Partner Communications Company Ltd (PTNR) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2007 financial and operational results. At this time all participants are in a listen-only mode and later we will conduct a question and answer session with instructions being given at that time. (OPERATOR INSTRUCTIONS) And I would now like to turn the conference over to your host, Mr. Oded Degany. Please go ahead sir.

Thank you. Good afternoon to those of you in Europe, the Middle East and Asia, and good morning to our listeners in North America. Thank you for joining us for this conference call to discuss Partner Communications' second quarter results. With me on the call today are David Avner, our CEO, Emanuel Avner, our CFO and also Dr. Dan Elder, VP of Carrier, International and IR.

Our CEO, David Avner, is going to present several statements followed by Emanuel Avner, our CFO, who will provide a review of our second quarter results and then we will open the floor to Q and A. At this time if you don't have a copy of today's release please contact our Investor Relation Manager here in Israel, Deborah Margolis on 972-544-815-952. I repeat, 972-544-815-952. And the copy of the release will be either emailed or faxed to you immediately.

Before we begin I would like to draw your attention to the fact that all of the statements in this conference call may be forward looking statements within the meaning of the US Private Security Litigation Reform Act of 1995. In connection with such, all forward looking statements, you should be aware that Partner's actual results might vary materially from those projected in the forward looking statements. 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 July 31, 2007 as well as in Partner's private filings with the US Security and Exchange Commission on the form of 20-S, F-1, 6-K, as well as S-3 shelf registration statement, all of which are readily available.

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

At this time I would like to hand the call to our CEO, David Avner. David, please.

Thank you, Oded. The second quarter of 2007 was yet another strong quarter for Partner. We are reporting today approximately 400,000 third-generation subscribers, approximately 15% of our 2.7 million customer base. Partner has also managed to add in the second quarter 30,000 high quality subscribers, 80% of them are business subscribers. Our customers benefit from Partner's investment in third-generation and HSDPA networks. The force of the investments are reflected in an impressive growth in our data and content revenues. The assets built by the company in recent years making it the leading cellular company in Israel continue to strengthen. Our advantages in network quality and excellent customer service will enable us to further strengthen our market position and address new areas of activity.

Partner continues to be awarded for its superb marketing comparing the strong brands we developed and the organizational culture which drives all of our activities. As we continue to improve on all of our financial and operational measures we continue to streamline our business activities and to review all opportunities for cost savings while still enhancing our superb customer support. We continue to generate cash flow according to our plans and continue to payback to shareholders.

Over the last two years, close to 2 billion shekels have been paid to shareholders in the form of share buybacks and cash dividends. This quarter we announced an increase in our payout ratio from 60% to 80%. With that said, I would like to hand the conference over to Emanuel Avner, our CFO. Emanuel, please.

Thank you, David. We are very pleased overall with the company's performance this quarter. Total revenues rose by 6.9% compared with the second quarter last year. And this is despite the regulatory intervention and the effect of the competitive pressures. The key regulatory measures included the full effect of the mandated reduction in the interconnection tariff in March 2007 and the recent voice mail regulations that went into effect in January of this year.

Underlying earnings fundamentals also keep on following a growth curve. Gross profit and operating profit increased by 24.5% and 17.9% respectively compared with the [parallel] quarter last year. The percentage contribution of content and data revenues also continue to rise and included a 30.2% increase in non-SMS data and content revenues quarter on quarter.

These results were mainly driven by improved operational indicators including among others a 19.2% increase in the number of our 3G subscribers compared with the second quarter of last year.

Overall we saw a very encouraging growth in our profitability levels with EBITDA and operating profit increasing by 9.7% and 17.9% quarter over quarter respectively.

Net income reached NIS 228 million, another satisfying growth of 30.9% compared with the [parallel] quarter last year.

On the basis of these results our Board has approved an increase in our dividend policy from a 60% to an 80% net income payout ratio. The Board also approved the distribution of dividends for Q2 2007 of NIS 0.96 or approximately $0.23 USD per share, and in total approximately NIS 150 million or approximately $35 million USD to shareholders and ADS holders on record as of August 21, 2007. The dividend will be paid on September 6, 2007.

We also reconfirmed the annual guidance for 2007 which we gave at the end of January in the annual 2006 press release. With that, I will now hand the conference back to Oded. Oded?

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

(OPERATOR INSTRUCTIONS). Our first question will come from the line of Avshalom Shimei of HSBC Bank.

Hi. Congratulations guys. A few questions. Can you explain the one-time credit on the cost of services?

Hi, Avshalom. All we can say is that it is a one-time credit. We can not elaborate on that further. And this is a one-time, this is what is important to emphasize here.

Okay. The increased gross loss on equipment implies maybe that subsidies are increasing. What I want to ask is if this rate of increase is indicative to the next quarter and at the same time can you talk about pricing of handsets of 3G and 2.5G this quarter versus the previous quarter if prices are still coming down at the same rate, or higher or lower rate than what you saw before?

Hi Avshalom, it is Emanuel here. The gross loss on equipment last year was at the level of NIS 232 million. Indeed, this quarter we have a loss of NIS 56 million, so it is more or less the same rate. We have to emphasize that this time we have higher proportion of 3G handsets in the total portfolio of the company and this increases slightly the amount that we spend. But you have to take into account also that we have a higher number of (inaudible - highly accented) at this time compared to the parallel quarter last year.

Can you say anything about the rate of decrease in 3G handset prices, general trend of what you see versus what you saw before, let's say, at the end of 2006?

Of course we anticipate further decrease in the prices in the 3G handsets. This is what we see. On the other hand, the functionality and the capabilities of the handsets of course are improving from time to time.

And just last question is regarding OpEx. OpEx is down obviously and I am asking if this level is maintainable in your view. Should we expect it to increase maybe on the face of number portability or should we expect that to remain the same? What do you guide for that one?

Except on the NIS 24 million, a one-time credit that we emphasized in our report, I don't think that we should expect anything dramatically that will be changed in the next quarter. We are stating our guidance again that we will see increased sales, increased revenue this year compared to 2006 although we will have more retention cost as part of our preparation for the number portability. The EBITDA will be higher this year compared to 2006. Although we said that the rate of increase will be lower than what we showed in 2006.

Okay, thank you guys.

Thank you. Next we will go to the line of Maura Shaughnessy of MFS.

Good afternoon. A couple of questions. First of all, you raised the dividend payout to the 80%, but your net debt to EBITDA even with the higher payout ratio is probably around 1.2 times and so the dividend policy change doesn't really materially affect your leverage. And one would say you are pretty under levered at this point despite the dividend increase. Can you talk about cash flow priorities and further either share buybacks or what have you or your net debt is going to be zero in the foreseeable future?

Okay. First of all our Board of Directors increased the dividend payout ratio from 60% to 80%. And if you calculate the dividend yield that this will give us, of course there are many ways to calculate dividend yield, but you can show that the dividend yield of the company will be in a range of between 5 to 6%, which is I think comparable to other companies in our field in many other countries.

We know that out net debt to EBITDA is around 1 time, and the dividend policy will not change much the leverage of the company. We think that the leverage of the company may be more optimal. But right now there is no decision for further buyback or increase in dividends.

We review the issue of a one-time a dividend or a buyback. But till now, the review was not finished and we face some regulatory and tax issues that we have to solve yet.

Okay. Second question is, I know that you had hired AT Kearney to do a cost study and you perhaps mentioned that the retention costs would be a little bit higher this year given the number portability in December, but how should we think of that, the cost cutting and opportunity as we think especially into 2008?

Okay. We think that [maintaining efficiency] is a long term process, it is not something that you do one time. We do benchmark from time to time with other operators using consulting companies like AT Kearney and we take into account that these processes take time. I think that you will see efficiency measures in the company from time to time. It will not be something that will showing as an extra ordinary item. But you will see that we can maintain efficiency in the company in the business processes, in procurement, in head count, et cetera.

I guess my question is, if costs are going to be a little bit higher this year due to the retention spending from the number portability in December? If there were any material changes in the efficiency plans driven by this study from AT Kearney, we wouldn't see that until 2008. Is that a fair way to put it?

What we implement out of this study with AT Kearney is things that will be started very soon and I assume that you will see that in the second half of the year in 2008. But again, I don't like to emphasize very much on this issue because as we see it it's a long term process and you will not see anything material in that side. The company all the time keeps its expenses on a low level and this is the trend that we show all the time.

I would like to take also this opportunity to also draw your attention to decrease in the royalties that we pay to the government. Last year we paid 3% royalties on our revenues and this year it went down to a level of 2.5%. And there will be a further decrease in the royalties up to a level of 1% in 2010.

But one comment which takes into account the potential increase SAC and SRC is the fact that we can reiterate our EBITDA guidance. We said at the beginning of the year that EBITDA will increase in absolute terms but in lower rates in growth compared to 2005, 2006. So we see that in Q1 and Q2 there are trends that support this guidance.

With regards to CapEx, it looks that you spent about 150 million year to date which is around a little above 7% of service revenues. And I think you had been guiding or talking about around a 9%-ish kind of level in terms of ongoing CapEx. Can you talk about CapEx expectations?

Last year we spent something around NIS 450 million and we said that we expect that the level of CapEx (inaudible) much from last year. This means that we should be more or less around NIS 500 million according to the first and second quarter we are at the lower pace. But this is only investment timing. According to our cash flow, if you draw attention to the cash flow of the company you will see that the cash flow for investing activities in the first half of the year was NIS 250 million which supports more or less the overall annual guidance.

Okay. I was just citing page 5 of your release which talked about the net investment of fixed assets, but alright, so just go off the cash flow from --?

(Technical Difficulty).

Okay. And the last question. In terms of the data expectations, data revenues which were at 12 and change as a percent of revenues, can you talk about where that is materially below some of what we are seeing in North America and in Europe? Where can that number go?

Yes, we know that in other companies, especially in Europe, you can see that data and content accounts go 20% or even more of total revenues of the company, so we see that as a potential for us. Right now only 14.5% of our subscriber base are in the third-generation network. And we know that there is a very close correlation between the number of our 3G subscribers and the level of data and content that we can generate. Quarter on quarter the data and content, the non-SMS part of the data and content decreased by 30%. We think that this is a very good pace and we think that as long we increase the number of 3G subscribers it will grow.

Okay. Thanks very much.

Thank you. Our next question will come from the line of Istvan Mate-Toth of Credit Suisse.

Good evening gentlemen. Istvan Mate-Toth from Credit Suisse. I have a follow up question on the CapEx comment. In your cash flow you have gross [additions] of 250 as you said, but I suppose there is another entry. We have seen 120 increase in trade payables, so (inaudible) management. I am suggesting that essentially this was more thought for the rest of the year. So you will have spent about NIS 400 million CapEx in gross addition. Can I just clarify that?

The second question I have is on 3G migration. I think the question of handset price has been brought up. Would you expect an acceleration in 3G migration or is it something that you would actively like to pursue given the fact that some of your competitors have also announced ambitious 3G strategies.

I will start with an answer regarding your second question. We think that investment in 3G is something that is very important for the company. We see the benefit of new 3G subscribers in the form of additional minutes of (inaudible), additional revenues from data and we will continue to support subsidizing and increasing the number of 3G subscribers.

Can you repeat your first question please?

The first one is just that I have seen in terms of net additions you had NIS 250 million in your cash flow, so you are running ahead of your NIS 400 million. But I have also seen that there is an increase in trade payables of 123 which has bolstered your operating cash flow significantly. So does this mean you are still sticking to the NIS 400 million net CapEx, cash CapEx for 2007?

Yes, we do.

You do. Okay. And just a follow up on your comments on 3G. Do you have a magic pricing level in your mind where you think that 3G take up could have (inaudible) significantly? There is talk of a Nokia phone, 100 Euro, for next year. Is there a magic number for handset pricing where you could see most 3G take up or do you think this is going to run its natural course?

Unfortunately we don't think there is a magic number. Of course we see a down trend in the prices of the 3G. On the other end we see increased functionality or better functionality of these handsets. I can't say more about that.

That is what I had. Thank you very much.

Thank you. Our next question will come from the line of Sergei Arsenyev of Goldman Sachs.

Hi, good afternoon. I just had a small clarification question. When you are talking about your content and data revenues including SMS with 12.4% of total service revenue, what is the SMS portion of that, and what is the more advanced 3G portion of that revenue.

The non-SMS part out of this 12.4% is about 60% and the SMS is about 40%.

Okay, and presumably you see the non-SMS portion of the data revenues increasing?

The non-SMS increased by 30%. We see also very nice increase in the SMS part.

Okay. Thank you.

Thank you. And next we will go to the line of Stephen Pettyfer of Merrill Lynch.

Yes, thanks. Good evening. Just two questions. First is just a point of clarification on the new dividend payout policy. Just so I am clear on that. Should we be thinking about calendar 2007 you paying 80% dividend for the full year or is that just sort of starting effectively now going forward.

It is from the beginning of 2007. It is annual dividend.

Okay, and in terms of can you give us any more thought about quarterly --how that is going to break out on a quarterly basis. Should we think about the fourth quarter as being the catch up quarter?

Yes, you are right.

Okay. Thank you. And then as far as your success on the business customer side of the mix. How do you think about that going forward? Do you see that as a niche, a market, where there are further growth prospects?

In the second quarter we saw a total increase in the customer base by 30,000 subscribers. Out of that we had 24,000 subscribers coming from the business segment. This is more or less the trend that we see recently. Let me remind you that in 2006, 71% of our total net adds were again from the business segment.

Right, but I guess my question there is, do you see that trend continuing? Are you effectively taking customers from some of your competitors in that segment? Or do you think this is a segment of the market which is actually growing?

No, no, no. We think that all of the business subscribers already have similar handsets and we assume that all of them are coming from our competitors.

Okay. Thanks.

Thank you. Next we will go to the line of Ella Freed of [Prizman].

Hello, good afternoon. I would like to ask you a series of questions please. First, publications about irregularities concerning the cost of licenses -- can this have an impact in addition of expenses or any other problems for Partner?

We are unaware of any such impacts. There were never any allegations made against Partner with respect to licensing.

Okay. Another question is, there was a slight decrease in the cash flow in the second quarter in comparison to the first quarter, cash flow from operating activities. Is it the seasonal phenomena, or will it have impact on the future revenues? Is it an indicator, or is it just seasonal?

No. Cash flow, sometimes the part of the working capital in the cash flow depends on the payment date for the suppliers. In the first quarter, the payment date was on Saturday. And it was postponed to Sunday and therefore it was in the second quarter. So therefore there was increased cash flow in the first quarter on account of the second quarter. This is the only reason for the change in the cash flow.

So the average remains unchanged actually?

Yes, you are right.

Okay and there is a third question. I must congratulate you, there was a decrease in the churn rate. And I would like to hear you explain how did you achieve it?

Most of our churn is coming from the pre-paid segment. There are two effects into this decrease. One is the seasonality. Usually we see decreased churn in the pre-paid segment in the second quarter. But on the other side we think that this is also the proof of our retention activities that we do from the end of 2006.

Okay. Thank you very much.

And next we will go to the line of Darren Shaw of UBS.

Hi, good afternoon gentlemen. I had a few questions mainly linked to the new dividend policy. First of all, I wonder if you can try and sort of tell us the thinking behind increasing it to 80% and perhaps why did you not go to 100% like some people hoped in the market, and I think CellCom have sort of guided people towards 95 to 100%? And would you consider raising it in the future? And secondly is, what do you see is your long term sustainable EBITDA margin? Thank you.

Okay, regarding the 80% ratio, one should take into account also the absolute figure of the dividend, not only the ratio, and also the dividend yield that is generated by this amount. We think that 80% is a good level compared to other companies in our field. It gives a very nice dividend yield. We think also that going up to something like 100% dividend payout ratio may give a negative sign to the market that the company would not expand and will not invest. And we think that 80% is decent and something that we can maintain for longer terms.

Regarding your question about the EBITDA, unfortunately we cannot give any guidance to the EBITDA. But in absolute terms, of course, we said in our guidance in the beginning of the year that EBITDA will grow in 2007 despite the regulatory interventions and despite higher expenses for retention.

Just in case you misunderstood, I just asked about long term sustainable EBITDA margins. I think you had 35% in the second quarter. Do you think it is possible to raise them or you think they are somewhere near the peak given the pressures from the regulator?

You have to take into account that we said in our press release that there is a one-time credit in the amount of NIS 24 million in our cost of sales. So in order to do your calculation you have to take this in your calculation. Let's say about the EBITDA margin for the next quarter I don't like to comment on.

Okay and final question from me please, just on number portability. I think the latest date we talked about was December this year. Can you just tell us how you see things panning out in terms of what will actually happen on a sort of monthly basis. Have you got a lot of staff in place to sort of take in new customers? Are you working on trying to retain people? Can you just sort of tell us about some of your plans?

We think that number portability is an opportunity for Partner. We believe that in parallel to the opportunity, we want you to expect that there will be an increase in the churn rate and also an increase in the subscriber acquisition cost and retention cost. And we are also close to (inaudible) event.

Great. Thanks very much.

Thank you. Our next question will come from the line of Igor Semenov of ING.

Yes. Hi, thanks. I have a question on your business customer. As you said as you are signing up quite a few new business customers I was wondering if you have already started providing them with fixed line services as well. I think this is something you were talking about at the beginning of the year and if not yet, should we expect it this year or you think it is going to be a longer term project? Thank you.

Okay, regarding the non-cellular activity of Partner, we have already launched a few services and we have a few business customers. We provide those customers with transport services and also with the voice services. In the foreseeable future we do not think that the revenues which would be derived from this activity will be material to the company, but we think that it has strengthen our relationship with the customers, increased the stickiness, and opened for us potential to generate additional revenue.

Right, but it is not like you are going into the local services for fixed lines.

At this stage our focus is on the business segment. In the future we do not (inaudible) the possibility of entering the residential market, but we will find the best way of how to provide the services to this market.

Is it possible to break out how much you generate from non-cellular services right now?

No, we do not disclose those numbers but we can say that at this stage it is not material.

Okay, thank you.

(OPERATOR INSTRUCTIONS) And we have a follow up from the line of Maura Shaughnessy of MFS.

Just getting back to the balance sheet and the leverage, you mentioned that the study as to how to review things is still ongoing. What is the appropriate leverage for a company such as Partner if you are only at about 1 to 1.2 times levered today? What is the appropriate capital structure?

Of course if you look on companies like Partner around the world you will find that there are many levels of leverage to many other companies. You can see (inaudible) at the level of 1.1 times and you can see companies with higher level of net debt to EBITDA. We think that if Partner can bear a higher level net debt to EBITDA and we think that we can feel even comfortable with 2 times. Right now, as we said, the review regarding this issue was not finalized yet. We encountered some legal and taxation issues that we have to solve. And when we will have the decision, of course, we will publish that.

I guess, you are changing the dividend policy for just 2007 which is sort of a bizarre way to change dividend policy. Are we going to be hearing about a more sustainable policy and a more sustainable leverage goals at the end of the year, beginning of '08? What is the plan here?

The 80% payout ratio is not necessarily relates only to 2007. This is the new dividend policy of the company. We have not said that it is only for 2007. Regarding the one-time dividend owe or buyback, this will resolve, I assume, in the next quarters. And when it will be we will announce later.

And in terms of though, when you mentioned this review about the capital structure and the cash flow return policies -- when should we hear how you are thinking about the capital structure? Is that something this year? Is that something at the beginning of next year? Any sense of helping us out on that issue?

Unfortunately I cannot give you any specific date because there are some issues that are not in the capacity of the company itself. We--

I'm sorry, what are the issues that we are waiting for to make that decision when you talk about pacts, etc, etc? What are those issues?

I don't like to elaborate more about this issue because it may harm our process in this issue.

Okay and my second question is, what is the churn on your post-paid customers today?

We have not disclosed this issue.

Can you tell us if it is improving or how, is most of the benefit on churn this quarter due to lower pre-paid churn or is due to better post paid churn?

Okay the difference in the churn is coming from actually two reasons. One is the seasonality regarding the churn in the pre-paid segment. And another thing, we do have decrease in the churn in the post-paid side which relates, we think, to more retention activities that we do.

Okay and the last question about the churn. Do you break out what voluntary and involuntary churn is and what the trends are there?

No we do not.

Okay, thank you.

And there are no further questions in queue at this time. Please continue gentlemen.

Okay. Thank you. This concludes our second quarter results conference call of Partner Communication. We appreciate your interest and please feel free to contact us at investor relations if you have any additional questions. Access to this call and to other valuable information on Partner is available through our website, www.investorsofpartner.co.il. Thank you very much and have a lovely day.

Thank you ladies and gentlemen. This conference will be available for replay after 8:30 pm today until August 7 at midnight. You may access the AT&T Executive Playback service at any time by dialing 1-800-475-6701 and entering the access code of 880162. International participants may dial 1-320-365-3844. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.