Partner Communications Company Ltd (PTNR) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company second quarter 2009 results conference call. All participants are at present in listen-only mode. Following management's formal presentation instructions will be given for the question and answer session. (Operator Instructions). As a reminder, this conference is being recorded August 10, 2009.

I would now like to turn the call over to Mr. Oded Degany, Vice President of Corporate Development and Strategy and Investor Relations. Mr. Degany, would you like to begin?

Thank you very much Tessa, and 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' 2009 second quarter results.

Today, we are joining the conference call from Tel Aviv where have just recently concluded our Board Meeting. With me on the call today are David Avner, our CEO, and Emanuel Avner, our CFO. Our CEO, David Avner is going to make several statements, and then Emanuel Avner, our CFO, will give a summary of our financial and operational results. We shall then open the floor to Q&A.

At this time if you don't have a copy of today's release please contact our Investor Relations Manager in Israel, Deborah Margalit, on 972 54 4815952 and a copy of the release with be either emailed or faxed to you immediately.

Before we begin I would like to draw your attention to the fact that all statements in this conference call may be forward-looking statements within the meaning of US Private Securities Litigation Reform Act of 1995.

Regarding such of our 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 releases dated August 10, 2009, as well as Partner's final filings in the US Securities and Exchange Commission on the Form 20-F, F-1 and 6-K, as well as the F-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 is subject to the previous Safe Harbor Statement 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 website at www.orange.co.il.

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

Thank you, Oded, and hello to our listeners. I am very satisfied with our operational and financial performance, which shows that the management is staying focused on the realization of the Company's short-term objectives and long-term strategy.

This quarter we have recruited more than 40,000 new subscribers; a very strong achievement and a direct result of our continuous effort to improve our service quality and strengthen our relationship with our customers.

Partner strives to continuously launch new initiatives in order to improve service experience. Towards the end of the first quarter we completed most of the implementation of our new Company-owned contact center across the country, and opened the new advanced centralized handset repair laboratory which goal is to decrease waiting times at our service centers, enhance subscriber satisfaction and increase productivity. The decision to strengthen Company-owned distribution channels has started to yield positive results.

Our customer-oriented approach is reflected, as the low churn rate, keeps on bearing fruit. And I am proud that, once again, our brand, Orange, has been elected the leading telecom brand in Israeli for the seventh year in a row. The unprecedented record is mainly a result of Partner's focus on service quality.

Partner also continues to strengthen its position as a comprehensive telecommunication operator, as we are making satisfying advancements in our new sector of activities, ISP and Fixed Telephony. In this areas, as in our core Cellular business, we aim to provide our customers with a unique user experience, offering innovative features and services for an unmatched value proposition.

During the ramp-up period we also intend to integrate additional sales channels in order to leverage our broad interface with our customers. These activities are one of the foundations of the Company's future growth and a major opportunity to differentiate ourselves from competition.

I would like to conclude by mentioning the announcement made by our parent company, HTIL, in early July, regarding a possible sale of its indirect equity interest in Partner. With this regard, I take this opportunity to thank Partner's management for their professionalism and focus on the business during this period.

We look at the future with confidence, as the strong assets built by the Company over the last decade will enable Partner to continue to grow and drive value to our shareholders in the years to come.

With that said, I would like now to hand the call over to Emanuel Avner, our CFO. Emanuel, please.

Thank you, David. Once again Partner has maintained strong profitability in our core Cellular business this quarter, and we believe we are in a good position to be able to benefit from any future economic upturn.

Service revenues decreased by 0.7% in the second quarter of 2009, compared with a larger decrease of 2.9% in the first quarter.

Similar to the first quarter, the decrease primarily reflects the impact of lower roaming activity as well as lower Voice revenues resulting from the reduction in billing interval and competitive market conditions, which continue to put downward pressure on the outgoing Voice tariff.

On the other hand, there were a number of positive impacts on Service revenues including, one, an increase in total network minutes reflecting the approximately 3.4% increase in the subscriber base, an increase in the weight of post-paid subscribers with the higher than average level of usage, and an increase in Content and Data revenues and revenues from Non-Cellular services.

Gross profit in Q2 2009 was only marginally lower than Q2 2008, decreasing by 0.2% to ILS590m. This reflects the net impact of the capitalization of ILS53m of handset subsidies under IFRS in Q2 2009, offset by a decrease of 5.4% in gross profit from services due to the lower service revenues, the additional costs associated with the new fixed line services and the additional depreciation from the capitalized handsets.

Selling, marketing, general and administration expenses decreased by 1.2% in Q2 2009 to ILS171m. Again, this is mainly due to the positive impact of the capitalization of sales commissions under IFRS, offset by additional costs from our new fixed line services.

EBITDA totaled ILS574m in the second quarter, the equivalent of 42.2% of Service revenues and 37.9% of total revenues. This is an increase of 1.8% from Q2 2008. Excluding the impact of handset capitalization in Q2 2009 and other income, EBITDA less other income would have been ILS501m, a decrease of 6.5%, or ILS35m, compared with ILS536m in Q2 2008.

This decrease mostly attributed to the impact of the ramp-up cost of our new ISP and Fixed Telephony initiatives in Q2 2009 in the amount of approximately ILS25m for the quarter, and the reduction in roaming revenues.

For the first half of 2009 the dividend declared totaled ILS467m compared to ILS395m declared for the first half of 2008, representing an increase of approximately 18%.

Turning to developments in funding, last week the Company filed a draft shelf prospectus with the Israeli Securities Authority. The Company intends to issue new debt securities in the second half of 2009, subject, of course, to the publication of the shelf prospectus, delivery of supplemental shelf offering report and market conditions.

We expect to use the net proceeds from the issue of debt securities for general corporate purposes, which may include financing of our operating and investing activities, refinancing of outstanding debt and continued dividend distribution from time to time, subject to the decision of the Company's Board of Directors.

Looking ahead to the second half of the year, the launch of the Apple iPhone in the coming months is likely to increase the Company's working capital due to the build up of inventory and the sale of part of the handsets bundled together with airtime packages, as opposed to separate payment for the handsets.

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

Thank you very much, Emanuel. You are now invited to ask your questions. Tessa, please open the call to Q&A.

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. (Operator Instructions). The first question is from Daniel Meron of RBC Capital Markets. Please go ahead.

Thank you. Congrats on the ongoing execution, guys. David, can you provide us with a little bit more color on the business climate right now that you are seeing in the marketplace as far as the demand, the trend in roaming and also the competitive landscape? Thank you.

Yes. In general, we said at the beginning of the year that we do see signs [through] the recession and, in fact, we see today moderation in the impact of the recession.

We do see some growth in the Minutes of Use, minus 1% or something like this that you see is actually a plus 1% if you exclude the free minutes that we gave away in 2008. We do see a reduction in the ARPU, but it's stable. And in general our revenues are just 0.7% lower than the Q2 2008, in comparison to 2.5% which we had in Q1.

So in general we are quite optimistic and, as we projected from the beginning, there is some impact of the recession, but we also notice a moderation of the impact in this quarter.

Okay. Do you also see that in the roaming business? Are we seeing a return to typical seasonality this time around?

No, we don't. We still see a decrease in the roaming volume in terms of the number of minutes. And I think that this is the result of two major factors. One is, of course, the recession, or the impact of the recession on the business segment. And the second factor is a continuous change in the usage pattern of our roamers.

Okay. And then, just switching gears here, MIRS, you made an [unbidding] offer. Can you walk us through the rationale of this move and what are the dynamics that may be attributed to that, as far as the Ministry of Communications Agreement to such a move, if and when this becomes more serious? And what's the timeline on this deal?

Daniel, naturally, we can not elaborate further or to give more color on the potential transaction with Motorola. The only thing that we can say, and this is by the way due to the fact that we are dealing with M&A and, almost by definition, we are limited and agree to strict confidentiality.

From our perspective we see the acquisition, or the potential acquisition of MIRS, as a vertical integration. We don't refer to MIRS as a strong competitor, if a competitor at all. And we think that it might be a complementary business to partner. And I think that I can not add and elaborate on that further.

Okay, than you. I'll yield the floor.

Thank you.

The next question is from David Kaplan of Barclays Capital. Please go ahead.

Hi, good afternoon, everybody. If we could just -- a little bit on -- again on MIRS. How is the Regulator reacting to the bid put in by Partner, or has there not been a reaction yet?

I think I recall long ago that there was an early -- before any of the companies had put in a bid, the Regulator had said that he would frown upon. So if you can update us if something has changed vis a vis the Regulator and a potential acquisition MIRS by one of the existing cellular operators.

Well, as you know, I think that we have stronger argument towards the potential Regulator's position. As I mentioned before, we are referring to this potential acquisition as a vertical acquisition and not as a horizontal one.

I think that you are familiar with MIRS numbers, and you know -- and you can very easily notice that its market share is relatively small. So, unfortunately, David, I can not elaborate on that further.

Okay. And then I had one more question about the -- if you can give us a little bit more color into how the Non-Cellular businesses have been performing over the first half of this year. Are they meeting -- are -- is the acquisition of subscribers meeting expectation, the types that are being offered, where are we in that whole rollout?

Regarding the Non-Cellular business, as expected and based on our business plan, we define the first year as a ramp-up year, and we all need to be very patient about the result of this new business. We strongly believe that the rationale behind this is a very solid one.

As we disclosed in the first quarter the investment in this business is around 25 -- or the impact on the EBITDA is around ILS20m, ILS25m per quarter. And, hopefully by the end of the year, once the numbers of the subscribers will be more material, we will share with you the numbers.

But you'll need to be very patient. We said from the beginning that this business is going to be breakeven in the second half of 2010. And we are patient. We strongly believe that it will strengthen our relationship with our customers, that it will provide us with the possibility to address new sources of revenues.

After all, we are dealing here with around ILS5b of new market. But we want to do in the partner way, or in the Orange way, meaning that we'll do it very seriously, very cautiously, and we'll make sure that we provide our customers with the best product, and also the richest product.

All right. And just a last question on handset sales. The last two quarters there have been profit on handset sales, which is an abnormality. Do you see that continuing through the course of 2009, or do you think that the launch of the new handsets such as the iPhone might impact that and turn us back to a normalized [growth] loss on equipment sales?

David, it's -- actually, when we transit to IFRS we deal with the subsidy of the handsets in a new approach where, when there is a subsidy on the handsets and when the contract is (technical difficulty), there has been some [requirements] to [again] capitalize the subsidy of the handset. And we do it from time to time, of course, according to what you see in the report.

And in other contracts where we have a profit -- when we sell the handsets in profit, we can recognize -- so I assume that also in -- you will see on one hand some (technical difficulty) sales of this equipment (technical difficulty) in profit, and you will see also (technical difficulty) [of stuck] in other (technical difficulty) there is subsidy and when (technical difficulty) the IFRS for capitalization.

I guess we can discuss this further. I am not really sure that -- I guess we'll discuss this further. I wasn't really clear on the answer.

No problem. If you like you can give me a call; it's Emanuel. You can give me a call and we can more elaborate on that.

Okay, thanks.

The next question is from Darren Shaw of UBS. Please go ahead.

Hi, good afternoon, gentlemen. I had two questions. The first one was on the -- on Hutchinson. Could you just tell us what kind of benefits or synergies you have from having HTIL as your controlling shareholder, such as global purchasing agreements or any other kind of benefit [going from] benefits and having them on board?

And secondly is, on the use of the Orange brand, can you just remind me on when the current agreement, which I think is -- you pay zero to France Telecom runs out, exactly which year and what would you -- how would you go forward? Do you renegotiate now or you wait closer to the time, or if you could just tell us a little bit about that and maybe what other -- if you know what other companies who are in your situation, the kind of numbers they pay to France Telecom for use of the brand. Thank you.

Okay, Darren, regarding the first part of your question the major agreement that we have with Hutchinson is actually an option to join their procurement group agreement with respect to handsets.

We think that the change in controlling Partner will not have a material impact on the business. It will have an impact, but not a material one. And I think that this is the major issue that we have with respect to the sale.

Regarding the second part of Orange, we have a license, which is a perpetual license, royalty free until June 2013. And at this stage we cannot assess what will be the royalties, if any, four years from now.

Okay. And when you say not material impact, Oded, do you mean -- do you define material as not less than 10%, or you mean a really minute number?

Materiality has a qualitative and quantitative criteria. I suggest that we'll speak in terms of materiality and not try to translate or quantify it because we don't disclose the benefit, if any, that we have from the Hutchinson agreement.

But let's not forget that there are other alternatives to buy handsets. And also that in some cases, or even in many cases, we don't use the agreement and we buy handsets directly or through other channels.

Thank you very much.

You're most welcome.

(Operator Instructions). There are no further questions at this time. Before I ask Mr. Degany to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin in two hours. In the US, please call --

Excuse me, sir, there is a question. Will you take it?

Yes, I will.

The next question is from Aram Fuchs from Fertilemind Capital. Please go ahead.

Yes, I know you can't talk about specific subscriber numbers, or you don't want to talk about specific subscriber numbers on the Landline businesses, but I was wondering if you could just talk about how you are selling these services. It is the same sales force that you are using for the mobile? And sort of the packaging of it, maybe you can give us the detail like that? Thank you.

We decided that during the ramp-up period, due to the fact that the numbers are not material and are not meaningful at this stage, not to disclose and to share with you the numbers, only at the end of the year or once it will be material.

Regarding the process itself, we are now in a process of integrating additional sales channel -- Company-owned sales channels and also distributor sales channels in order to fuel the growth in this business. We believe that there is a huge opportunity here for Partner. And we don't forget, even for a moment, that the numbers of customers' interruption that we have and the interface that we have with the Israeli public is a huge one.

Just to give you a glimpse, we have 1.5 customer interruptions per month, more than 60k calls for the call centers, more than 100 contact points with customers, distributors and so on and so forth. So during the ramp-up period, one by one, we intend to integrate those sales and distribution force, and they will become eventually a part of the overall sales force that will support this business.

Okay, great. Thank you very much.

Thank you.

There are no further questions at this time. Before I ask Mr. Degany to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin in two hours. In the US, please call 1888 295 2634. Is Israel, please call 039 255 900. Internationally, please call 9723 9255 900.

Mr. Degany, would you like to make your concluding statements?

Thank you, Tessa. This concludes our 2009 second quarter results conference call of Partner Communications. We appreciate your interest and please feel free to contact us at Investor Relations if you have any further questions.

Access to this call and to other valuable information on Partner is available through our website at www.orange.co.il. Thank you very much, and have a good day.

Thank you. This concludes the Partner Communications Company second quarter 2009 results conference call. Thank you for your participation. You may go ahead and disconnect.