Good day, and welcome to the second quarter 2019 results conference call. For your information, today's conference is being recorded.At this time, I'd like to turn the call over to Korhan Bilek, Director of Treasury and Capital Markets Management. Please go ahead, sir.

Thank you, Wallace, and hello, everyone. Welcome to Turkcell's Second Quarter 2019 Results Call. Today's speakers are our CEO, Mr. Murat Erkan; and our CFO, Mr. Osman Yilmaz. We have a brief presentation, and afterwards, we will be taking your questions. Before we start, I would like to remind you to review the disclaimer of our presentation.Now, I hand over to Mr. Erkan.

Good morning and good afternoon, everyone. Welcome to Turkcell's Second Quarter 2019 Results Call.On behalf of the Turkcell family, I'm glad to announce another solid set of results made possible by the efforts of our dedicated team. We kept focus on our customers and innovative solutions, we continued strong double-digit growth in this quarter.We recorded 21% annual top line growth and TRY2.6 billion EBITDA with a 41.2% EBITDA margin. Record-high ARPU growth, both in postpaid mobile and fiber residential, also higher usage of data and digital services supported these strong results.Our new strategic focus, digital business services, contributed strongly to both the corporate segment and overall group results. Including both recurring and one-off projects, its first 6-month performance was up 62%. Solid operational performance, coupled with effective cost management, has led us to revise our full year EBITDA margin guidance up to 39% to 41%. Moreover, we have further strengthened our balance sheet with prudent finance management and cash-generation capability.As at the end of June, our net debt-to-EBITDA ratio has improved by [0.3x] year-on-year to 1.2. And today our Board of Directors has the taken decision to hold general assembly on September 12, 2019, also proposed the new dividend distribution dates, keeping the total dividend amount the same at TRY1 billion.Moving to next slide. Now some further details on our financial performance. We recorded a TRY6.2 billion top line on 21% growth and TRY2.6 billion EBITDA on roughly 20% growth. Our EBIT reached TRY1.3 billion with a 20.8% margin.Going forward, we will monitor and communicate EBIT performance as an additional metric. We believe EBIT is more transparent by eliminating the impact of new IFRS standards. We registered a net income of TRY465 million on a 12% rise. Net income, before the one-off provision, rose 27% year-on-year. This provision is related…

Thank you, Murat. Now let's take a closer look into the financials.In the second quarter, group revenues rose 21.3% year-on-year, corresponding to an incremental TRY1.1 billion. TRY895 million of this increase is from Turkcell Turkey on the back of strong ARPU and higher contribution from corporate segment.Moreover, international subsidiaries contributed TRY160 million, thanks to increased data consumption in Ukraine as well as the positive effect of currency movements. The incremental contribution of our consumer finance company was almost flat in the quarter, given its deleveraging. It will likely turn negative in the second half of the year.EBITDA rose by 19.6% year-on-year to TRY2.6 billion, with a margin of 41.2%. In a quarterly trend comparison, our EBITDA margin marked a 1 percentage point improvement. This was mainly due to a solid rise in revenues, plus lower G&A and S&M expenses. It's worth noting that we achieved net customer gain, while keeping marketing expense under control. EBIT increased by 18.3% year-on-year to TRY1.3 billion with a margin of 20.8%.Next slide. Now let's take a closer look at our techfin companies' performance. Financell's growth has slowed down as expected this year, while Paycell's growth momentum continued. In a market of regulatory limitations and increased retail prices and taxes, Financell's consumer loan portfolio decreased to TRY3.2 billion. We expect this declining trend to continue until around TRY2.5 billion. While this means a lower top line contribution, it is positive for the group cash flow.Cost of risk rose slightly to 2.9%, still below the market average for general purpose loans. Loan insurance penetration of 97% over the past 1 year will help us reduce this ratio. Pro forma net income of Financell, excluding fair value of swaps, would be TRY110 million in the first half of the year. Meanwhile, our payment services company, Paycell, continued…

[Operator Instructions] Our first question comes from JP David from JPMorgan.

A couple of questions on Paycell and then just one on financials. So firstly, on Paycell, I just wondered if you could confirm whether this is a very CapEx-light model, like most mobile financial services, i.e. that the CapEx to sales would be quite low around this business? And also around Paycell, you mentioned a number of new features that you are introducing over the medium term. I wondered if you could give a little bit of color around how price-sensitive customers are in using Paycell as an application? Are they more interested in features? Are they more interested in price? And then just switching gear and for clarification, I just wanted to understand why in your net financial gains and losses, you incurred a loss both before hedging and after hedging? I would would've thought that the hedging element would would've gone the other way and provide a little bit of an upset. So just wondering if that's a sort of one-off thing?

Okay. Thank you very much for the question. First of all, our Paycell -- actually, our techfin solution is just quite low-CapEx solution actually, very, very limited CapEx around it, which is, I mean, very usual in this type of business. So I would confirm that the CapEx part is not too high. Obviously, the IT tools and softwares investment happening around it, but this is -- more or less, this is it. So I think the CapEx part is quite low. And also customer acquisition cost is also low for us because we are utilizing our existing resources, our shops, our online channels and, as said, our digital channels. So in this side, which is our advantage actually.On the customer type of Paycell, in Turkey, as far as I know, there are 20 million unbanked people in Turkey. So if you think that at least -- more or less 40% to 50% of them are customers, then it shows our opportunity. Obviously, our techfin solution and Paycell solution not just addressing our just Turkcell customer, also our other customers as well. So quite variety of customer base. Obviously, the addressable market is this unbanked customer.For the financial part, let me give the word to Osman to answer this long position and short position.

Actually, the increasing financial expenses was a result of increased cost of hedging. On the quarterly basis, our hedging cost is around TRY1.70 million. This is mainly result of increasing Turkish lira swap rates. Also Turkish rates was quite volatile. During the course of first half of the year, the rates went from 100% to 50% and this resulted in a volatility in our financial expenses.And this mainly comes from the derivatives, which are not subject to hedge accounting. The fair value deviations between the first quarter and second quarter resulted in a increased cost of -- increased financial expenses for the second quarter. We can say that this is a one-off because we will -- we are not supposed to see another large swing in the interest rate, given the current -- existing levels of interest rates. The March and April events were kind of one-off events, so we might deem it to be a one-off event.

Our next question comes from [Igor Kywan], Bank of America Merrill Lynch.

I have three questions, if I may. The first one would be on the stronger EBITDA margin and less pressure what we've seen in Q1. Can you please explain again the key drivers to what efficiencies have been realized versus Q1? Second question on these new taxes, which is implemented on the activation of handsets, which are not purchasing in Turkey. Can you -- do you expect any impact on the business as a result there? And then third question would be on the 5G licensing, is there any clarity at this stage?

Okay, [Igor], thank you very much. For the first question, regarding our EBITDA margin improvements, the quarter-on-quarter EBITDA margin improvement was a reflection of our successful performance in growing our ARPU, resulting in higher-margin service revenue and managing our cost effectively. Especially, on sales and marketing side, we have heavy cost control.Regarding second question about 5G and 5G expectation and roadmap. Actually, we don't expect an auction in the short-term horizon for 5G. We have a successful 4.5G infrastructure ready for software upgrade anyway, and it is not that [indiscernible] access in one of our technology that will be much better with 5G. I'm proud to state that we have wide spectrum resources we are already using in this technology. So we don't see any difficulty on the side. So -- but we'll see the regulation authority decision anyway. Just in regard to second question, could you please -- I missed your second question, could you repeat your second question?

Yes, sure. The second question was more on this new taxation for the registration of handsets, which are both abroad. I mean do you think there's going to be any impact on the business? And just -- sorry, following up on the first question, on the EBITDA margin, it wasn't a question versus a -- on the Q-on-Q, but more on the year-on-year. I mean if you look at the year-on-year pressure, it's significantly less, especially on the Turkish margin versus in Q1. So just wanted if you could elaborate a little bit on the cost side? And what has been kept more under control than in Q1?

Actually, more or less -- the answer is more or less the same because we have inflationary prices on the ARPU side, but the impact will come with a period of time. So versus Q1 to Q2, we see that impact will hit more than Q1. So this is mainly ARPU result.And regarding handset part, obviously, this is government decision and they decide to increase the taxation, but we haven't seen a dramatic impact on term loan sales and device sales in Q2. And obviously, we had some hit from last year's installment part. But other than that, we see quite steady performance on the term loan side.

Our next question comes from Herve Drouet, HSBC.

Couple of questions from my side as well. Firstly, in term of the new additions you managed to bring, are you happy with the current trend in term of new additions you are getting in the Mobile segments? And do you think your sales and marketing cost control will remain on the same trend as we've seen in H1 looking in there H2?Second question is back to this FX license, especially, this stringent median loss you put in Q2 on your fair value of the hedging derivatives. I was wondering, could you give us a bit more clarity on how that has been calculated? I mean you mentioned interest rate. I was wondering, is it short-term Turkish interest rate you are talking about? Or long-term 10-year treasury bonds driven movement?And finally, on maybe the content, I mean there have been some issues with right issues on the football right in Turkey between Digital and the Football Federation. I was wondering, could potentially Turkcell be interested in getting more involved with premium content, such as Turkish football rights?

Okay. Let us start with the first question regarding net addition of mobile subscriber. Actually, we took several actions targeting price-sensitive customers holding innovative customer-focused campaigns and offering addition in value proposition, which had a positive impact on customer acquisition.We started to see positive trend, starting from March, and continued this trend in the second quarter. Actually, we stated this as Q1 conference call as well. We have learned that considerable portion of the customer that churn in Q4 '18 and Q1 '19, returned back to Turkcell quality in Q2 '19 as well. We have continue our inflation in price and practicing in 2019 as well as by enhancing the value that we have been able to enrich our services and provide more to our customers.Regarding sales and marketing part, obviously, we'll continue to control our sales and marketing costs during the rest of the year.Regarding second question, loss in Q2, very good. I think Osman can answer this question and come back to the third question.

Actually, we have 2 types of hedges on our balance sheet, long-term hedge and short-term hedge. Long-term hedge are typically for hedging our long-term foreign currency liabilities, and also we have short-term hedges on our balance sheet from overnight to 3-month maturities.And the short-term hedges are typically for liquidity management and also for hedging our FX liabilities in our consumer finance companies. Most of our long-term hedges are subject to hedge accounting, so they do not create much savings on our fair value calculations.But the swings in the interest rates were more fierce in the short end of the yield curve. The yields curve move sharply up to 1,000% back to 30% in only couple of days. So it's -- and it also coincides with the quarter end. So it's created savings on our sales team and [look] operations. So we can say that it is mainly driven by the volatility in short-term rates. The long-term hedge do not create volatilities since they are subject to hedge accounting.

Regarding third question, content of football, right? I think our TV platform is doing very well in terms of revenue, in terms of subscriber on both IPTV side and OTT side.For the football right, I think this is quite expensive price to capture just one body, and I don't know if it should -- it seems -- we are hearing from news like you're hearing, but I think we need to involve more customer and go deeper into the segment so that we can -- actually so that anybody can get this return back. And as of today, I cannot comment on are we interested in or not because they have another 2 years contract with federations. So we'll see what's going to happen.

Our next question comes from Ondrej Cabejšek with UBS. Ondrej Cabejšek: So couple of questions for me, please, and mostly on tax and FX. First of all, on Paycell. If you could just give some light on whether you're facing any regulatory hurdles or banking issues as you push back here with the initiatives that you are launching? And if for example, you think some licenses or products that you currently cannot provide, whether there is upside to this 50% CAGR that you're guiding for?And second question on the consumer finance business. If you could just explain a bit how you are able to achieve 15% EBITDA growth on a consumer portfolio that is decreasing year-over-year by almost -- or maybe even more than 30%.

Regarding taxing side, I think -- to be honest, we are not facing in regards of an issue. Actually, we do see some regulatory changes, which helps taxing today is to be positioned better in the market. For example, we just have seen that mobile post regulation is issue, so everybody can get mobile post 1st of September, which is good news for techfin companies.And also we see that draft all from banking process and regulations under preparation. So if these are good news for our techfin platform. We hope to see this regulation and change happen soon so that we can be competitive in the market.For the second question, Osman will answer regarding the financing.

Thank you. There are 2 main factors driving EBITDA growth on the portfolio. First, effect of small downhill will be more visible in the second half as the slowdown started in August last year.And the second factor is net interest margin widened on better cost of funding management. Our net interest margin widened since the last year's last quarter. So these 2 factors resulted in high EBITDA growth than expected, but we will see a slowdown going forward. Ondrej Cabejšek: And maybe just one follow-up on the device sales, please You mentioned in the report that your equipment revenues almost doubled year-over-year. I assume that these are -- and that you've had a couple of campaigns here. So the question is, are these completely outside of the -- any sort of financing schemes that you might have? And were they basically you driving this -- the device sales outside of this as a way to avoid the limitations that have been in place on consumer loans since last year?

Yes. First of all, the revenue increase was coming from Digital Services business and these are the project device, which is part of the project. So this is -- these type of sales has nothing to do with financing or financing company. So this is kind of one-time projects in the Digital Business Solution area.

Our next question comes from Ivan Kim from Xtellus Capital.

3 questions for me, please. First, which is going back to the consumer finance company. So the net interest margin widened, as you mentioned, quite significantly, about 250 basis if we look at the information that you provided. So I was just wondering whether it's sustainable. Or we should expect it to compress back to 4%, 5% level? That's the first question. The second question is just going back to 5G, which remains unanswered. So when should we expect that [with back from] to be sold? And maybe something you can share with us on the cost. And then the third and last question on the Digital Business services. You mentioned some of that growth that you have shown in the first half was one-off. So I was just wondering, what percent roughly of the growth was one-off?

Okay. Let me answer question 2 and question 3, and then Osman will respond to question 1. For the Digital Business services, it is not one-off anymore because there will be continuous one-off projects in Digital Business solution. This is typical business solution behavior. Our -- our DBS, we offer tailor-made and end-to-end digital solutions to both private and public sectors.This includes hardware, cloud, cyber security, IoT, data center, digital integration, et cetera. So these contribute strongly to both corporate segment and overall group result. It's standard today, this typical behavior of this segment. So we will continue to see one-time project probably every quarter, every month. I hope to see every day, to be honest. So this is nature of the business.Regarding 5G, it is difficult to say about the cost part of it because everybody thinks differently because there are different behavior in the market, the different behavior, different countries. For Turkey side, we are preparing ourselves for every option. But on the other hand, we already invested heavily on the spectrum for 4.5G. So we want to utilize this 4.5G spectrum as much as we can. So let's come back to the first question regarding finance company. I give the word to Osman.

Net interest margin on customer financing company widened since last September on the positive duration gap that be around the balance sheet. And also dynamic repricing of the loans helped us to keep net interest margin high and stable. Actually, we expect net interest margin to remain stable over the course of this year. We are not expecting a contraction in net interest margin going forward, given the lower interest rate environment in Turkey.

And just maybe a follow-up on 5G, please. So there is nothing on both timing and what spectrum will be available?

Yes. Exactly, yes.

Our next question comes from Alexander Vengranovich, Renaissance Capital.

I have a couple of questions and the first one is for probably a little bit more general, but can you please discuss the competitive advantages you have in mobile, video and Paycell if you compare yourself with your main competitors in the market? Can you please differentiate a bit like why Turkcell is better than competitors in this segment? And that's the first question.Second question is more specific on Mobile segment. So I've noticed that over the last like 2 years, the gap of the blended ARPU between Turkcell competitors has widened quite substantially. Can you please discuss whether you think this gap will be sustainable and you want to keep it? Or you think you might be targeting something more aggressive behavior on the market? And instead of increasing the ARPU, you might be looking at improvement if you were a subscriber base? Well, that's probably it.

Okay. Let me start with question one, which is regarding Paycell and Mobile. First of all, we have quite strong customer database that we know their payment cycle, their behavior, their location, their -- these kind of things. So -- and also we have quite strong sales channel all over the Turkey. And we see that they are visiting our shops -- actually, digital shops as well as physical shops, and we see that 18 million people every month visit our shops. So this is opportunity for us on the Paycell side.Regarding Mobile ARPU growth, ARPU growth was mainly driven by higher data consumption and digital services usage and upsell effort as well as the continued effect of inflation in pricing. I cannot count just one. Probably have 3 or 4 behavior that help us on ARPU growth side.

So you basically plan to keep pushing the data usage on your tariffs and you don't see any kind of comparatives -- like any strong response from your competitors on the tariff side. So basically, the situation of the market is pretty stable, and everybody is just look at pushing their tariff -- sorry, the data usage right now and not trying to compete on the tariff side. Right?

Obviously. We are in telecom -- mobile and at least telecommunication market. We see that response from our competition, but we have quite strong digital services, a strong sales channel, and campaign capability and marketing and brand. So I do see that we will see response from competition and this is the fact of life. This is how we can act and react on the competition side. I think we'll continue executing well on this aspect.

Okay. And then maybe just a quick follow up on the video content. So we previously discussed a little bit the right for football championship. But maybe you can also discuss a little bit the production of the exclusive content, like TV shows or like movies. Do you think about that? Is that something where you might be engaged in the future? Or you think the market is not -- and your subscribers are not requiring that exclusive video content on your platforms?

Yes. To be honest, we would like to be platform provided to our consumer. So that anybody has an interesting content could be exclusive, nonexclusive, a small beat, whatever, they can come to our platform and provide solution to our customer. So we don't want to be exclusive on any shows because we don't see that it's viable to a company like us. So we will provide -- giving services to whoever has interesting content, very welcome to our platform. So we can share the value, share the profit.

So I got the approach. I'm doing that right now and you're having an exclusive partnerships with the content producers?

Not necessarily exclusive partnership, but we have partnerships with a lot of content providers in Turkey and outside Turkey. So -- but it shouldn't be the exclusive agreement with them. Partnership is good.

Our next question comes from Cemal Demirtas, Ata Invest.

My question is related, again, to the equipments revenues. When we look at the figures, if we exclude the impact of that growth equipment revenues, we see around 48.4% growth in Turkey [indiscernible] Turkey. And if we assume that this equipment revenue jump in second quarter is temporary, how do you think you will achieve your growth guidance of 18% to 19%? And in the international side, we have less currency appreciation. If we assume that the currency will remain at current [bill], what are your views about the rest of the year, at least from the currency side? If the currency stays at current levels, the hedging impact and, of course, the topline growths, what are your base assumptions for the rest of the year?

Regarding equipment revenue, this revenue was always part of our revenue. So it is not one-time revenue that we face in Q2. So we'll continue have equipment revenue as part of our business, especially digital business solution as well as our term loan sale. So equipment revenue will be there. So I think this is response for first question. So this is not a just temporary jump in our results.So on second question, it is very difficult to comment on currency level, but I think -- I think the inflation is becoming under control in Turkey, and also we do see currency decrease after the election. So we don't expect any election next 4 years. So it seems things should be stable and getting more and more stable right now.So I think not easy to comment on this one, but I do see that things are improving.

And as a follow-up about equipment revenue side, could you compare with the profitability of over -- the profitability of your overall business, is it by -- dovetail any dilutive effect or improving effect?

Actually, I would say, I don't see any improving effect, but I don't see dilutive effect as well because since we have equipment sales increase, we do keep our EBITDA and EBIT margin similar levels. So this is not the case. The reason for that, we are utilizing our existing resources to use multiple functions. So we don't have additional sales team for selling equipment. We don't need such a teams. Or our G&A expense also -- although it is spend, so we have very limited G&A expense on the equipment sale. So these are accelerating our margins.And also I see that not only the EBITDA part, but you see that positive impact as well. So I think this is relatively quite good business.

Okay. And my last question is about subscriber growth. After fourth quarter, we see some increase in your subscriber base, and we see your price are more competitive. Could you give us some clue about your price index? And are you planning to gain further quantity? How do you see the competitive environment for the rest of the year?

Obviously, on the competition side, we don't see a lot of change. We believe in the right pricing, reflecting the value that we generate for our customer. Over the past 3 years, we have been able to enrich our services and provide more to our customer, and we'll continue our inflation in pricing practice in 2019 as well as by enhancing the value that we offer to our customer. So obviously, we will see that inflation coming under control, so we'll see our pricing services based on this one as well, so.

We have no further audio questions. Dear speakers, we can now switch to the written questions.

So this is Korhan. We have 2 questions from the web. [indiscernible] asked, considering your consolidated revenue growth in the first half was 20%, what is the reason behind maintaining slightly lower than this as your full-year guidance for revenue growth? So what are your expectations in the second half?

Let me give you something about it. There are couple of factors which will be resulting in a revenue growth slowdown in the second half of the year. The contribution of international revenue will be lower as the positive impact of currency movement been lower the second half of the year. The significant Turkish lira depreciation happen in Q3 2018. We have already seen the slowdown in Customer Finance business revenue in the first half of the year due to regulatory limitation on customer loans or smartphone financing. Its revenue will likely to turn negative in the second half of the year due to the contraction of the loan portfolio.According the loss expected devices in our group revenue to slow down as a result of this regulatory limitation.We will be transferring our sports betting operation to the winning party of Sportoto tender as of August. These are the things that we see that our revenue slowdown. But we expect slowdown in this area will continue to see the strong service revenue growth based on all-time-high ARPU trend.Accordingly, we will be maintaining our operational profitability. We have signaled this by upgrading our EBITDA margin guidance this quarter.Regarding EBITDA margin guidance revision, in the light of our 6 months financial and operational platform months and our expectation for the second half of the year, we are confident of exceeding our previous guidance. We believe that there will be no further revision.

One more from the web also. [indiscernible] asking, is there a likelihood of reversal of TRY60 million provisions related to cost side? And what was the reason for this liability?

Actually, there is no likelihood of any reversal of this provision. The main reason for this provision was KCell had to terminate its active sharing contract with the local operator with the change of contract company after acquisition of the shares by Kazakhtelecom. So it's a one-off event. There is no likelihood for reversal, and we are not expecting further payment from this transaction.

Another question also from [indiscernible]. Quarter-on-quarter increase in depreciation was 17%. What was the driver for such an increase?

Actually, Q-on-Q, increase in depreciation is less than 17%. It is 7%, and the main reason behind the increase in depreciation is increase of network investment as well as capitalized expenses under IFRS 15 and 16.

Okay. So for one last time, [indiscernible], can you check if there are any further questions? Let me confirm.

Dear participants -- dear speakers, we have no further audio questions.

Okay. Then thank you very much, all. This is end of our call. We thank our CEO and CFO for their wonderful presentation, and thank you all for taking the time to participate in our call. See you next time. Bye-bye.

Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.