Partner Communications Company Ltd (PTNR) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by. Welcome to today's fourth-quarter and full-year 2006 financial and operational results conference call. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded and I would now like to turn the conference over to our host, Dr. Dan Eldar. Please go ahead, sir.

Thank you, David. Good afternoon to those of you in Europe, the Middle East and in Asia and good morning to our listeners in North America. Thank you for joining us for this conference call to discuss Partner Communications' 2006 annual and fourth-quarter results. With me on the call today are David Avner, our CEO; and Emanuel Avner, our CFO. At this time, if you do not have a copy of today's release please contact our Investor Relations Manager here in Israel, Ms. [Deborah Margelite] on 972-544-815-952 and a copy of the release will be either e-mailed or faxed to you immediately.

Before we begin I would like to draw your attention to the fact that all our statements in this conference call may be forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995. In connection with such oral forward-looking statements you should be aware that Partner's actual results might vary materially from those projected in the forward-looking statement. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in Partner's press release dated January 31, 2007 as well as Partner's prior filings with the US Securities and Exchange Commission on Forms 20-F, S-1 and 6-K, as well as the S-3 shelf registration statement, all of which are readily available.

Please note that the information in this conference call related to projections or other forward-looking statements may be relied upon subject to the previous Safe Harbor statements as of the date of this call. For your information, this call is being broadcast simultaneously over the Internet and can be accessed through our Web site at www.investors.partner.co.il.

At this time I would like to turn the call over to David Avner. David?

Thank you, Dan. We're pleased with our fourth-quarter and annual results, which showed good financial and operational results, driven by our award-winning customer service, our leading brand, the excellent quality of our network, and our unique advanced voice content and data services. For another year, Orange has been named the leading telecommunication brand in Israel, and we have been voted as the mobile operator with the best customer service by Globes Israeli business daily newspaper. These core strengths will enable us to continue to grow our subscriber base and drive value for our shareholders. These assets will also be instrumental while we brought in the portfolio of services we offer to our customers. With the transmission fixed line telephony license now awarded to us, we are well on our way to offering customers a wide range of superb telecom services.

We now have 276,013 Asian customers. We are leading the Israeli market in terms of the number of third generation subscribers. Our third generation customers can enjoy a wide and growing variety of data and content services in Israel as well as in dozens of destinations abroad.

HSDPA is also available to our customers in the most operated area in Israel, offering a unique high-speed wireless Internet experience.

Finally, before I end these brief comments I would like to take this opportunity to thank my predecessor, the founder of the Company and the (technical difficulty) and for their assistance and support throughout 2006. With that said, I would now like to hand the conference over to Emanuel Avner, our CFO. Emanuel, please.

Thank you, David. 2006 was a very good year for Partner. Again we increased revenues and improved all profitability levels. Revenues rose by 9.4%, which includes a 36% increase in non SMS satellite content revenues.

2006 operating profit increased by 35% compared with 2005 and the Company recorded annual EBITDA of ILS1.85 billion, 33% worth of revenues, up 18% from 2005. As a result of our strong result over the year, we have doubled our EPS in 2006, which enabled us to distribute a yearly dividend per share of ILS2.63, equivalent with a dividend yield of approximately 5% at current market prices.

Following the ruling of the Supreme Court on November 20 2006 on the matter of Partner's marketing company, which overturned the rules regarding the completion of financing expenses, the Company included in its financial statements an additional provision for taxes of ILS35 million. This provision is an estimate of the additional tax expenses relating to the profitability that is part of the financing expenses accrued in years 2005 and 2006 will not be recognized as an expense for tax purposes. The Company has reasons justifying the recognition of these expenses for tax purposes or part of them but we have recorded a provision since at this time the level of certainty required in order to recognize these expenses that does not exist. Looking forward to 2007 we expect our subscriber base to continue to grow despite the highly penetrated market. We will, however, continue to focus heavily on the 3G subscribers and expect to see strong growth in our 3G base. Despite the forthcoming decline in interconnect tariffs for March 2007, and the decline in revenues, that will result from the recently introduced regulation regarding short calls to voicemail, we expect growth in total revenues in 2007. We also anticipate the number portability, which is expected to be implemented during the year, will lead to higher retention costs and a rise in churn rate following implementation. Barring any further adverse material regulatory decisions, we expect an increase in annual EBITDA in 2007, though at a lower pace than in 2006.

Regarding our dividend policy, the Company is currently conducting a review whether to increase its dividend policy above a 60% net income payout ratio and will complete the review during the first half of the year.

With that, I will now hand the conference back to Dan. Dan?

Thank you, Emanuel. You are now invited to ask your questions. Moderator, please? Moderator?

(OPERATOR INSTRUCTIONS). Alex Wright, UBS.

I have three questions initially if I may. First of all, I wondered if you could give us any indications of the business plan you have in mind, following your receipt of a fixed line license -- any kind of indications on the services, the anticipated CapEx spending revenue potential would be appreciated.

Secondly, could you indicate the potential impact of the voicemail ruling in terms of when exactly that began and what you would anticipate the approximate amount to be over time.

And then, thirdly, you indicated that you are expecting higher retention costs in association with number portability. Would you expect those primarily to take the form of higher handset subsidies or have you any other expectation in that regard? Thank you.

With respect to your first question, Alex, we will start offering fixed line services, the primary target audience is going to be business customers. We do not expect revenues to be material -- definitely not in the initial stages. And the primary motivation is to broaden the portfolio of services so that we enhance the customers seeking it and generate a higher customer loyalty for the Company. We do not believe that this involves any significant CapEx as we will initially be relying on the infrastructure which we bought by purchasing the assets of May 1. As you recall we have completed that transaction in mid-2006; we bought Transmission Network, which is comprised of approximately 900 kilometers of fiber optic, which runs through many of the business centers in Israel. And this network gives us the opportunity to both reduce the cost for our core transmission as well as using the same network in order to provide fixed line telephony to business customers.

With respect to the second question, we have not given guidance on the voicemail but we have said that these may adversely affect our revenues. I'm not sure that everyone is familiar with the regulation. The regulation basically gives an opportunity to customers who call other customers on our network and do not receive the customer but rather are routed to the voicemail to hang. Before they start to be charged, we are obligated to put an announcement saying that the call is being transferred to a voicemail.

With respect to your third question, the answer is, yes, we expect to see retention costs primarily in the form of handset subsidies to upgrading existing customers.

Can I just ask regarding the last question, can you give any kind of indication of the level of handset subsidy on a 3G customer compared to an average 2G customer?

No, this is guidance that we haven't provided but there are several factors which shall play into this arena. One, we do see continued lowering of the prices of handsets. They have been significantly going down since we launched the third generation network in December of 2004. So, that is the good news. On the other hand, we do see occasionally handsets which are more pricey, and these contain more features, as these will probably include HSDPA capability, which will be offered to customers in 2007 and so on.

The other effects which may be coming into play is the number of transactions. If the handset subsidy may go down per transaction, it is possible that there will be more transaction and we do foresee an acceleration in the rate by which we move customers from second generation network to third generation network, and, therefore, you may expect an increase in the total spend on upgrades.

Istvan Mate-Toth, Credit Suisse.

I wanted to ask you what are the factors you will consider when deciding upon maybe increasing your payout ratio? What would be -- are you thinking in terms of credit metrics that you would be willing to carry on higher leverage and what those numbers would be, if you could specify them. Or maybe you think that there would be stronger cash flow generation in the business. Therefore you could -- the higher dividend ratio would allow you to support the same credit metrics. If you could provide a bit more detail from that, that would be very kind.

We're not in a position at this point in time to provide very much color into it. As you know, we have a payout ratio of 60% at the moment. As we have stated, this policy is being reviewed by the Board and the governing bodies of the Company.

If you are asking is it more likely that we will see a higher payout ratio than a lower payout ratio, then the answer is yes. You may expect to see a higher payout ratio if the Board so decides. We expect to complete this review in the first half of 2007.

(OPERATOR INSTRUCTIONS). Avshalom Shimei, HSBC.

Congrats for the results. Just had one question regarding working capital. If you can provide some color regarding first the trend going into 2007? And then if you can specify what do you think is going to be the main drivers for working capital going into 2007, especially given the increasing retention costs that you mentioned.

Regarding the working capital going forward, I don't see much change in the trend that we have in 2006. And if you have seen in our balance sheet, we have an increase in the long-term receivables. This is due to a 36 installment that we provide to our customers when they buy equipment. I assume that this strength will continue along 2007. Beside that, I don't see any other changes in the working capital.

So you are saying we will see similar trends in terms of the growth of working capital as we've seen in 2006 basically?

Yes, correct.

Alex Wright, UBS.

First question is on the sales and marketing spending. You've attributed most of the increase there to growth in your sales force, which has clearly led to increased sales. I wanted to ask, are you more or less at the level of personnel that you want to be in that area now or do you foresee further increases in the sales force? And then as a separate point, what kind of wage trends are you seeing in this area? Is there any increased pressure due to competition or whatever?

And the second question I had was looking at the usage trends, I wondered if you could break down somehow the contribution to your usage growth between the changing mix of subscribers as you have more business subscribers? And the line growth amongst your whole existing subscriber base.

First question, Alex, on the sales force, we believe we have an adequate sales force going forward. And your other question I'm not sure that I understood the business customer question.

Well first of all just to follow up on that first point, you believe you have an adequate sales force. Just on the wages side, are you seeing any increased wage pressure in that area or is it fairly stable?

We do not see any pressure.

Okay, thank you. And then the second question was on usage. You've clearly seen quite strong usage trends. I assume that some of that is due to the increased contribution of business customers to your overall base. But can you also give some comments on the usage trends within your overall existing average subscriber base?

Encouraging.

So we shouldn't attribute all or most of the growth just to the shift towards business?

I don't think so. I think that we see very good usage on other segments, as well, but definitely the business customers have the highest usage though the lowest per-minute charge.

If I could just follow up with one final question whilst I'm on, actually. The net financial expenses in Q4 were low relative to previous quarters. Clearly, inflation is low but is there anything else going on there that has led to that decrease in expense?

No.

We'll return to the line of Istvan Mate-Toth.

I just wanted to ask the question, what is your guidance? This predicated upon, you expect some decent revenue growth and some modest EBITDA growth. It seems to me that your view of the market is that there is not going to be any major change in the competitive dynamics, competitive [testing] 2006 and 2005. Is this correct?

I'm just wondering one would have thought that both telephone and telecom we're seeing that they are increasingly getting their act together. But don't you think there is a bit more downside risk to that relative to benign market for 2007 and beyond than has been the case for '06 and '05?

We are operating in a very competitive market. The primary competition I would say is in the business segment. There is also significant competition in other segments. Some of the competition is focused on positioning third generation services -- has become a major issue. Now we have all players, including the telephone and telecom with full advanced third generation services and this has been a major emphasis for all players. We do foresee the continuation of their competitiveness in the market. This competitiveness may even be heightened by the introduction of number portability.

I think one can assume that all players will try to defend their existing customer base and maybe even to acquire additional subscribers in the context of number portability.

We believe that we at Partner are not disadvantaged. We know that we have entered the market last, which means that we have found in this market the largest number of captive subscribers which we never used -- which will never turn off the network of their existing operators unless they can take their phone number with them.

We here at Partner also benefit from the strongest brand in the business here in Israel, which again gives us an advantage while introducing number portability. However, we do expect to see churn levels as a result of the introduction of number portability go up. If experience in other places is to be relied upon, there is an initial spike in churn and then churn goes back down more or less to the same level where it was before the introduction of number portability or slightly higher. So if you are asking about the competitiveness, it is competitive now and we do not expect to see a less competitive market in 2007.

Thank you very much for that. But you don't expect that this would have potentially a more negative impact on your pipeline -- financial performance in '07 I think had before? Because I think overall, the signs are for a market getting a little bit worse. And am I wrong thinking that you are a little bit [strong wind] about this?

The guidance that we have given is to expect growth in subscribers, which is good news. We still expect growth in revenues, which is good news, and to expect growth in profitability. We have indicated the growth in profitability on the EBITDA level so I think that our outlook and guidance for 2007 is definitely a good outlook and the guidance is optimistic.

(OPERATOR INSTRUCTIONS). Alexander [Abaklatun], Goldman Sachs.

I just wanted to clarify. You mentioned that you expect EBITDA growth, but now you say that you expect also profitability growth. Just to make clear, do you expect that EBITDA margin will grow in 2007? Thank you.

I'm sorry, can you repeat your question, Alex?

I just want to clarify if you expect simply EBITDA growth or you also expect EBITDA margin to grow?

We have not given guidance on EBITDA margin growth. We have given guidance on absolute turns EBITDA growth.

Thank you very much. Dr. Dan Eldar, at this point we have no further questions in queue.

Thank you very much. This concludes the end of 2006 annual and fourth-quarter results conference call of Partner Communications. I would like to thank you all for your participation. Access to this call and to other valuable information on Partner is available through our Internet site at www.investors.partner.co.il.

Thank you very much and good morning in North America. Good evening in Europe, the Middle East and in Asia.

Thank you very much. Ladies and gentlemen, if you would like to access the phone replay of this conference you may dial 1800-475-6701 and enter the access code 858685. If you're internationally dialing please dial 320-365-3844. That conference will become available after 8.30 this morning Israeli time.

Once again, dial 1-800-475-6701 in the US. Outside the US, dial 320-365-3844 and enter the access code 858685. That concludes our conference today. We appreciate your participation as well as you using AT&T Executive Teleconference. You may now disconnect.