Partner Communications Company Ltd (PTNR) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications third-quarter 2011 results conference call. All participants are present in a 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 November 23, 2011.

I would now like to turn the call over to Mr. Gideon Koch. Mr. Koch, please begin.

Thank you and thank you to all participants for joining us on this conference call to discuss Partner Communications' results for the third quarter of 2011.

With me on the call today is Haim Romano, Partner's CEO, and Ziv Leitman, our CFO. As a backdrop to our results, our CEO Haim Romano is going to first give an overview of Partner's strategy and Ziv will cover our financial and operational results for the quarter. And finally we'll move on to the Q&A.

Before we begin, as is traditional, 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 Section 27A of the US Securities Act of 1933 as amended, Section 21E of the US Securities Exchange Act of 1934 as amended, and the Safe Harbor provisions of the 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 23, 2011, as well as Partner's prior filings with the US Securities and Exchange Commission on Forms 20-F, S-1 and 6-K as well as the S-3 self 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 statements 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.

I will now turn the call over to Partner's CEO, Haim Romano. Haim?

Thank you, Gideon. Good morning to everyone in the US and good afternoon to everyone elsewhere. First, it is my first conference call. I am the CEO of Orange in the last six weeks, and it is a great pleasure to be here again. As you well know, I was one of the founders of the Company in 1998 and left the Company in 2005 and now have the privilege to be here again as the CEO of the Company.

What you can see here is continuing of the trend of the first half of the year. The final -- the financial results of the third quarter reflect the impact of the regulatory change, including a reduction of the interconnect salaries together with the increasing of the competition in the cellular markets. [As thought], operation of conditions require Partner to prepare and act accordingly while maintaining the Company assets and proving operation and processes.

My first and most -- and most pressing task is to refocus on the regulation of -- on the organizational towards the customer. Partner's long tradition of treating the customers is one of its main assets. We will continue to take all measures, all necessary steps and actions in order to safeguard these key strategic assets.

We're implementing now a number of measures aimed to improve the interface of the customer satisfactions and simplicity and then to increase the customer satisfaction. We expect them -- expect improved level of customer service and be well-known as the best customer service in Israel as we used to be before.

The changes ahead of us are not easy to take, but we are persistent and we are going to do it the way that we did it before and we are sure that we can do it again.

We also remain focused on long-term needs for the Company as part of the measures. We are going to, in turn, we are going to invest in improving the network and invest in [all these things too].

Regarding 012 Smile, we continue to work towards maximizing the synergy between the two companies. At the same time, we are beginning to build it carefully, measure Partner with or into Smile. Our vision remains one of which Partner as a group offers the customer a wide area of service in areas of cellular and fixed telephony.

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

Thank you, Haim. As Haim said, our results continue to reflect the impact of the reduction in interconnect areas and strengthen competition in the cellular market. Cellular service revenue decreased by 25% from NIS 1.4 billion in the third quarter of 2010 to NIS 1.1 billion in the third quarter of 2011. This decrease mainly reflects the reduction in interconnect are so effective January 1, 2011, which reduced several of service revenues in the quarter by approximately NIS 282 million. Excluding the impact of the reduction in intercompany tariff, service revenue would have decreased by 5%, reflecting ongoing price erosion and NIS 26 million of one-time provision made in the quarter for (technical difficulty) against the Company.

Compared to the second quarter, service revenue remains steady. However, this reflected the seasonality increase in particular from [raw materials] revenue being offset mainly by the ongoing price erosion and the impact of one-time provision I just described.

Overall ARPU was NIS 111 this quarter. This is a decrease of 11% compared with an adjusted NIS 125 in the third quarter of 2010 and a decrease of 1% compared with NIS 112 in the second quarter of 2011. Operating profit from equipment sale continues to provide an element of support profitability boosting profit by NIS 63 million in the quarter compared with the prior quarter in 2010. The increase largely reflects an increase in the average revenue per handset mainly due to the propulsion of Smile phones sold.

Compared with the previous quarter, revenues from cellular equipment sales decreased by 25%. The reduction in equipment sales in the second half of 2011 is expected to reduce profits from sales on one end but will [produce] working capital on the other end.

Our operating profit for the cellular segment was NIS 300 million for the third quarter of 2011, a decrease of 37% compared with the third quarter of 2010. This decrease largely reflects the impact of the interconnect tariff reduction on the profit in the amount of approximately NIS 117 million as well as the reduction in service revenue.

EBITDA for the segment in the third quarter of 2011 was NIS 447 million, a decrease of 30% year on year.

The fixed line segment including 012 Smile provided a contribution to EBITDA of NIS 82 million in the quarter, an increase of NIS 77 million compared with the third quarter 2010, of which 012 Smile contributed NIS 60 million.

Turning to cash flow, the improvement in free cash flow this quarter was mainly due to the decrease in operating working capital in the amount of NIS 132 million. This was an outcome of various factors, including tariffs, a reduction in inventory level of NIS 82 million; second, an increasing factor in of interest revenue so result of higher proportion of sellthrough (inaudible) [reduction] as opposed to payments through the customer bill; third, new arrangements made by 012 Smile with credit card companies to advance the billing cycle payment by number of days, which improved operating cash flow in the quarter by approximately NIS 37 million; fourth and finally, the reduction in sales of equipment which I have already described.

So [in view of those] changes, free cash flow from -- increased by 138% in the quarter compared with previous quarter to which NIS 376 million. CapEx in the third quarter was higher than the quarterly level due in the first half of the year. This trend is expected to continue in the fourth quarter, reflecting the impact of the upgrade of the Company net flow.

The level of net debt at the end of the third quarter of 2011 through the NIS 4.72 billion compared with NIS 4.86 billion at the end of the previous quarter. The high level of cash on the Company balance sheet is due to be used in part for repayment of Series A notes in the next two quarters.

Finally, the Board of Directors has chosen to distribute dividend for the third quarter of 2011 in the amount of approximately NIS 140 million, representing approximately 80% of the net profit of the third quarter. That concludes my prepared remarks.

Can I now ask the moderator to please begin the Q&A? Moderator?

(Operator Instructions). Michael Klahr of Citibank.

I have got three questions. Firstly on customer service, can you tell us about how you measure that? And how you -- what you're doing to change it, to improve it?

The second question is on the 012 Smile. In the -- when the company was bought, you -- Partner -- spoke about NIS 70 million to NIS 80 million of synergies. So I want to understand where you stood on realizing those. And also, I think the run rate used to be when you bought it in terms of EBITDA at around NIS 70 million a quarter, so that's a bit lower. So wanting to understand why that is lower.

And then my third question is on churn which has been going higher were trending higher when your competitors' trend is going lower. So just some understanding what the reason for that is and where we can expect trends to go in the coming quarters. Thank you.

I will refer to the customer service and to the churn rates and my colleague, Ziv Leitman, will refer to 012.

They will measure the customer service [in] the traditional measures of time to for answering. That is what we call the service level and our goal is to be around 30 minutes -- 30 seconds, sorry -- as a standard for 80% of the calls. We measure the one-stop shop calls. One-stop shop calls means that 85% of our calls should be -- all the problems should be solved in the first call and other non-measures in the industry.

We, last year, recruited more than 3,000 employees to take hold of the situation in the market and to be able to answer all the calls regarding the changes in the regulations in the market. What we do now is reduce the number of agents, but increasing the professionality of the agents in the way we work, improving the IT systems, and improving the systems.

In this way, we reduce the churn as well and we turn the trend of reducing the level of satisfaction from the side of the customers and the way that they look at our service is not as good as it used to be before.

How long do you expect this process to take to get to the targets which you've set?

First, we are not that far from the target in terms of service level. In terms of the other items, we have -- I think -- three or four months ahead of us to implement the plan. We do it together with reducing quite a big number of agents being more efficient and being more professional. I expect the customer service to be as good as it used to be in the timeframe of six months from now, not farther than that. We did it before.

As you know, I was the customer manager in the past and I know this Company very well, so I'm sure that we can get it in not longer than six months.

Even today, I was ready to prove that our customer service today is better than our competitors or at least not bad, not worse than them. So the situation is not that bad that you can -- we can be perceived from what you read in the papers. We are in a better situation today.

Referring to the churn rates, I changed -- and I think that you could read into the statement -- I changed the policy of the Company from a market share to retaining our customers and we intend to launch a loyalty program, especially for our -- what we call score A to Z our best customers and we are sure that we can find a way to reduce the churn rate especially for those loyal and heavy payers.

It won't be easy, because the market is now in front of penetration of newcomers, but if you take out the prepaid markets from the phone, well I think the situation is not that bad and we can be even better if our strategy plan will be implemented the way that we plan to do. Ziv.

Regarding 012, the EBITDA for the quarter was NIS 60 million, but in the quarter we had change in the way we do -- we capitalize [sub] because of the change in the amendment to the telecommunication law which imposed restriction on sub -- on the subscriber regs, it's fine. So this accounts for roughly NIS 5 million.

So 60 plus 5, it's a run rate of 65 multiplied by 4. It is not that far from the 68 which is the run rate you remember a year ago.

Regarding the synergy, let's remember that now we still have structural separation. And only upon the launch of the first MVNO, the structural separation will be lifted. And then we'll see the synergies. A year ago. the Company was talking about between NIS 70 million to NIS 80 million synergies coming from expenses as well as from revenue, like the cross sells and so on. And we are still seeing that such a number is achievable.

But first of all, the structural separations should be lifted so we will be able to see all the kinds of synergies.

So, what's the first to be exactly? So once the first MVNO comes into the market, launches, you can then start to cross sell and realize those synergies?

We are expected to launch in December, this coming December. There [did] -- and maybe after there, will be a short period that we have to wait for the MOC regulation.

It is a [formal] stage procedure (multiple speakers). Shortly I guess in the next few months to be listed.

Okay, thank you.

Richard Gussow of Deutsche Bank.

I would like to talk about the decline in equipment sales, Q on Q. I noticed that your competitors did not have a similar decline and I was wondering if this was a deliberate strategy on your part to increase cash flow and what can we expect in the quarters going forward.

You are right, the equipment sales were reduced significantly compared to the second quarter and it is a combination of a few factors.

First of all, the propulsion of sales -- the propulsion of sales done through credit cards was increased significantly compared to previous quarters. And by that, we proved our cash flow. Because once we sell to a credit card, we factor it and it's -- then it's off-balance-sheet because it's a [nonrecourse for the] transaction. This is one issue.

The second issue, we are not willing to sell the equipment at any price. So we insist on having a certain profitability. This is also a reason why the sales were reduced.

And another factor that was in the first half of the year, there was a big wave of smartphone replacements. So now the phase is much lower. Probably in the next few months, once we launch the iPhone 4S and maybe later on the iPhone 5, so maybe the level of revenues will be increased, but we need to see what will happen.

Anyhow, we don't think that the rate of the level of the first half of the year, this is the normal rate.

I want to add on that that the company put more attention on the quality of the sales in the last quarter (technical difficulty) and this effort reduces a little bit the number. There was a number of equipment that was sold, but the quality of the sale and the number of the churn rate after sale was there, reducing dramatically.

What I want to mention here that is you get the ARPU of our Company is much better than the ARPU of our competitors. You mentioned the equipment sale, but you look at the ARPU for our competitors and compare it to ours, the ARPU is still higher, significantly, than our competitors. And if you look at the network revenue, we have the same level of network, the same amount of network revenue like Cellcom although they have a couple hundred thousand more subscribers than us. A couple of hundred.

So we see that [many of the gaps] between our performance to Cellcom is in all the operation expenses. This is the point that we look at it and those are the efforts that we started immediately after I came to the Company to reduce cost and to improve our operational results. And this is our chance to end the market.

Okay. Also, on a different topic, I would like to ask you about the high committee and what you see as the potential and risks of the recommendations of the committee?

We look forward to the Minister of Communications to adopt the recommendation of the committee and I know that the Minister didn't decide yet and we met with him and we look forward to the decision.

And we think it is a big potential for us once there will be also a market in Israel and once the price will be set, according to cost plus rather than retail minus. So it is a big potential for us.

Okay. Thank you very much.

(Operator Instructions). Darren Shaw of UBS.

Hi, Haim, and good luck on the role. I have two questions. The first one is, can you give us your first impressions of being back in Orange? What it -- how it has changed over the years since you were last there? And maybe comment on its strengths and weaknesses.

And the second question is actually the net profit in Q3 was actually lower than in Q2 and yet in Q2 the Board decided to pay no dividend and in Q3 it's paying a large dividend, an 80% payout. I just wanted to know if you could comment on the factors behind that decision. I guess it is to do with the free cash flow coming back, in which case, Haim, do you suspect there will be a change of the official policy of the at least 80% payout ratio linked to net profit or maybe linked more to free cash flow?

Thank you for your questions. The first one is an easy one, so I'll start with the second one. I think that I haven't been here in the second quarter, so I can't refer on that, but the policy of the Company was to look at the results and to (technical difficulty) still be to serve at 80% of the profits yearly. And I think that the Board of Directors decided to stick in that policy and I think that they did the right decision.

So and for us it was, then, kind of an obvious decision.

Partner is -- how to say it? -- it is different than in the past, but is still a very, very strong, very promising company. I think that you can find here the foundation of the past. The last year was a dramatically different year from the years before, because of the regulation changes, but it is still the foundation of the Company, the Company out here.

I met here many of the people from the first days. It is a very proud company. It is a very sharp company today and it will be much more efficient than what I see today and I'm sure that you'll see tomorrow.

So in terms of the brand and the way the people (inaudible) the Company look at the future, they look at it very, very optimistically and we feel that we can bring back in a short time and the Company to the place it should be and we will be again the leaders of the cellular market in Israel or the telecommunications market in Israel. So we are very optimistic about it.

Thank you.

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 1-888-326-9310. In Israel, please call 0392-55901. And internationally, please call 972-392-55901.

Mr. Koch, would you like to make your concluding statement?

Thank you. This concludes the conference call of Partner's results for the third quarter of 2011. We appreciate your interest and please feel free to contact us if you have any additional questions. Access to this call and to 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 third-quarter 2011 results conference call. Thank you for your participation. You may go ahead and disconnect.