Partner Communications Company Ltd (PTNR) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company third-quarter 2009 results conference call. All participants are at present in listen-only mode. Following operations, management's formal presentation, instructions will be given for the question and answer session. All participants are at present in listen-only mode. As a reminder, this conference is being recorded, November 9, 2009. I would now like to turn over the call to Mr. Oded Degany, Vice President, Corporate Development, Strategy and Investor Relations. Mr. Degany, would you like to begin?

Yes. Thank you very much, Stephane. Good afternoon to those of you in Europe, in 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' 2009 third-quarter results.

Today, we are joining the conference call from Tel Aviv, where we 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. Then we shall 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 54 481 5952 and a 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 statements in this conference call may be forward-looking statements within the meaning of US Private Securities Litigation Reform Act of 1995. Regarding such oral 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 November 9, 2009, as well as Partner's prior filing with the US Securities and Exchange Commission on the form 20-F, F1 and 6K, as well as F-3 shelf registration, 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 at 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 satisfied with Partner's results this quarter. Partner's continuous commitment to provide the best service to its customers has been recently rewarded by a survey run by The Marker, which attributes to Partner the best score in the service level out of the all Israeli cellular companies, in all the survey parameters. Our ability to attract new customers is also reflected in the high level of net additions this quarter. In a highly saturated market, our customer-oriented approach has enabled us to recruit an impressive 64,000 subscribers, and we are proud to have crossed the 3m subscribers line.

However, we continue to experience this quarter a challenging, competitive and regulatory environment, which is diluting tariffs and pressuring margins. In such challenging times, the Company needs to adjust its cost structure and tighten the belt. We have recently started a wide efficiency program that aims to improve our profitability levels and should bear fruit during 2010.

At the same time, Partner continues to invest in its strategic initiatives and new domains of activity. Partner is committed to innovation and I am proud that for the third time in a row, the Company was ranked by top Israeli business managers the most innovative company in the Israeli by a wide margin. The recent developments in the Israeli telecom landscape support Partner's vision and place the Company in a strong position to take advantage of new opportunities and achieve its goal to become comprehensive communication service provider.

Partner is a value company that will stay committed to returning value to its shareholders, and demonstrated this quarter by the --- is demonstrated this quarter by the dividend distribution of ILS300m. We have also announced this quarter that we consider a capital reduction to over ILS1b.

This is also the occasion for me to congratulate Scailex, its business partner, and Scailex's Chairman, Mr. Ilan Ben-Dov, for the successful completion of the acquisition of Partner's controlling interest and warmly welcome them on board. I would also like to thank Hutchison Telecom and its Chairman, Mr. Canning Fok, for creating such a high standard company and providing Partner with the continuous support that made it the leading telecom company it is today.

I am convinced that the entry of a new controlling owner, coupled with the tremendous assets the Company has built over the last decade, will take the Company to new heights for the benefit of all Partner's shareholders.

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

Thank you, David. Hello, everyone.

This quarter, we continued to face tough economic and market conditions. Service revenues totaled ILS1.4b, decreasing by 4.3% from the parallel quarter of 2008. As in the first half of 2009, the decrease is mainly due to lower outgoing voice revenues, reflecting both the competitive market conditions and tough regulatory environment which continue to dilute the outgoing voice tariff, as well as the impact of lower roaming activity. These factors also mostly explain the decrease in ARPU by 8.5% that we experienced this quarter, from ILS165 in the third quarter of 2008 to ILS151 in the third quarter of 2009.

Positive impacts on revenues included the growth in total network minutes, reflecting the approximate 4.4% increase in the subscriber base and an increase in the proportion of good quality postpaid subscribers, as well as the increase in revenues for mobile messaging services and from non-cellular services.

Operating profit was ILS401m this quarter, compared with ILS522m in the third quarter of 2008, the equivalent of 23.2% decrease. This decrease is attributed to the lower service revenues, as well as higher operating expenses coming from the new fixed line services and increased depreciation expenses reflecting the impact of handset capitalization under IFRS and network equipment disposals.

EBITDA totaled ILS570m in the third quarter, the equivalent of 41% of service revenues and 36.2% of total revenues. This represents a decrease of 10.9% from the parallel quarter of 2008. Excluding the impact of capitalization of handset sales, EBITDA would have been ILS528m in Q3 2009, a decrease of 17.5% compared with Q3 2008. The decrease is largely explained by the additional expenses related to the ramp-up of the ISP fixed line telephony initiatives in the amount of approximately ILS41m for the quarter and the effect of the reduction in service revenues.

The Company management is fully aware that the profitability needs to improve. This is highlighted this quarter more than in others, because of comparison with the record quarter of Q3 2008. This puts the issue into sharp focus. As David explained, we have begun to work on a wide-ranging operating efficiency program with the help of McKinsey consultants, which has the aim to reduce operating costs from the coming year. For the fourth quarter of 2009, we expect the profitability gap, compared with 2008, to be more moderate than it was this quarter.

Turning to the issue of dividend, the Board has chosen to distribute approximately ILS300m to shareholders for this quarter, the equivalent of 114% of net income. The Company is also considering a capital reduction, in order to distribute a one-time dividend of over ILS1b. If approved by the Board of Directors and the applicable court, the contemplated capital reduction will be likely to take place during the first quarter of 2010. The dividend policy for 2010 is also under review, and a decision will made -- will be made over the next few months.

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

Thank you very much, Emanuel. Stephane, you are invited to open the floor to Q&A.

Thank you. (Operator Instructions). The first question is from David Kaplan of Barclays Capital. Please go ahead.

Hi. Good afternoon, everybody. I have four questions, if that's okay. The first one is do the subscriber numbers that you reported in this quarter include subscribers to the fixed line? That's the first question. Do you want to take one at a time or shall I just list all four?

Go ahead. You can move ahead.

All right. How much is expected -- how much does the Company expect to save in its efficiency plan over the course of 2010?

Third question about the capital reduction is, is there any chance that the capital reduction will be used for purposes other than to pay out a special dividend?

And then the last question, also on the capital reduction, is given the equity balance on the balance sheet after this quarter of ILS1.9b, how much capital could be requested from the courts to be reduced, so to speak? Thanks.

Okay. David, so referring to your question -- to your first question regarding the number of customers, it does not include fixed line subscribers. Those are pure cellular subscribers. Okay? So 64k net adds in the last quarter. You think -- you can recall that it is on top of the 41 that we recruited in the last -- in the previous quarter. And all of those are pure cellular subscribers.

Out of them, out of the 64, 35,000 are postpaid subscribers.

Regarding your second question about the anticipated cost saving as part of the efficiency and the plan, you know we cannot disclose this number. But you know we have managed very successfully in the past to conduct and to facilitate cost cutting plans and we are optimistic that we can -- that we will do it also in 2010. So we'll need to see in the -- see it in 2010.

Regarding the capital reduction, let me remind you that the debt capacity of Partner, if I compare it to the industry average and compare it to the number of 2.5 EBITDA multiple, it's substantially higher than the current debt. And it is a sufficient debt capacity that can fulfill all the Company's needs in terms of M&As, in terms of one-time dividends and so on and so forth.

Can you repeat the last question?

Well, in the press release -- the last question was how much are we talking about, given -- because in the press release you said over ILS1b, yet on the balance sheet you have ILS1.9b, which is closer to ILS2b. So I was curious of is there a particular reason why you're leaving that half of it on the balance sheet?

Actually, we have already started a process for the capital reduction and it will include also research, economic work that will be done by independent research company. In this case, it will be Ernst & Young. Ernst & Young will submit economic work that will be presented to the Board of Directors, and according to that the Board of Directors will decide how much to apply for the capital reduction. Right now, we don't have the number. And only after this decision of the Board there will be a submission of application to the court, and I assume that this will be finished somewhere in the first quarter of 2010.

Will the Board decision or the recommendation to the Board be made public at the time, or only after a court decision will this become public?

I assume that we will give a notice about the recommendation of the Board, because this will be included also in the application to the court and this will be public.

Okay. Great. Thanks very much.

Thank you, David.

The next question is from Daniel Meron of RBC Capital. Please go ahead.

Thank you. Hi, David, Emanuel. Just a quick -- and Oded, of course. And just a quick question on the net adds. Any particular drivers for this that you can identify? What is -- can we think about other ways that you're going to expand that?

And then, the last one on my end is on the ISP efforts. When do you think that this business will start generating material revenues to offset the costs associated with that? And will you increase your efforts in this space? Thank you.

I could hear only the second part of your question, regarding the ISP. And I can of course repeat what we said in the past, that we don't expect those revenues to be material in 2009 and of course in the first half of 2010. At this stage, we prefer not to provide guidance about the potential revenues and the expected revenues of this segment.

What was the first part of your question?

Yes, on the high net adds, is it a result of your direct channel or are there any other efforts that you've done to increase the number of net adds? It's been like the second quarter in a row and obviously it seems like a trend, at least we hope so. And I just wanted to get more color on that.

The highlight of recruiting new subscribers is mainly the result of the strategic move that we did at the end of 2008 and the beginning of 2009, when we have exchanged the services of a third company provider that provided us the retail services of the company. The name of the company was [SuperFan]. And we have changed it to be a retail that is managed by Partner. So we have built 35 new kiosks and the new store, and this Company-owned retail chain actually made the change from -- to the current achievement that we enjoy the last two quarters.

David, can you tell us if you think this rate is sustainable? It is by far well ahead of your other competitors in the market for the second quarter in a row. I would assume that there are other competitors looking for a way to limit that.

Looking forward, I can count on the strength of the brand. This quarter, or actually the last month, we were rewarded again as the best service company in the cellular market and the most innovative company in the Israeli market in general, not only the cellular market or the communication market. The strength of the brand and the retail chain that we have established, I think they are the main result. And regarding the future, you know the future is bright, we believe it will continue. We do not disclose the numbers that we assume that we will report in the future.

Okay. Thank you, David. And then (multiple speakers).

And just one comment. Ilan has just arrived and joined us, so if you have specific questions that you want to refer directly to him, you are of course most welcome. I'd invite you to do so.

It's actually a great timing because Ilan -- hi, Ilan.

Hi. How are you doing?

Good. So I actually wanted to ask David, but since you're there, I just wanted to get a little bit more of a read from you, as the new key shareholders, what are the changes that you guys together are planning to implement for Partner in 2010 and beyond?

Are you referring to me, to Ilan, or to David?

Either one, Ilan or David, whoever wants to take this question. I'd appreciate your take on, now that you guys have taken the lead, what are your plans for the Company going forward?

First of all, it's an honor for me to have you guys here. I'm still on my study period and one of the classes I have to attend is this conference call. So don't really expect to hear too much wise stuff referring to the future.

However, I would like to draw all your attention to the past and the past is the last six months. And for me, watching the Orange Company at Partner, what they did is tremendously brave. And these guys are too modest, in my opinion. And they really don't put the right emphasis, and you the [phoners] really understand that hearing your questions regarding the net adds really shows me that you guys really understand the business.

Look, 2009 was one of the most horrible periods in the history. And Partner as a Company took a brave decision to penetrate. In time of a recession, these guys decided to penetrate the market. And actually, if you look at the net adds on the cellular for the last six months, I think that I won't be mistaken by saying that Partner has recruited more new adds than both of her competitors put together. And you guys really understand what it's all about, because the future belongs to these new adds.

If you combine that to the massive activities, marketing, that created really a major distance from our competitors in terms of brand awareness, level of service, innovative, if you look at all those parameters, you really understand that these guys choose really to penetrate wisely. Maybe sacrificing ILS10 or ILS20m on a quarter, but long term it really doesn't matter. Put that together with -- I think it's the most professional retail - and this is my professionality -- the most professional retail stores in Israel for mobiles that they've created in 2009.

If you take these three issues in this period of a recession, I think it's a marvelous and a great achievement for the Company. And, hey, we are making some shekels as well, after doing all that. So, for me, just to conclude, at this period I can only refer to the past, and the future looks even better when you see the strength. And it's not only a financial or business wisdom; it also takes a lot of guts to do those things at a recession time. So this is my comment for the past.

Has that answered your question, Mr. Meron? I believe that Mr. Meron has disconnected. The next question is from Madhu Kodali of Fertilemind. Please state your question in a slow and clear voice.

Thank you for taking my call. I was wondering if you can talk about the previous -- the challenging competitive and regulatory environment. I was under the impression that that has been always the case and I'm trying to understand what's new that developed in the recent -- last few months, or last quarter. If you can talk about it, I would appreciate it. Thank you.

Okay. We can provide you with a concise description of the regulatory landscape. Generally speaking, I think that most of the issues have not changed in the last few months and quarter. No doubt that high on the regulator's agenda you can find the willingness to introduce an MVNO. We, based on our experience and a pro forma study that we conducted abroad, do not believe that there is a real business case for MVNO in the Israeli market. But it's very important to mention that it is high on the regulator's priority.

There are some other things. It's not directly related to the regulation, but you can find a few changes in the corporate structure. There is a law called the Law of Economic Efficiency, which dictates a decrease in the corporate tax rate until 2016, I think, to 18%. So, one should put probability on this law. There is also an initiative by the regulator to reexamine a potential decrease in the interconnect tariffs. They engaged with a consulting firm called Mira, in order to reevaluate the economic value of interconnect tariffs.

What I can say with this regard is that, historically, we knew how to successfully cope with those changes and we are building the mechanisms, based on our experience, how to mitigate the impact of such a potential change.

I think that, above all, if you want to have a better view on the regulatory environment, I can refer you to the report of Professor Grunau, which can provide you with a high-level description of what are the key issues. But I think that those that I named are the most -- I would say the overhanging issues that are the hot topics, so called.

Right. So MVNO and interconnect tariff I understand. I kind of missed what you are saying about the corporate tax. Could you please repeat that?

Yes. There is -- there was a law brought by the Knesset, the Israeli Parliament that dictates a decrease in the Israeli corporate tax law until 2016 to around 16%, one-six percent.

Okay.

Okay? It's something that relates to the entire business environment, not specifically to the telecommunication industry. But it is very important to understand that there is a potential upside which is derived from this law.

All right. Okay. One other question, on the iPhone. I was wondering if you guys have a timetable when that's going to launch and if you have come up with any kind of pricing plans.

Well, at this stage, we have not disclosed any specific timetable to the iPhone -- to the introduction of iPhone. I believe that -- based on the news, that you will hear something in the next few weeks.

Okay. That's it from me. Thank you.

Thank you very much.

The next question is a follow-up question from David Kaplan of Barclays Capital. Please state your question in a slow and clear voice.

Hi again. Going back to the subs number, can you try and explain to us where the growth is coming from? Because although, as you have already stated, that the growth for Partner is greater than that of the competitors combined, this is still a market which we all know to be relatively saturated and therefore the numbers of acquisitions seem somewhat high. So where is that growth coming from? Or is it related to -- or I should say and is it related more to the movement of customers from prepaid to postpaid, as opposed to new subscribers?

Well, I think that the success or the high number of net adds is a combination of two major factors. The first one is the strength of the brand. And this is not a slogan. We think that the strength of the brand has an economic value. By the way, you can see and review the recent news, and you can see that we have ranked in pure service as number one in terms of service, innovation and so on and so forth.

And the second thing which is very important is the change and the establishment of our Company-owned distribution channel, the productivity of Partner's employees substantially higher as compared to the previous alternative. And I think that you see the result in the numbers in this quarter, and also in the previous one.

Regarding the distribution channels that we mentioned, on top of what was mentioned already, it of course will handle also the sales of the ISP and the VOB, which is of course an advantage for us. So we will have an arm that none of the other competitors in these services have, because they are doing telemarketing only. So this retail channel, Company-owned retail channel, has a high value in other terms as well.

Another thing that we haven't mentioned is the change in the level of service that we provide to our customers. We have changed the way we fix phones. The fact that we were chosen again with a much higher difference than in the past to be the best service company in Israel shows that this change was for the good. And we -- actually, a customer can give his phone to any of the points that we have in our retail chains, meaning more than 17 different places in -- all over Israel, and get them back either to his home or in any other place that he would like to choose.

The service is better. The level of fixing phones is better. The opportunity for us to get in touch with the customer and upgrade his phone are higher. And these two changes, the change in the service and the change in the retail, supported by the strength of the brand, all together gave us this achievement of 64,000 subscribers.

David, since you mentioned the potential cross-sell opportunity, can we talk a little bit about how successful or where we are with the ISP and VOB launch? I think, if I'm not mistaken, if we compare the -- as it was stated in the press release, the reduction in EBITDA due to the investment in those two new services, I believe that, third quarter, that that reduction was less than it was in the second quarter. Can we imply from that you are already seeing revenues from that stream that are worth talking about?

Well, you know the level of revenue which is derived from the ISP activity is relatively minor. I think that we said in these last few quarters that we do not expect the revenues to be material in 2009, as well as in the first half of 2010. We define 2009 as a ramp-up period in which we are examining the system, building the system, learning the right way to penetrate this market, and there is no change.

Now, one of the things that you should bear in mind, as David mentioned before, is that we think that there is inter-correlation and some influence of the ISP so-called campaigns on the cellular campaign. So, some of the expenses that you see in the ISP which are directly related to the ISP activity have some influence and diffusion and a positive influence on the Company traction in the mobile segment.

Okay. And I guess the last thing I'd like to talk about is, given the changes that have happened in the Israeli telecommunications market over the last couple of months, it's now pretty well assumed that there are going to be some assets available for sale, some of which fit in with Partner's business plan quite well. Can you talk a little bit about if you see any opportunities, if you are going to be looking for opportunities? And would the -- and would financing for those opportunities come from the raising of new capital or is that again potentially a use of the capital reduction?

Well, you know we usually do not comment on any potential M&A. If we have something to disclose, we do it officially. I just can give you a high-level background about the opportunities that we have in the market. First and foremost, we have established our Company-owned ISP/VOB activity. It's a very attractive alternative and it will serve as an alternative unless we decide to acquire some player, but it is a feasible and relevant alternative.

Regarding the opportunities in the market, we are familiar with the companies, we are familiar with the situation and we always compare what is the highest NPV or the highest value contribution that we can bring to the shareholders. And since we have the [economic] alternative, I think that the fact that we have a choice has some value to our shareholders.

Thanks.

(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 1888 782 4291. In Israel, please call 03 925 5938. Internationally, please call 9723 925 5938. Mr. Degany, would you like to make your concluding statement?

Thank you, Tessa. This concludes our 2009 third-quarter results conference call of Partner Communications. We appreciate your interest, and 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 third-quarter 2009 results conference call. Thank you for your participation. You may go ahead and disconnect.