Ladies and gentlemen, thank you for standing by. I am Galilea, Chorus Call Operator. Welcome and thank you for joining the Turkcell's Conference Call and Live Webcast to present and discuss the Turkcell Second Quarter 2021 Financial Results Conference Call. At this time, I would like to turn the conference over to Mr. Ali Serdar Yagci, Investor Relations and Corporate Finance Director. Mr. Yagci, you may now proceed.

Thank you, Galilea. Good morning and good afternoon, everyone. Welcome to Turkcell's second quarter 2021 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 doing Q&A. Before we start, I would like to kindly remind you to review the last page of our presentation, for our Safe Harbor statement. Now, I hand over to Mr. Erkan.

Thank you, Ali Serdar. Good morning and good afternoon. Thank you for joining us today. Before we dive into the result, I would like to extend my condolences to every country, including our own beloved Turkey that is fighting wildfire disaster and flood recently. The world is dealing with one of the most severe heat waves, which underlines the importance of addressing climate change and refocus sustainable strategy. In the second quarter of the year, we accelerated our outstanding performance, delivering robust operational and financial results. We recorded 23.5% revenue growth, and EBITDA reached TRY3.5 billion. Net income was TRY1.1 billion on 31% year-on-year growth. Despite prevailing pandemic condition, this performance was enabled by customer-centric strategy, a diversified business model, and digital ecosystem with high value offers. All this was possible due to remarkable subscriber base growth of 617,000 and double-digit ARPU growth in mobile and fiber residential segments. Additionally, our strategy of prioritizing our digital channel has helped us during the second quarter, whereby their share in our sales reached 18%. To note, we distributed the first and second installment of the 2020 dividend on April and July 13, and the last installment planned to be distributed in October. Our outstanding result and our expectation for the second half, have led us to update the full-year guidance. Next slide. Let's take a look at our operational performance in the second quarter. In the mobile business, with our continued focus on postpaid segment, the base grew by 501,000 and the postpaid share reached 66% of the total, on a 3-point rise year-over-year. Going forward, we aim to keep our postpaid focus and further increase the postpaid share. Despite the lockdowns in May, affecting acquisition and churn numbers, after the ease of the pandemic measures in June, we gained some momentum…

Thank you, Murat. Now, let's take a closer look into our financials. Our performance in the second quarter was outstanding and resulted in an TRY8.5 billion top line on an accelerated 23.5% growth year-on-year. Despite the strict COVID-19 restrictions, we were able to generate 9% quarter-on-quarter growth. For the first half of the year, top line growth exceeded 20%. Our EBITDA reached TRY3.5 billion on a 22.7% increase, with a 40.5% margin. Our CapEx to sales ratio rose to 24.5% in Q2, due to advanced capital spending in line with our plan. We registered a net income of on a 30% rise in Q2. As we disclosed last week, pursuant to Tax Law number 7326, we have restructured our tax assessment for the years 2017 and 2018. Another article of the same law allows us to revalue a part of our fixed-asset investments based upon domestic PPI. The impact of the letter has more than compensated to the former. Next slide. Now some details on revenue development. In the second quarter, Group revenues rose 23.5% year-on-year, corresponding to an incremental TRY1.6 billion. Of this increase, TRY1 billion drives from Turkcell Turkey. This was the result of the strong ARPU and netted performance, mainly in the postpaid base. Turkcell international revenues rose 45% year-on-year, thanks to strong lifecell operational performance and the positive impact of currency movements. Our Techfin segment contributed TRY47 million to the top line, fully driven by Paycell revenues. Other segment grew by 42.1%, contributing TRY285 million in this quarter on the back of higher equipment sales, supported by digital channels. Next slide. Group EBITDA rose 22.7% year-on-year to TRY3.5 billion, driven mainly by strong top line growth. The EBITDA margin slightly decreased to 40% in Q2. The factors affecting the change in EBITDA margin, a gross margin…

The first question is from the line of Cabejsek Ondrej with UBS. Please go ahead.

Hello. Congratulations on a strong quarter. And thank you for the question. Couple from me, please. First of all, on the upgraded guidance, can you maybe break down – because the top line guidance, I guess, is ahead of the EBITDA guidance, and also CapEx is up, so, two questions here. In terms of the top line upgrade, can you give us an idea of, what that is primarily driven by, because it would seem in the context of the EBITDA that it is kind of the non-core businesses that are growing faster than perhaps expected? And then in terms of CapEx, if you could break down the impact between FX? You mentioned additional fiber investments and anything else? And then second question from me, please. You've had another huge quarter in terms of mobile net additions, at the same time your main competitor, I guess, highlighted that the composition in the market stabilized quite a bit during the second quarter, and that it’s looking pretty good. Can you just talk about where these numbers are coming from? And how you, as the market leader, see the competitive situation in mobile, please? Thank you very much.

Okay. First of all, thank you very much. Regarding guidance revision, I think, it's – we achieved quite robust performance in the first half and despite the challenge of the pandemics environment. I mean, when we look at Turkcell Turkey, we have significant growth or especially strong SaaS subscriber and ARPU performance. We achieved net subscriber addition 1.3 million in the first half of the year, so which means this subscriber base will help us to increase our revenue level at the second half of the year. And also on the international side, we see strong organic growth in Ukraine operation, together with the positive impact of currency movement supported top line growth. So, this is also another confident situation for us for the second half. On the EBITDA guidance revision, it mainly depends on revenue increase. And regarding CapEx breakdown, because I also mentioned in the slides, in the presentation, we would like to invest more on fiber since there are demand from the customer side. So, we increased number of home pass target from 500,000 to 600,000. So, which will drive the CapEx increase. Also, as I mentioned, Ukraine is promising market. We are gaining market share, we're gaining – we're increasing our top line growth. So, we would like to invest in Ukraine more, since we invest we get more as well. So, this is the main reason for the CapEx. And obviously, since we have more customers, the customer needs more data, so we are going to invest more in this side. Regarding second question, for the net addition, first of all, our strategy is based on providing a rich value proposition to our customers through differentiated products and services. And we have diversified business model. We offer high quality telco services, wide range of digital services, as well as digital payment solution. And as clearly stated from our customer, our infrastructure also enable us to provide all the services with maximum quality, and this help us to increase our customer bases. Also AI-capabilities is important. We can go further micro-segmented approach, which enables to make us right offer to the right customers, at the right time. So, in terms of where are these customer, mainly postpaid. Out of 617,000 customer, of them mobile – sorry postpaid customers, and out of this postpaid customer, 40% of them switched from prepaid and 60% of them active execution of new lines. Thank you.

Thank you. May I have a very short follow-up on the CapEx question please? You mentioned strong demand in fiber and that is consistent with what your competition is saying, should we read this may be that the higher target than just 0.5 million homes per year would be not just the 2021 target, may be going forward as well that you would accelerate the plan for the medium-term as well?

Exactly, because we don't want to stop after investing 600,000 home pass. So, we see that the demand will continue, especially we have also 5G from the first, when the 5G comes, we need more fiber. So, when we invest in home pass, on anything, it will help other business as well. So, definitely we'll continue to invest in fiber.

I must say, I meant more than 0.5 million because your previous guidance was kind of 0.5 million per year over the next couple of years. Would it now be say 0.6 million per year over the next couple of years?

We hope more than that. To be honest, we hope more than that.

Okay.

Because when you start investment, it will take time to accelerate the machine. When the machine gets speed, you can easily increase the speed of having home pass or customer actually. So, I think – I hope more than that.

Okay. Thank you very much.

The next question is from the line of Degtyarev Vyacheslav with Goldman Sachs. Please go ahead.

Yeah. Thank you very much for the presentation. Couple of questions. Firstly on the 5G, what would be your thoughts over the time you can build for the financial implications of the spectrum auction? And would you envisage the significant investments into the network after or around the spectrum allocation? And the second question would be on the electric vehicle projects, can you outline certain potential for the further upcoming capital commitments into this project, and also the timing, the magnitude of the monetization, as well as the synergies you see with Turkcell? Thank you.

Okay. Vyacheslav, thank you very much. For the 5G, as you may recall a couple of months of ago, the Deputy Minister of Transport and Infrastructure unofficially announced that new spectrum auction related 5G could be held in 2022, with the commercial launch of 2023. So, this gave us some guidance. Since then, we don't have heard any official announcement from the government with respect to the 5G timeline. Meanwhile, we continue our preparation for the 5G and we are ready to get 5G spectrum and license. And also, as a recent development, we are working very hard on the preparation of 5G. And in June, we launched commercial 5G app on roaming services, so that Turkcell subscribers can now use 5G services in 29 countries. Overall, we don't have any official timeline for 5G. However, we already have a strong 4.5G network, which we believe is the 5G transition. Our extensive tests with the different partners on different use cases will also help us to offer a quality 5G service going forward. Regarding CapEx side of the 5G, as I said, we don't have clear schedule for the 5G auction. And obviously, when you wait more, your CapEx demand decrease, because the cost of equipment by nature of the technology decrease. So, we'll see what's going to happen, but obviously the announcement is there. It’s not official announcement, but it's an announcement. Regarding electrical vehicle project, our capital commitment to this project is around EUR115 million. So far, we have invested around EUR25 million already. So, going forward, we will continue to release its capital during the project phases, and depends on where we need, when we need, it really depends on the project plan and the progress of the EV company.

Thank you. Can you maybe elaborate on the synergies you see with Turkcell?

Regarding synergy, e-mobility is everywhere. So, when we joined this partnership, the TOGG partnership, everyone was thinking that why telco operator joining this EV consortium. But everybody right now, since that e-mobility is trend, the connectivity, entertainment and the car without driver is very important, which needs high speed, low latency and strong customer engagement. So, that's the main reason that we have synergies. So Turkcell and TOGG can have lasting together, including smart-living solution in smart city, smart charging, data-based business model, suppliers and partners with no competencies and so on. There are integrated digital services and payment. Payment is very important as well, charging solution and infrastructure, IoT is there. So, there are many, many things may come during the road map, but we'll see what we can help on this side. But I think clearly, Turkcell has vision to finalize this synergy.

Thank you, very much.

The next question is from the line of Mandaci Ece with UNLU Securities. Please go ahead.

Hi. Thank you very much for the presentation. I have a couple of questions. The first one is on your hedging and FX costs, compared to the last two years average, we are seeing a higher level FX loss – net FX loss, when we also include the fair value adjustments. So, the currency and fixed rates were also volatile in the previous quarter. So, what else has changed specifically for this quarter? Is this TRY518 million FX loss, is there any one-offs in that or is this the new base now? Should we consider such a number as quarterly FX losses going forward? And secondly, I want to also ask about your deferred income you have generated for this quarter due to accounting change. Is this also one-off or, we will – will we going to see such effects in the coming quarters? And thirdly, two days ago there was the emerging market news that you were in talks or started the process for the sale of stake sale in Paycell, minority stake sale in Paycell. Could you also provide your prospects regarding the potential asset sale, and when this could be official or when we should expect such news? So, thank you very much.

Ece, thank you very much. Let me ask – let me give the floor to our CFO, Osman, to answer all three questions, and then maybe I can comment at the end of his comment.

Thank you very much. Hedging and FX cost increased significantly compared to last year, especially compared to the last – the average of last three quarters. We can associate this increase with rising hedging costs. You know, short-term swap rates almost more than doubled compared to last year, and this is creating – this make a negative impact on our FX revenues. On the other hand, we needed to generate Turkish lira for our working capital needs, as well as for dividend payments. Since we hold majority of our cash in hard currency, we need to generate Turkish lira through short-term FX swaps and the cost of this short-term FX swaps are also classified under hedging costs. And one-third of the FX loss that you see in this quarter is associated with this short-term Turkish lira need. Fair value adjustments, hedging cost increase and Turkish lira generation needs make up for the high FX hedging cost this quarter. We expect a gradual decrease in hedging costs and FX loss over the next quarter, unless we see other sharp increase in the dollar TRY parity. For the second question that you are asking, it is associated with the recent tax legislation that I tried to explain during the presentation. We made use of the right introduced by recent changes in law, which allows us to revalue some of our fixed assets and inventories. As per the law, the respective assets, these are typically network assets, especially mobile network, fixed network, and data center investments. These assets can be revalued with PPI, Producer Prices Index, until the year end. And we need to pay 2% over the value of these assets in order to be able to revalue those. This high increasing inflating the value of our fixed assets, it translates into higher amortization and depreciation costs in the following years, which creates a deferred tax income on our balance sheet. By the way, it's a cash impact, because we will be able to pay less tax on – due to increasing amortization. So, it translates into a deferred tax visit on our balance sheet, and makes a positive impact on our net income. On the third question, I assume that you're referring to the news that appeared on the merger markets yesterday. It's no surprise. We have been expressing our interest in a potential stake sale, not only at Paycell, but also in other subsidies, including Superonline. We continue to work on the – on different alternatives, but I can say that so far we haven't been given any mandates by our shareholders to finalize this process. We still explore alternatives. And if something material happens, we will share with you through the disclosure platforms.

Thank you.

The next question is from the line of Demirtas Cemal with Ata Invest. Please go ahead.

You mentioned about one-off and you had some recently announced tax investigation numbers, I guess, you recorded in the second quarter. Could you just give us some clarification on that? Thank you.

I'm sorry. Mr. Demirtas, can you please tell your question again? Because we could not hear you in the beginning. Thank you.

Okay. My question is about effective tax rate. I see that you recorded tax income. Maybe during the presentation, you mentioned about the details, I don't know if I missed it, but that's my first question. And the second question is about the one offs, you mentioned again during the presentation, but I didn't clearly hear. If you could just, sort of elaborate that. And what's the latest tax investigation results impact was seen in second quarter? Did you record that in the second quarter? Thank you.

Thank you very much. First of all, regarding effective tax rate is, without one-offs, 2% and 3%. And regarding second questions, as we have announced last week, our company was imposed a tax assessment in relation to the tax investigation that was conducted with respect to the special communication tax for 2017. I would expect the special communication tax, value-added tax and corporate tax for 2018. We also shared that we will benefit from restructuring provisions for this tax assessment and will pay TRY258 million at the end of September. This led to an increase in other expenses.

Okay. It was recorded under other expenses. Thank you.

The next question is a follow-up question from Cabejsek Ondrej with UBS. Please go ahead.

Thank you. I have one follow-up in terms of costs as well. You mentioned about a year ago, I believe, that part of the, and I think it was a half of the selling and marketing expense decline that you saw because of the lockdowns and moving to digital would be sustainable. Now, we are – I know there's been another lockdown in Turkey, but on an annualized basis, that ratio of selling and marketing expenses was more or less flat year-over-year. And you mentioned in your presentation, the ongoing share of digital sales. Can you maybe update us in terms of where you think the sustainability of the – I mean there is a 1.5 percentage points year-over-year decline in terms of selling and marketing expenses as a percentage of revenues last year, what part of that is or would be sustainable today versus what you said about a year ago? Thank you.

Thank you very much, Ondrej. First of all, the – I mean regarding sales and marketing expense increase, the deterioration in selling and marketing expense has been mainly driven by the increase in marketing expense, not just – not the selling side. We started a new communication campaign on Turkcell Ecosystem, positioning comprising both telco and digital services. We will continue investing in this campaign during the years as well. So, this is one of the reason. But regarding selling expenses, either flat or decreased due to the lockdown happened in May as well. Regarding – is there any other question?

May be just if there is an update in terms of how sustainable the levels of 2Q are going forward? Because, I mean, we may have expected a bit of a rebound in terms of selling and marketing compared to last year, as you flagged that's only part of the decrease from a year ago was sustainable. But there was virtually no change in terms of the proportion to relevance. So, is there another assessment today versus what you said a year ago when you said roughly half only of the savings were sustainable, would you say it's more today?

Yeah. First of all, during the first half, we see that especially sales expenses declined. But during the second half, we would like to see little bit bounce back on the selling, because we will continue to invest in our sales channel. But as you know, we would like to invest more and more on the digital sales channels. This is our focus area. If we can continue to increase digital channels spending and the digital channels expenses, this will help us with more savings. But obviously, it's not going to be the same as the first half. We expect little bit more on the OpEx increase during the second half.

Thank you.

The next question is from the line of Demirak Kayahan with Ak Investment. Please go ahead.

Hi, thank you very much for the presentation and opportunity to ask questions. I mean, as a follow-up on the CapEx side, based on the upper end of your guidance you're roughly looking for higher CapEx, compared to the previous quarter. So, what I'm trying to understand, what percentage of that related to additional 100,000 home taxes. And also very roughly, what is the incremental revenue contributions you are looking from this, 600,000 home pass? Or in other words, what is the, I mean, expected payback period for this investment? Thank you.

Okay. Thank you very much. For the first question, regarding CapEx increase, almost one-third of them comes from the FX increase, one-third of them comes from fiber investment, and one-third of them growth business, including Ukraine and mobile subscriber base increase as well. Regarding payback, the payback period usually is long-term ROI. But we see during the pandemic, we see that fiber investment return cycle is decreasing. So, we'd like to benefit on this side, but obviously, mainly eight years, nine years is payback is acceptable on the private investment.

Okay. Thank you.

Because economical – actually the fiber lifetime is almost 25 years, so eight years is okay.

The next question is from the – a follow-up question from Mr. Cabejsek Ondrej with UBS. Please go ahead.

So, one more follow-up from me, please. In terms of Superbox, I noticed that the trend of net additions has been going down quite a bit from the peak of about a year ago. And you don't even talk about the product in your presentation anymore. Is that because you think the market for this product is, kind of saturated by now? Or are you actively trying to replace it specifically with fiber? Or any update on how you see that going forward? Thank you.

Thank you. Actually, your response was quite okay. Since its launch, Superbox has shown substantial growth in the subscriber base, providing the demand for need fixed wireless access product backed by quality network. Our success with Superbox also shown that our company is ready for the 5G transition period in Q1 2021. Superbox subscriber reached 626,000 on the back of increase of demand and brand awareness, as well as rising household broadband demand in pandemic environment. From now on, we will be more concentrated on monetizing our Superbox subscriber subscription, with a focus on network efficiency, usage optimization and price adjustment. So, we recently did some price adjustment. We would like to monetize more Superbox product with a more efficient network infrastructure. So, that are the two reasons. And Superbox is not a cheap product. It's a high-quality product with high demand. So – but we would like to focus on the OpEx side as well, the cost – network cost side as well. So, it's in a balance, so we are increasing Superbox ARPU in an acceptable level. And Superbox is not a competition for fiber. And we – I mean, it's a product that specific needs or address the needs of customers in the high-speed and high-quality and mobility environment.

Mr. Cabejsek, are you finished with your question?

Yes. I was on mute. Thank you very much.

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

I would like to thank all the contributors, all the listeners. Thank you very much. Good afternoon, good evening, good morning for everyone. Thank you.

Well, thank you. This is the end of our call. Thank you everyone for taking the time to join us today. We hope to meet you in the upcoming quarters. Goodbye.