base, took Mobile revenues 20% higher year-on-year. Mobile delivered an impressive performance throughout the year. LTE subscribers' average data usage increased 23%. The number of upsells, except for both generated through recontracting were 46% higher year-on-year. A robust consumer demand for Turk Telekom's mobile services and our concurring strategy, both of which we expect to remain supportive in the coming periods are evident in these numbers and lend us confidence in maintaining a strong mobile performance with an above inflation ARPU growth in 2024. On Slide #8, we compare 2023 performance to our guidance in historic figures. Excluding the IFRIC 12 accounting impact, a 74% revenue expansion in the final quarter has taken the full year '23 growth to 71% ahead of the high end of our guidance range of 67% to 70%. The full year EBITDA reached TRY 27.3 billion, sealing an annual growth rate of 43% with close to 34% margin and again, surpassing the high end of our guidance range, which stood at TRY 35 billion to TRY 27 billion. Excluding the annual impact of the earthquake and other one-off items, the full year EBITDA margin was nearly 35%. We ended the year with a total of TRY 21.6 billion CapEx, slightly ahead of our full year guidance range of TRY 19 billion to TRY 21 billion. Now moving on to Slide #9, 2024 guidance. We assumed an inflation trajectory leading a new CPI to 42% by the end of 2024. Our trajectory incorporates the Q1 '24 actual inflation and a downward trend from the expected peak in May. Accordingly, we expect our operating revenue to grow in the range of 11% to 13%, with continued subscriber base expansion in all lines of business, except for the fixed voice segment, dynamic pricing policy and robust upselling and recontracting performance. We expect solid trends in data and speed demand to prevail in 2024 and nicely support growth in ARPUs. We see our EBITDA margin improving to 36% to 38% range, which maintains momentum in revenue evolution and improving OpEx to sales ratio. Finally, we expect a CapEx intensity in the range of 27% to 28%. A higher volume of FTTH convergence and greenfield fiber access projects in addition to new data center and solar power plant investments can be considered the main drivers of the expected pickup in CapEx intensity ratio from last year. Finally, on Slide #10, we would like to share with you the progress we make on our sustainability agenda. As Turkey's leading telecommunication company, we are keen to grow our contribution to climate action. In its first meeting of 2024, our sustainability committee agreed upon targeting a 45% reduction to Telekom Group's Scope 1 and 2 emissions in total by '23 and net 0 by 2050. We have also submitted a commitment letter to the SBTI for our near-term targets. We are smoothly progressing on our road map to get the near-term targets approved by the SBTI. We take important steps together with our stakeholders to control our environmental impact and lower our carbon footprint. These include our work focusing on energy efficiency, diversification of energy sources, renewable energy, clean transportation and waste management. Moving to our '23 CDP score up by 2 matches to be from the prior year is a testimony to our commitment for climate action. We will remain devoted to raise our overall CDP score to A in the coming periods.Overall, we delivered a successfully balanced performance in a year we had to deal with significant headwinds. We have taken several actions to improve growth and resilience of our businesses. Lastly, the collective impact of these measures has become more reasonable on the second half metrics. Having left some particular challenges of '23 behind an improving macro picture and consumer sentiment as well as our ever-growing strength and capabilities in our businesses encourage us to expect a more vigorous year ahead. Certain KPIs that we closely monitor have been assertive in early months of the year. With this supportive factor, we stand confident in our ability to deliver on the ambitious targets we set out for the year ahead. Thank you. Kaan, the floor is yours now.

[Kaan Aktan, executive]

Thank you very much. Good morning, and good afternoon, everyone. We are now on Slide 12 with our financial performance. Audited revenues exceeded TRY 100 million 10% annually from TRY 91 million a year ago. Fixed Internet and mobile together made more than 70% of operating revenues. Mobile made the largest contribution to growth with TRY 6.4 billion higher revenue year-over-year. 13% increase in corporate data revenue was largely driven by growing managed services, including cybersecurity and data center services. Also, there has been a reclassification of some Wi-Fi service revenues from fixed broadband line to corporate data in 2023. While the robust 29% growth in other revenue was supported by ICT solutions, also in equipment sales decline in international revenue was largely driven by the changing euro to lira rate, short of inflation accounting in taxation. Moving on to EBITDA. Consolidated EBITDA dropped by 8% annually, closing the year at TRY 33.5 billion versus TRY 36 billion in a year ago. Similarly, full year EBITDA margin contracted by 640 basis points on an annual basis to 33.5%. Excluding the IFRIC 12, impact EBITDA margin was 35%. The higher growth in OpEx compared to revenue was the main driver of EBITDA margin contraction, but the southern earthquakes also affected the performance. While costs swiftly increased high inflation, the positive impact of pricing and other actions on revenues like due to the contracted nature of our businesses. As such, OpEx to sales ratio climbed to 66.5% from 60% a year earlier, mainly on the back of a 6% rise in personnel costs, which alone made 60% of the annual increase in total OpEx. Relatively less so, increases in commercial and other costs have also led an expansion in the OpEx to sales ratio. Now down at the operating profit level. Performance turned to negative TRY 2 billion from positive TRY 1.5 billion in the prior year. Coming to the bottom line, net financial expense increased less than 2% annually to TRY 18 billion despite severe rise in exchange and interest rates throughout the year, thanks to effective use of financial risk management tools. Finally, net income rose almost 140% in excess of TRY 16 billion from TRY 7 billion a year ago with the help of a sizable tax income inflated by the indirect impact of applying inflation accounting on statutory accounts for the first time, which will be considered a onetime effect recognized in 2023. Between the sizable price adjustments we made, particularly in the second half of last year, in addition to those we land for 2024, should lead to a decline in OpEx to sales ratio and improving EBITDA margin throughout 2024 under the assumption that the inflation trend will change out starting from June. Our assumptions driving the 2024 guidance also includes a 42% year-to-year end and 59% average inflation in addition to a onetime rate in personal wages, which has already happened at the beginning of this year. It's worth mentioning that our guidance is highly sensitive to these assumptions. Although being rather simplistic, the trial sensitivity analysis suggests that every 10-percentage point upside risk to our year-end inflation assumption, repeating the number, which was 42%, will stream about 2.5 percentage points of our revenue growth forecast. That said, we do think we have the options and capability to mitigate this impact through a range of actions on varying components driving revenue growth. We are now moving on to Slide 13. Total CapEx spending has grown slower than revenues by 7% annually to TRY 26 billion. With CapEx intensity ratio declined about 50 basis points from last year to below 26%. On the right-hand side, we present the breakdown of full year '23 investments by lines of business on historic numbers. According to fixed line investments made almost half of the CapEx spending, whereas Mobile took almost a quarter. The rest was allocated to IT projects and other CapEx items. We are now moving on to Slide 14 with debt profile. Thanks to the continuing deleveraging the net debt-to-EBITDA ratio dropped to 1.17 multiple of the year-end from 1.27 multiple a year ago. Net debt dropped to TRY 40 billion as of 2023 from TRY 46 billion as of 2022. Cash equivalents held up to TRY 13.6 billion, of which 40% is FX based by adding $270 million equivalent of FX protected time deposits on top of that number, total number will be TRY 21.6 billion. The share of local currency borrowings within the total debt portfolio remained flat quarter-over-quarter at 18%. The FX exposure included other equivalents of TRY 2 billion of FX denominated debt, TRY 2.4 billion of total hedge position and TRY 180 million of hard currency cash. The hedged amount included a $270 million equivalent of FX protected time deposits, slightly down from $280 million in the prior quarter. As you can see on the top right chart, more than 51% of our debt has less than 1 year to maturity NAV, a picture driven largely by our Eurobond due in June '24. Firstly, as you might have followed from our disclosure dated March '29, we signed a long-term loan agreement with Bank of China and the Export-Import Bank of China under the insurance coverage of our -- the amount of this facility was TRY 200 million, and the final maturity is March 2029. Secondly, the positive developments that we have seen in the financial markets over the past few months, certainly raise our appetite to consider an international issuance soon. We are now on Slide 15. Our long FX position was $540 million by the end of 2023. Excluding the ineffective portion of the hedge portfolio, namely the participating cross-currency contracts, foreign currency exposure remained almost unchanged from third quarter around $245 million short FX position. The FX since analysis we report regularly in our quarterly financials suggest assuming all else constant, a 10% increase or decrease in FX rates would have around TRY 800 million impact on our pretax income in either direction. Finally, the unlevered free cash flow was TRY 7 billion compared to TRY 11 billion a year ago. The year change can largely be attributed to the declining EBITDA versus rising CapEx in the year. And finally, on Slide 16, we try to present the impact of the inflation accounting on our balance sheet and P&L through some select ratios we monitor regularly, evident in all the metrics, including net debt to EBITDA, debt to equity or the valuation multiples we present on this slide, inflation account increase lies the true strength of our balance sheet value of our company and the effectiveness of our risk management policy. This will conclude my presentation, and we can now open up the Q&A session.

[Operator]

[Operator Instructions] The first question comes from the line of Cemal Demirtas with Ata Invest.

[Ender Kaynar, analyst]

Congratulations for good results. First, I want to thank you for the transparency in your disclosures regarding IFRS 29. Honestly, it's one of the best all, if not the best. It's one of the best examples in terms of transplant. So I would like to thank you once again, and it actually keeps me more optimistic about the future of our markets, Turkish markets, regarding the disclosure standards. So thank you again. I think it's a big thing for the analysts, to be honest. So I think several times. And I will get to my question. Regarding your guidance, your margin guidance is signaling some improvement. What type of business is driving that improvement? That's my first question. The second question is the -- how the trend goes regarding your fiber? And the last one is about the long-term strategy that we are having regarding 5G and also your license in the fixed side. So whatever are going to be the prospects in that area.

[Ümit Önal, executive]

We really appreciate your kind words about the quality of the disclosures and the inflation adjustment is a standard. It's really not easy to implement, but we also know that it's even more difficult to analyze from outside parties. We try to be as transparent as possible and also try to set a base for future disclosures. Obviously, we assume a healthy revenue growth for next year. And when it comes to drivers of the revenue growth, we forecast a healthy subscriber growth in all business lines. I mean, the mobile and fixed line businesses, hopefully better than what we had last year. And at the same time, we also forecast a stronger ARPU trend, especially for fixed broadband and expect to see strong ARPU growth now this year, both in our mobile and fixed line businesses. So having said that, I think it's worth mentioning at least how the real revenue growth formulation work when it comes to inflation adjustment, so we are following the comments, especially after our release of the financials. We said we are forecasting the inflation at 42% for the full year. This is 12-month inflation. But when it comes to inflation adjustments in our financials. The reference is mainly taken from the average inflation increase for the year.So although we did we see a drop versus last year in the full year inflation number, the average inflation that we calculate based on that 42% assumptions comes to almost 60%, 59%. So the revenue growth takes the reference from that number rather than the 42%. So if you want to translate to a historic revenue growth, you should use first the average inflation. And on top of that, you should use the guidance of 11% to 13% increase in the revenues, which comes to a strong revenue growth with the old standards or historic number comparisons. But finally, our OpEx assumptions is the key factor, I mean, with a strong revenue growth. But on top of that, our OpEx assumptions show that we see an OpEx growth lower than the revenue growth. One of the factors, as I mentioned in my part, we assumed only on salary adjustments, which is in line with the government's expectation at least for the minimum wage, which was also conferred yesterday by the minister himself. And also similar to inflation kind of increases, especially in the energy-related items like electricity and not FX hike, it is something not higher than the inflation forecast of 42%. So all combined together, that's what gives us the EBITDA margin improvement. And again, if there are patients from these critical assumptions like the inflation or wage adjustments that kind of -- we are ready to take further actions in order to at least go back to a similar margin improvement scenario. Probably you will remember, we started last year, we did, again, a low inflation assumption, which was around mid-40s, but the year-end came up to 65%. And there were a lot of corrections that we made in our operating model so that at least we can overcome most of the challenges that came from this inflation hike. And the second part of the question.

[Unknown Executive]

Yes [Foreign Language] First, I would like to thank Mr. Onal for his work content is, of course, very important for us, and it will continue. And we will always continue to incur our shareholders, stakeholders and investors correctly and transparently over. [Foreign Language] Remaining the concession as soon as [indiscernible] importance for Turk's digital network and to telephone. [Foreign Language] For this reason, the issue of concession will continue to maintain its top priority position on our agenda until the process is compete.[Foreign Language] As we have shared before, on level, I could care the -- in the top of Turk contract preparations. And in this regard, we share with you submitted the framework document in which we brought together our opinion the business and demand on this subject. [Foreign Language] We also know that our Minister of Transport and infrastructure stated that we expect a conclusion for the renewal of the concession of Turk Telekom within 2024. [Foreign Language] Our minister also said that you expect the conclusion within the first half of the year, and it will probably be for a 25-year expansion. [Foreign Language] In line with all these explanations and since this issue is a priority for the sector in general and for Turk, we expect to make a concrete progress in the not-too-distant features. [Foreign Language] Allow me to give you some information about 5G as well. Again, our Minister of Transport and Infrastructure stated that they aim to share the 5G transition plan with the public this year, and that priority will be given to local products. [Foreign Language] As we said before, we have been continuing our work on 5G for a long time, and there are many things to be decided upon and to be clarified in terms of the regulations on this subject by the regulatory authority. [Foreign Language] I mean, implementation of 5G technology at the right time, the right conditions is critical for consumers, for the industry and for the total benefit expected from 5G, and we believe both the government and the regulatory authorities to be factoring this information into account. [Foreign Language] Also a concrete timetable has not yet been put forward by the decision makers, but this doesn't necessarily mean that we are not making our current investments to be compatible with future technology. All our investments are in line with the future technology. Thank you.

[Operator]

Mr. Jamal have you finished with your questions?

[Ender Kaynar, analyst]

Thank you. I appreciate.

[Operator]

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

[Campos Gustavo, analyst]

Congratulations on the results. Just one quick question from my end. I'd like to review your refinancing plans. You mentioned that around half of your capital structure is due now during this year, and that's around TRY 32 billion. Now you have the Eurobonds and that's around the TRY 15 billion related to your plan to refinance, right? And would you mind confirming did you say like you were planning to come to the market? Or are you planning to assess other market alternatives. And then you're going to have like TRY 6 billion from the Bank of China refinancing rate that's due in March 2029. So I'd just like to get some color on how you're planning to address those maturities.

[Kaan Aktan, executive]

As I mentioned, we are now, at least as of the end of last year, our cash balance, cash and cash equivalent plus the currency protected time deposits. The total number comes to something like TRY 21 billion, TRY 21.5 billion at the end of the year, which is the cash that's mostly plan to be used for as the base case scenario for the refinancing of June 2024 Eurobond payment. That was the plan. Probably there will be another payment of Eurobonds in the early months of 2025. So we said complementing other financing options. As you mentioned EUR 200 million Chinese source ECA funding. And probably, there will be a similar number from 2 other different sources in the coming months before we close maybe the second quarter. There will be a similar number in total that we will be able to get the commitment, again, under ACA transactions. So in total, that should be something like EUR 400 million for the year on top of the cash that we had. But we said in order to have a more visible forecast for the refinancing of 2025 maturity, where we are now seriously entertaining the idea to come to the market for another Eurobond issues in the coming weeks. So that will be the basic plan for refinancing of this year and also the early next year's maturities. But on top, we are also using local currency funding from local sources in the form of commercial loans as well as short-term lira bonds. We already got the authorization from the capital markets for both under different companies and under different structures, up to TRY 10 billion of issuance, the right to issue TRY 10 billion bonds and Sukuk in the local market. That's still not utilized. But that's also a plan B for raising financing. This will be the summary of refinancing options for the next 15 months.

[Campos Gustavo, analyst]

Yes. That is very clear. And just one thing that I would like to clarify. Are you going to try to come to the market to refinance both of the 2024 and 2025 tranches? So let's say, an issuance of TRY 1 billion? Or are you going to try to refinance them one at a time as the maturities progress?

[Kaan Aktan, executive]

If we come to the market, that will be a standard $500 million, which should mean that we will be refinancing one tranche and the other should come from the sources that I just listed, mentioned.

[Operator]

[Operator Instructions] 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. Thank you.

[Ümit Önal, executive]

Thank you everyone for joining us today, and we hope to see you next time. Thank you. Bye-bye.

[Operator]

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