Partner Communications Company Ltd (PTNR) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company's second-quarter 2011 results conference call. All participants are at present and 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 August 10, 2011. I would now like to turn the call over to Mr. Gideon Koch. Mr. Koch, please go ahead.

Thank you, welcome to all our listeners. Thank you for joining us on this conference call to discuss Partner Communications' results for the second quarter 2011. With me on the call today is Yacov Gelbard, our CEO; Emanuel Avner, Partner's outgoing CFO; and Ziv Leitman, Partner's incoming CFO. Our CEO, Yacov Gelbard is going to make several statements and then Emanuel will give a summary of our financial and operational results and outlook. We will then of course open the floor to Q&A.

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 the US Private Securities Litigation Reform Act of 1995. Regarding (inaudible) 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 August 10, 2011 as well as Partner's prior filings with the US Securities and Exchange Commission on forms 20f, S1 and 6-K, as well as an S3 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 stage I would like to hand the call over to our CEO, Yacov Gelbard. Yacov, please.

Thank you, Gideon, and hello to all our listeners. As we discussed during the outlook for the Company's first-quarter results, the financial results for the second quarter continue to reflect the negative impact of the regulatory changes occurring in the Israeli cellular market, mainly the significant reduction in interconnect towers and the (inaudible) competition in the market.

As we are attentive to our customer needs, we have recently promoted measures to improve our customer service. We've expanded the points of contact, both physical and virtual, with the customers as a way of (inaudible) expanding our distribution system. In addition, we have continued to promote investment in infrastructure including deployment of fourth-generation technologies and investment in the transmission network.

With respect to 012 Smile, we are currently formulating the principals of working together to enhance the value of the group. These principals will be implemented while the structure and separation limitations have been removed.

Turning to the dividends, the Company's Board of Directors resolved not to distribute a dividend at that time. In light of the significant increase in the level of uncertainty in the global economy and the Israeli economy and the changes in the Israeli telecom market and their impact on Partner. We believe that that decision not to distribute a dividend at this time and to (inaudible) for maintaining Partner's financial strength and leadership.

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

Thank you, Yacov. Following the recent regulatory changes including the reduction in base connect towers, the reduction of exit fees and the increased competition in the market we are currently witnessing a material reduction in the profitability of cellular services. Overall average revenue per subscriber or ARPU was NIS112 in this quarter compared with adjusted ARPU of NIS123 in the second quarter of 2010, a decrease of 8.9%.

On the upside the subscriber base continues to grow as that revenue from content and data services system. Looking ahead, as a result of the reduction in the profitability of cellular services we expect net income for the second half of 2011 to be significantly lower than second half of 2010.

Turning to cash flow, as a result of the increase in the level of sales of high value devices including smart phones and other devices, the Company's working capital increased in the first half of 2011 leading to a significant decrease in free cash flow. In order to improve the free cash flow for the second quarter the Company took several measures including receiving advance payments from credit card companies.

The Company expects the free cash flow for the third and fourth quarter of 2011 to improve compared to that of the second quarter of 2011. Nevertheless, the trend of increased working capital requirement related to higher sales of high-value devices together with a decrease in the Company's net income is likely to lead to a significant reduction in the level of free cash flow for the year 2011 compared with the year 2010.

On a personal note, this is my last quarter at Partner as CFO. With the appointment of Ziv Leitman as the incoming CFO, I'm certain that I am leaving the Company in a safe pair of financial hands. With that I will now hand the conference back to the moderator to begin the Q&A. Moderator?

(Operator Instructions). [Dov Rosenberg], RBC.

Hi, thanks for taking my question. My first question is on equipment. While it nearly doubled year over year, sequentially it went down a little bit. And I was wondering if it sort of -- if it's starting to decelerate or is this just a one quarter thing -- you think it will go back up from here? And more in general, when it eventually does decelerate a little bit, do you think it will go back to historical levels or somewhere in the middle?

It's Yacov speaking. We see the phenomena of new handsets more (inaudible) entering the market is something that's going to be with us for quite a long time. The second quarter there was some reduction in the number of handsets sold either to new customers or upgraded by current customers.

We believe that slowing down curve will go also into the third quarter of 2011 slowly, not sharply, going forward. But we see that very closely new tablets are going to enter the market, there will be a large variety of tablets, economy priced tablets. So we believe that end of fourth-quarter we'll see another movement of tablets that will be sold through our different channels.

So to summarize, I don't see a sharp decline in numbers of smart phones that are going to be sold. But it's going to be a little bit smaller comparing to the first and second quarter.

Okay. Thanks. Now on churn rate, churn rate was down to 6.5 from 7.3. Is -- I mean in last quarter it sort of spiked on the cancellation of the exiting fees. Is this a steady state or do you think you can -- it will still go down from here or go up?

Can you repeat, please, the question? We don't (multiple speakers).

Yes, I'm sorry. Churn rate was down to 6.5 after 7.3 -- last quarter it sort of spiked to 7.3 on cancellation of the exiting fees and everybody sort of leaving programs. And this quarter went down to 6.5. What I'm wondering is -- is it now sort of on steady state or from 6.5 where do you think it will go next quarter?

It's very hard to estimate. We saw it going down, just to understand the process, because of the limitations of customers to leave the Company -- move to other companies. We could sign many customers that have been recalled in two companies as two different customers. And now they can leave easily. So we see a phenomenon for (inaudible) a great number of customers that are dropping out of the total customer base of all the operators.

That increased the churn rate of all the operators in the first quarter and second quarter. That's phenomenon is slowing down. So looking forward I believe that either it will be stable or will go down. I don't believe that this will increase not in the next two or three quarters, but we cannot anticipate yet what will be the impact of new arrivals into the market either it's the MVNOs or the new operators. So looking at two quarters I think that the phenomenon will be that we'll see it either stable or going down.

Okay. And on net income you sort of -- you gave an outlook that's going to go down. Is there any quantification that you can give?

No, we -- actually we did in the guidance. We said that we believe that the second half of 2011 will be lower than the second half of 2010.

Right, okay. Okay. And last question from me for you. On dividends, do you expect to return next quarter or it's a play it by ear kind of thing? Wait and see how the market changes?

It's important to understand that the Board of Directors has not changed the dividend policy. If it would have changed (inaudible) what is the new policy. The current policy is still stays with a decision that has been taken in the past. That the Company will distribute dividends 80%, at least 80% of its net profit.

The decisions that have been taken for the second quarter did not change that policy, which means that the dividends issue is being rediscussed looking at the third quarter, the fourth quarter or the yearly annual reports. Those are the financial uncertainties will go down and hopefully it will go down. I believe that the decision looking forward to the first quarter or fourth quarter could be changed in comparison to the decision that has been taken for the second quarter.

Okay, all right, thank you.

[Aaron Shore], UBS.

Hi, it's actually gerund Darren Shaw here from UBS. I had a few questions, first couple maybe for Yacov. What is your plan for cutting costs? Where in the business, Yacov, can you try to cut costs and have any been cut in the quarter? And what's the outlook for the rest of the year and 2012? Second question is where are we on the 012 synergies? And two more questions, but maybe I'll just wait now and let you answer those. Thank you.

So let's start with cost cuts -- cost cutting. I like to elaborate where we were in the first quarter and the second quarter of that year. On one hand the regulator has reduced by a regulatory decision our revenue very sharply. It takes time for a company, any company, to try to recover its revenue stream.

On the other hand, we had to put more resources offering to customers, listening to customers, recruiting customers, preventing customers from churning. More customers called us, 30% to 40% more, and the length of a discussion with a customer became longer and a huge pressure has been put on telephony services and frontal services.

We recruited through the first half of 2011 1,500 new CRs in order to bring back [high lift] service level that our customers were used to, which means increasing costs in order to preserve our service-level. And now we are -- we have come to a fantastic service level back to what -- where we were in the past.

And looking forward we will try to build new efficiency measures looking at the market that had changed and probably is going to change in the future and looking at our whole business structure from a completely different angle. This is a process where the management is working, looking, analyzing and probably the process will start within two to three months based on decisions that will be taken.

Talking about 012, I mentioned that regulatory -- we cannot lift up the potential synergies out of the cost synergies or revenue synergies between the two companies. So what we're doing those days we are preparing some actions that had to be analyzed or have to be analyzed and we are going to prepare ourselves to the day when those limitations will be removed and then start implementing those plans and programs in order to lift up the synergies and translate it to new revenues and reduction of costs.

Okay, thank you. And just one final question. Can you just give us any idea if you're planning any cuts in your CapEx spending and the outlook for CapEx for the second half of this year and for next year? Thank you.

There are plans of reducing CapEx; we are now in the process of upgrading our infrastructure, our cellular network and adding more fiber to our transmission network. We are in the process of re-looking at our IP systems that should support the new business processes that we plan in order to reduce cost. So I don't see on the other hand increasing CapEx, but in the near future I don't see on the other hand reducing CapEx. But it will be more or less within the level of 2011 looking forward to 2012.

Great, thank you very much.

David Kaplan, Barclays Capital.

Hi, I have two questions. First has to do with the leverage at Partner. I know you raised money at the end of last quarter. Are we -- it's around 1.7 times, 1.8 times net debt to EBITDA. Is this a level where the Company is comfortable? Do you see yourselves leveraging up farther? That's my first question.

My second question actually relating to CapEx as well. Do you have any idea when the potential spectrum tender for 4G is going to be published by the Ministry of Communications? And when do you think you'll have to be investing CapEx in that project?

Well, from your second question we expect that the new spectrum will be introduced in maybe four to five months from today. And be able to purchase that spectrum probably in second quarter of 2012.

The investment is paying already within process because the new network that we have agreed to purchase from Ericsson is a network that enables on the same network to serve second, third and fourth generation customers and at the same time to serve fixed line customers.

It's a most advanced network. We are already investing in that network, so finalizing that investment means (inaudible) hopefully we'll meet the benefit to use that capability of the new spectrum that we recruited from the regulatory office.

And on the debt?

About the debt, actually the debt level of Partner is somehow less than NIS5 billion and currently the Board of Directors got a decision that Partner will use its cash flow and some of the credit lines that we have in order to purchase in the market Series A bonds that are going to be paid anyway until the first quarter of 2012. At this stage Partner believes that this level of NIS5 billion is a different level and I'm not -- I don't think that it will go above that.

Okay. Is there a point at which you believe that the credit agencies are going to have an issue with your level of debt? And then I have one more question after that.

Right now we don't have any sign from the rating companies that they are going to downgrade our rating credit.

Okay. And then lastly, if you could just talk a little bit more specifically about the reason not to pay a dividend in the quarter. In the press release you talked about the global economy, you talked about potentially the Israeli economy. Can you talk a little bit more about specifically what it is that you're seeing and why you believe that impacts the Company's operating cash flow and ability to pay a dividend?

I cannot speak on behalf of the Board members. But within our Board members we have at least three former bankers that look at the phenomenon what is happening today in the financial markets global wide and the potential of falling off the potential impact of the Israeli economy and they decided to be more cautious and not to take at this stage a decision to distribute dividends. But as I mentioned, it has nothing to do with any change at this stage, at that point of time of our dividend policy that is still enforced.

Okay, I understand the comment about the policy. However I guess the question that remains is, if nothing changes between now and three months from now potentially Partner wouldn't pay a dividend in the third quarter as well, is that a fair assumption?

I cannot speak on behalf of the Board of Directors. I think the decision has been expressed very clearly.

Okay, thanks.

(Operator Instructions). [Jim Altrueller], [Aviation Advisory Service].

Good afternoon, gentlemen, thanks for taking my question. I noticed in the first quarter news release that even before the integration of Smile your fixed line operations had turned to profitability. What happened to enable that development?

Without the 012 the focus achieved in the fourth quarter of 2010 and a sharp reduction in the cost structure of our fixed line operation. That the first quarter of 2011 the numbers were positive. But at that stage we made a decision to purchase and acquire the controls of 012 in order to increase our market share and foothold in the fixed line services in order that in the future we'd be able to cover a wide range of services under one roof.

Looking forward into the Israeli market, a competitive market that contains today two groups or maybe three groups that have and will have fixed line in mobile service are competitive. I know to be able to compete in that new competitive environment we needed a much stronger foothold in the fixed line services arena. That drove us to take a decision to acquire the control of 012 and build up the synergies between the two companies, decisions that we elected are being implemented when the regulatory limitations will be lifted.

Do you have any idea when those limitations will be lifted?

Theoretically it can be very quickly. The decision was that when the service ended [no] would be launched -- that will occur. It won't occur in the same day, but it might take another 30 days for the regulator to look at how the new MVNO is operating and then make the decision.

(inaudible) to the press, it seems that (inaudible) if you know might stop operation somewhere in September or October. Supposedly by the end of this year it does happen, the limitation will be lifted and what we should do is prepare ourselves to that point of time and stop getting all the advantages from a cost point of view -- cost structure and revenue point of view in order to quantify those synergies and improve our profitability best of that.

Thank you very much.

There are no further questions at this time. Before I ask Mr. Koch 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 1-888-782-4291. In Israel please call 03-9255-921. And internationally please call 972-3-9255-921. Mr. Koch, would you like to make your concluding statement?

Thank you. This concludes this conference call of Partner's results for the second quarter 2011. We appreciate that investors will please feel free to contact us if you have any additional questions. (inaudible) this call and other vital information on Partner is available through our website at www.Orange.co.il. Thank you and have a very good day.

Thank you. This concludes the Partner Communications Company's second quarter 2011 results conference call. Thank you for your participation. You may go ahead and disconnect.