Partner Communications Company Ltd (PTNR) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company fourth quarter 2009 results conference call. All participants are at present in listen-only mode. (Operator Instructions).

Following management's formal presentation instructions will be given for the question and answer session. As a reminder, this conference is being recorded February 9, 2010. I would now like to turn the call over to Mr. Oded Degany, VP Corporate Development and Strategy. Mr. Degany, please go ahead.

Thank you, Tessa. 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 fourth quarter results -- fourth quarter and yearly results.

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'll 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, Mrs. Tanya Rabinovich on 972 54 481 5952, 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 our statements in this conference call may be forward-looking statements within the meaning of US Private Securities Litigation Reform Act of 1995. Regarding such 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 February 9, 2009, as well as Partner's final filings with the US Securities and Exchange Commission on Forms 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, please.

Thank you, Oded, and hello to our listeners. I am satisfied with Partner's financial and operational results for the fourth quarter and the year 2010 -- 2009, sorry. I am also encouraged by the early signs of improvement we recently identified in the business environment. Our results demonstrate the ability to simultaneously deliver strong financial results together with investments in platforms for future growth.

Partner's strategic decision to continuously invest in our excellent customer service and new Company-owned distribution channel, despite the demanding business environment, is reflected in net adds of 144,000 new Cellular subscribers. Once again this year Orange was named by Globes as the leading telecommunications brand in Israel, for the eighth year in a row.

The Marker, Israeli's business daily newspaper, named Partner as the Mobile operator with the best customer service. And we also were awarded The Marker's survey as the most innovative Company in the Israeli market. The dominance and the leadership of Partner in the Israeli market are two of our key assets.

Our decision to expand our product and service portfolio into the Fixed Line business is supported by the recent events in the Israeli telecom market. In 2010, following the execution of our Fixed services ramp-up period, we will start implementing the second phase and join our existing sales channels and force to the Fixed services sale efforts. On the product side we intend to enrich a Fixed Line portfolio to offer new broad, cost-effective products and features which address new marketing segments.

Partner is determined to establish new standards in customer service and innovative products which will further strengthen our position in the communications market. In 2010 we'll work in two major avenues; the implementation of the second phase of our Wireline growth strategy to maximization the entire Company synergy, and also -- the inter-Company synergy, and also execution of our efficiency plan which is aimed to realize the cost saving potential.

Partner has always striven to follow the golden path of maximizing the interests of our customers, shareholders and employees. Our success in combining the best customer service and attractive dividend yield, together with our commitment to employees' welfare, are our major achievements.

Year 2009 was landmark year for Partner. In this year we established the foundation of our future growth engines, strengthened our retail distribution channel and also successfully supported the change in ownership. I am certain that in the coming years we will harvest the fruits of our investments for the benefits of our shareholders.

With that said, I would like -- I would not like to hand the call over to Emanuel Avner. Emanuel, please.

Thank you, David. As David explained, operational financial performance of the final quarter was encouraging. Service revenues decreased only marginally by 0.8% in the quarter, although the revenue were positively affected by the shifting of some of the Jewish holidays from the fourth quarter in 2008 to the third quarter in 2009.

For 2009 as a whole Service revenues decreased by 2.2%, reflecting lower outgoing Voice revenues due to both the competitive market conditions and the mandated reduction in the billing interval, as well as the impact of lower roaming activity. Revenue growth continues to be supported through growing Fixed Line business revenues, Cellular content and Data revenues and the expanding Cellular subscriber base.

Operating profit for 2009 decreased by 6.8% compared with 2008. The decrease primarily reflects the supplementary expenses related to the ISP and Fixed telephony services, and the impact of the economic downturn. For Q4 2009 operating profit was approximately unchanged from Q4 2008.

EBITDA for 2008 increased by -- EBITDA for 2009, sorry, increased by 0.3% compared with 2008, reaching ILS2.3b, which is equivalent to 42.5% of Service revenues and 37.9% of total revenues. Excluding the impact of the capitalization of handset sales caused in 2009, EBITDA would have been ILS2.1b in 2009, a decrease of 8.4%, or ILS192m, compared with 2008. The decrease is mainly attributable to the losses of approximately ILS119m in 2009 related to the ISP and Fixed telephony initiatives, as well as the impact of the economic downturn.

The management of the Company has decided that full-year financial statements for 2009 will include a note that presents selected financial data on the basis of two operating segments; the Fixed Line business, including Fixed Line telephony, ISP and Transmission services and the Cellular business. This additional level of transparency will help both management and investors to assess the performance of each operating segment separately.

For 2009 the Fixed Line business segment contributed an EBITDA loss of ILS83m, representing an increase in loss from ILS17m in 2008. As I mentioned already, with the total, the new ISP and Fixed Line telephony services contributed a loss of ILS119m compared with a loss of ILS26m from these services in 2008.

Regarding dividends, the Board of Directors will decide on a quarterly dividend distribution following the approval of the audited financial statements for year 2009.

Turning to our guidance for the year ahead, in recent months the Company has undertaken a wide-ranging efficiency and cost review with the help of external consultants, with the aim of reducing operating costs. We are also beginning to see some early signs of an economic recovery. These two factors explain our expectation that profitability will be higher in 2010 than in 2009, providing that regulatory and competitive environment evolve as currently anticipated.

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

Thank you, Emanuel. You are now invited to ask your questions. Tessa, please open the process.

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. Hi, congrats on the ongoing execution. Can you give us a sense on where we are with the cost reduction and efficiency measures on '10? I saw that you already did some measures, but if you can give us a sense on where we should see the full realization of these efforts. Thank you.

Okay. Regarding the status of the capital reduction process -- (multiple speakers). Daniel, about the efficiency measures we said that we already started efficiency work with the external consultants. This was -- it had begun in 2009 at the end of the quarter. We already see some signs of that work in the fourth quarter in 2009 and I hope that you will see a full implementation of this work along 2010.

Would it be a second-quarter event that we'll see the full realization? Is there a timeframe? And also what is the magnitude?

I think it will be gradual along the year. You will see, I think, the full impact along the year. Of course, we implement several of these efficiency measures step by step and we already see some sign of that in Q4 2009, and I am sure that this will be bigger and bigger along the year.

Okay. And then on the ISP front would -- you mentioned that you're going to increase the efficiencies or the synergies of this product line with other divisions. Are we talking additional expenses that you'll put in, or are those resources already committed, so we're seeing pretty much the -- I guess, most of the financial drag on the EBITDA performance and from here on it should be improved?

Okay. First of all, in 2010 we will see some changes in the product side. And I think in that side we will see more efficiency from our side, bringing better and more efficient cost-efficient products to the market. On the sales side the sales now will be committed, not only by the ISP division of the Company, the ISP [hub] of the Company, but it also will be done by the whole sales force of Partner together. And I think this will bring, of course, better and higher force -- sales force to the market and, by that, we believe that our sales achievement will be much better in 2010.

Regarding the synergy in the Fixed Line and the Cellular, we do see synergies and the more we implement the product we see more synergies. And it goes in two avenues. One is the operational and sales side. We see now in the last quarters that the more we use the current sales force and retail chains that we already have to sell the ISP and VoIP products, it works better for us and, of course, it also saves money.

And on the produce side we have already synergies between the Cellular products and the Fixed Line products. It goes through the products itself and also through the tariff and the bundling between the products. So we see synergies and savings and creating value in the product due to the synergies in the product and in the operational and sales side.

Thank you, Oded and Emanuel. I'll yield the floor now. Thank you.

Thank you.

(Operator Instructions). The next question is from Tom Ulrich of RBC Capital Markets. Please go ahead.

Hi, guys, congrats on the execution. Just a follow up here. Could you outline the process of the capital reduction you guys are planning? Is this something for the next couple of weeks to be resolved?

Hi, Tom. We submitted yesterday and we announced yesterday that we submitted the settlement agreement with some of the bond holders. Now it's the Court's call to decide about the timeline and about the next step. Basically, we are optimistic about the process because we are familiar with the fundamentals of the Company and the financials of the Company, and from our perspective it's a no-brainer that a one-time dividend is possible.

And on top of it, of course, we are also optimistic because we have managed to obtain the consent and to remove some of the objections of the bond holders. Generally speaking, I want to be cautious and not try to predict a timeline but, as I mentioned, before we are very optimistic and we hope to see it soon.

Great. Thanks for the color, Oded. Good luck.

Thank you.

The next question is from [Bennie Dekel] from [Dash]. Please go ahead.

Hello, everyone. My question is when the Fixed Line business segment will become profitable.

Well, generally speaking, based on the business trend that we have, or the internal business that we have, we will see throughout the year an improvement in the financial results. We will start to report based on the entire Wireline segment, not just the ISP, in 2010, meaning that our reports will include the so-called consolidated revenues and profits of the ISP, the PRI transmission and the Mobile [re-calling] internal revenues. I prefer not to use guidelines, but I believe that the entire Wireline activity will be breakeven at the end of this year or the beginning of next year.

Thanks.

The next question is from Maura Shaughnessy of MFS Investment Management. Please go ahead.

Good day. A couple of questions, first of all, with regards to the special dividend, assuming that the Courts allow that to happen. Could you talk about your leverage goals, post the special dividend?

Second question is with regards to the economy, mentioned that there were some early signs. Can you be more specific? Is that with regard to roaming or what have you?

And then the third question is, just in terms of the competitive environment, what the iPhone has meant. And that would be my three, thanks.

Okay, regarding the first question, I believe that following the one-time dividend our net debt to EBITDA will be in the order of magnitude of 1.5, okay. Just to remind you, today it's around 0.91, okay. This is the number. So we don't intend to substantially increase the leverage of the Company following the one-time dividend.

Regarding the status of the Israeli economy, you know we have many metrics to measure and to feel the mood and the atmosphere in the Israeli market, but it's too early to provide the market with significant and very clear indications about recovery. What we said is that we see early signs which are reflected in some of our deep analyses of MoU and then some of the -- of customer behaviors and usage, by the way, mainly the business segment, some of the usage patterns of the roaming customers.

But it's still too early to say something which is very significant and very clear. And I want to be, again, very cautious about trying to predict what will be the impact of the recovery on Partner. Basically, we think that we will gain from the recovery because, generally speaking, we are more sensitive compared to the other to the impact of the recession. But we don't have any expected timeline for recovery and any, I would say, disclosed analysis of what will be the impact. And that, by the way, mainly because it's not very easy to distinguish between competition and the situation of the economy, okay.

Regarding the iPhone, the bottom line is that, unlike many -- or unlike other countries, such as US and in some places in Europe, our network is well prepared and is in a good condition. We are geared with the right agreement and the right infrastructure to support the increase in Data traffic.

The value of iPhone subscribers, based on the tariff plans and the packages that we introduced to the market, is relatively high and positively surprising us. Again, it's too early to decide about it because we launched the product only in the beginning of December, but we are very, very satisfied from the introduction of iPhone in Israel.

And, if you wouldn't mind, if I ask just one more question?

Of course.

Could you outline what your average cost of debt is right now and the expected inflation in Israel for 2010?

Okay, it's Emanuel here. Basically, we have something like ILS2.1b which are linked to the CPI. Out of that, we have 1 -- about ILS1.7b that bears 4.25% linked to the CPI. We have another [ILS50m] which bears now 4% linked to the CPI. And we have another loan which -- of ILS300m which appears on the balance sheet in separate line which is in terms of variable interest rate, which is now about 2%; 2% non-linked to the CPI. On top of that we have another -- we have a credit facility of ILS1.2b, again on the basis of variable interest rate, with the interest rate which is currently about 2.2% on an annual basis not linked.

And what is the expectation for CPI in 2010?

Right now, if you would like to buy now a futures on the CPI in Israel this will be about -- between 2.6% to 3% on an annual basis.

Great, thank you.

Thank you, Maura.

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

Hi, everyone. The first question I have is on CapEx. If you look at the CapEx in the Partner model it looks like the CapEx number was a little bit less than ILS100m for the quarter. That's a little bit lower than we were expecting. Can you talk a little bit about what wasn't spent on or why that happened, or has most of it just ended up being capitalized and going into the intangibles line?

Okay, I think you should look on the CapEx more on the annual level and not so much on a quarterly level, because you see that there are many fluctuations along the year. We started with a very high CapEx level in Q1 and after that it went down. But on an annual level you can see that it's more or less similar to what we had in 2008. For next year I don't think you should anticipate something which is not in line with that trend that you see right now.

Okay. And also can you just give us a sense or a timetable maybe vis a vis -- you mentioned in your 3Q press release that the dividend policy was under discussion. If you can tell us or give us some sense of when that discussion's going to take place and when we might hear what the result of that is.

The only thing that we say is that the new Board decided to declare the fourth quarter dividend only following the audited financial statements for 2009, which are expected to be released in the next few weeks. So we don't have an accurate or a specific date, but it's not a long term.

Okay. And then the last is just on the Fixed Line. I saw that you broke out Fixed Line revenues and EBITDA numbers for -- in this release. Can you just talk a little bit about if that's meeting the expectation that management had set for the Voice over Broadband or the Fixed Line business, and what the goals are for 2010?

Well, we decided not to provide the market with specific or with accurate guidance about the numbers of this business but, generally speaking, you are dealing with three type of markets. The transmission market itself is a market in the order of magnitude of ILS1b. Transmission meaning PRI which are Voice services to large enterprises and also [dual] transmission services, Data network. The Voice and the ISP markets are in the order of magnitude of between ILS4b and ILS5b, okay.

And the third segment, which is an inter-Company segment, are cost savings regarding our Mobile [backhauling] transmission. Let's not forget that Partner owns 1,400, one four, 1,400 kilometers of fiber optic network which provide the transmission services to our -- to large customers on one hand and, on the other hand, also assists us in the cost saving of our mobile backhauling. So this is also an inter-Company revenue. Generally speaking, as I mentioned before, we believe that by the end of the year the entire segment -- the entire reported segment will be close to breakeven.

Okay, thanks very much, Oded.

Thank you, David.

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 1 888 326 9310. In Israel please call 03 9255 900. Internationally please call 9723 925 5900. Mr. Degany, would you like to make concluding statements?

Thank you, Tessa. This concludes our 2009 yearly and fourth 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 the 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's fourth quarter 2009 results conference call. Thank you for your participation. You may go ahead and disconnect.