Partner Communications Company Ltd (PTNR) 2012 Q1 法說會逐字稿

Welcome to the Partner Communications Company first-quarter 2012 results conference call.

All participants are at 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 May 23, 2012.

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

Thank you and thank you to our listeners for joining us on this conference call to discuss Partner Communications results for the first quarter 2012. With me on the call today is Haim Romano, Partner's CEO, and the Ziv Leitman, our CFO.

Haim Romano will open the call by giving some thoughts about the recent developments in the market here in Israel, Ziv will then discuss our financial and operating results for the quarter, and, finally, we will move on to the Q+ACY-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 Section 27A of the US Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 as amended, and the Safe Harbor provisions of the 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 release dated May 23, 2012, as well as Partner's prior filings with the US Securities and Exchange Commission on Forms 20F, S1, 6-K, as well as the S3 Shelf Registration Statement -- all of which are readily available.

Seeing as 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.

Following the call, if you have any further questions, please feel free to contact our Head of Investor Relations in Israel, Yaffa Cohen-Ifrah, at +970-54-9099039. I will now turn the call over to Partner's CEO, Haim Romano.

Thank you, Gideon, and good day, everyone, and welcome to our first quarter of 2012 conference call. The financial results of the first quarter reflect the competition in the market and the challenging times of the cellular industry in Israel over the last year.

We continue as planned in the implementation of the efficiency measures with their contribution of a decrease of ILS80 million in operating expenses during the last six months. The full effects of the efficiency plan will be reflected in the upcoming months as we progress with the plan +AFs-that will be limited+ AF0-.

As part of the overall process we have reduced the number of positions by 1,440 positions from October 2011 until the end of April 2012. We also allocated a process of full operating merger between Partner, Orange, and 012 Smile that is expected to be completed in the third quarter of this year. The full merger will enhance our focus on the customer and will enable us to provide a range of services at home and mobile.

Last week we saw a significant change in the cellular market in Israel with two new operators launching operations with their unlimited plans offering prices that were far beyond the relevant prices in the market (inaudible). We are prepared to the competition and we have updated our marketing offers to the new market price level.

At the same time, and especially in light of the recent events, we are required to examine and to adjust our business strengths to the new realities. We will continue with our efficiency plan and even enhance it. We will continue with our investments as planned to invest a large amount of money and resources to upgrade our network. And in August this year we will complete and upgrade the most part of the Israeli population geography with our sites and we will have covered the major population centers.

At the same time our IP system recovery plan is focusing its plans. We are also looking ahead, focusing on the future potential growth including TV over the Internet. We intend to launch during the next six months a television and concert service over the Internet, OTT, subject to removal of regulatory barriers by the MOC. These services will be added to a wide range of services offered by the Company at a significantly lower price.

In closing, I am convinced that our unique experience and continued investment on our assets, our valued customers, employees, and the Orange brand will continue to sell as a platform to promote our business and cope with the future challenges.

Now I would like to hand over the call to Mr. Ziv Leitman, our CFO. Please.

Thank you, Haim. Given that 12 months is equivalent to a lifetime in our industry, I will limit my comments to the results of the first quarter compared with the previous quarter.

Cellular service revenue decreased by ILS42 million in the first quarter of 2012 compared with the fourth quarter of 2011. This largely reflects the ongoing trend of increasing ARPU levels due to pricing pressures from business (inaudible) +AFs-contracts+ AF0- and from private customers on turning to new, more attractive offers. On the other end, ARPU levels were vaulted by recruitment of new customers with above-average level of our group and buy existing customers moving to bundled packages with higher ARPU.

The ongoing price erosion has affected both air time and content and data service revenues. However, we know that Partners continues to succeed in maintaining higher ARPU levels than our key competitors. While several subscriber base decreased by approximately 29,000 over the quarter, the churn rate of post-paid cellular subscribers in first quarter remains at the level similar to that of the previous two quarters.

The relatively high level of churn partly reflects the Company approach over the past few months (inaudible). The approach emphasizes the value of currency and +AFs-fairness+ AF0- and clarity in all customer interfaces. As a result, existing customers are not given preferred treatment over new customers and also the same standard plans as new customers.

Cellular equipment revenues increased slightly this quarter, mainly reflecting the impact of the iPhone +AFs-cards+ AF0- launch in December 2011. Operating profit from sale of cellular equipment decreased by ILS10 million, mainly reflecting the decrease of unit profit. Total consolidated EBITDA for the first quarter of 2012 was ILS438 million, an 8+ ACU- decrease compared with ILS478 million in the fourth quarter of 2011.

Net profit was ILS146 million in the third quarter compared with ILS123 million in the fourth quarter before the impact of the impairment charge. Financial expenses were positively affected in the first quarter by the unchanged CPI level. For April and May 2012 the reference CPI level increased by approximately 1.3+ ACU-.

Together with the anticipated increase in the reference CPI levels for June, these increases are expected to lead to a significant increase in our linked expenses from the Company approximate ILS2.2 billion of (inaudible) debt. As a result, financial expenses in the second quarter of 2012 are expected to be substantially higher than those in the third quarter.

Returning to the results of the first quarter, free cash flow after interest payments totaled ILS199 million for the third quarter. This high level of free cash flow is evidence of the Company's robust ability to generate cash flow from net profits.

Net debt decreasing by approximately ILS200 million in the first quarter for a total decrease of approximately ILS400 million over the last year. Capital expenditures for the first quarter totaled ILS133 million, similar to the level of previous two quarters. However, total capital expenditures for the year 2012 is still expected to be approximately ILS650 million.

Turning to dividends, in light of the recent developments in the telecommunication market in Israel, the Company its business plan and, therefore, the Board of Directors decided not to discuss the issue of dividend distribution at this time but rather to discuss it later on.

Now we would be happy to open the call for questions. Moderator, please begin the Q+ ACY-A.

(Operator Instructions) Gilad Alper, Excellence.

Question is on the business model of the Company+ ADs- you are mentioning maybe adjusting it, which is I guess the reason you haven't paid dividend this quarter. So my question is what exactly are you talking about? Are you -- is it, for example, moving closer to the business model of Golan Telecom, maybe less customer service and more simplified Internet-based business model, or are you talking about something completely different? Thanks.

First, I would like to know at last what is the business model of Golan Telecom, because we didn't -- we tried to explore it but we didn't find it yet. So I am not sure that Golan Telecom knows its business model.

No, the idea is to -- and when we started already in the last six months to adjust our platform to the new situation in the market, reduced costs, and taking care of the customer in a different way. More self-service and less labor intensive company and this is one issue.

We -- as I mentioned before, we managed to reduce 1,440 positions. We can do much better than that. You can look at the Company at the year 2006, 2005 and see that the Company was there and staffed by something like 3,900 employees and providing great service. And this is our vision. Our vision is to be a leaner company with great service, personal in one hand and self-service on the other end+ ADs- very efficient and very precise company and still a premium company.

But you have to prioritize your missions and your objectives and this is exactly what we are doing. We have to enhance some of our activities and adjust them, but the business model has been started already -- the new business model started six months ago and you see the results in the reduction of the OpEx for example.

Okay. If I can ask just a quick follow-up, are you considering, for example, as part of your adjustments maybe not selling handsets anymore, especially because the gross margin on that part of the business is declining anyway? Is there any specific element you are considering simply giving up, rather than just becoming more efficient? Any part of the business that you think you might want not to do any more in the future?

What we started in the last two quarters is not subsidizing the handsets by reducing our ARPU, and you can see the difference between our ARPU and our competitors. +AFs-Cellcom+ AF0- went down to ILS90 ARPU because they subsidized the handsets with the reduction of the ARPU. We stopped that (inaudible).

So we intend to sell handsets+ ADs- it's a quite profitable business when you don't link it to the packages. So we can -- and now even today we just launched a new program for handsets, but we just cut the linkage between handsets and the programs. We intend to do the same in the business market.

Okay, thank you very much.

Michael Klahr, Citibank.

I have got two questions. Firstly, on the new offer that you came out with on, I think it was Thursday last week, the ILS125 unlimited up to I think 0.5 giga and ILS135 for 1.5 giga, that wasn't followed by Cellcom and Pelephone whose prices for similar packages are still close to ILS100, ILS160, ILS170. So I wanted to just check what was driving your cut in prices and whether it's having the desired effect for you so far.

First, I have to correct you, and sorry for that, but Pelephone is introducing ILS119 (multiple speakers) still we the (inaudible) in the market.

So that ILS119 is only with 100 megabytes of data so to get to (multiple speakers)

They are selling even lower than that and Pelephone introduced ILS99 offers in the door to door and we see it.

But for a similar data package of 1.5 gigabytes it's ILS170.

Yes, but at the end of the day the question is what will be the price that the customer will be paying and not -- if he is indifferent about data +AFs-doesn't mean that+AF0- he will pay ILS99 or (inaudible) about the data will pay ILS119.

We started that as a retention plan. We said that this is a pilot. We sell -- half of our sales are in 135, the 1 giga, and we follow the market and we see well then we didn't promise that this price will be forever. It's kind of a retention plan. We look at the market and we see what going on.

I am sure that at the end of the day this won't be the price, the common price in their market, but for today we think that this is the right answer for what is going on in the market.

If you loathe and we are -- I don't know where you are getting your information. The market is there and we see the retention effort by all the three companies. We are very, very similar to each other because we understand that for the time being we have to do something to face this ILS99 or ILS89. Not to match this, but to offer a reasonable offer for the time being to those sensitive, price-leery customers.

Okay, thanks. My second question is on what is happening in prepaid ARPU, if you could give us any color of the impact of the MVNOs on that. If you can tell us anything that differs from what we have seen in the financial --

Michael, just to complete my answers for the first question that you asked, we +AFs-prior to that+ AF0- we decreased our (inaudible). We are working hard to decrease our customer acquisition costs. If you pay a commission of ILS480, as is the common commission to the market, it's exactly ILS20 a month to the customer.

So we prefer to go and do direct sale and to save those commissions and to get more customers, return more customers than to go on with this trend in the market. You lose thousands and you gain thousands every day, so we have to support this roller coaster. I would love to enhance about it later if you want.

About the pre-paid, we don't see the competition at pre-paid today, but we are sure that it will be there. We take any measures that we have to take to face this threat. We know that it's there+ ADs- it's on our door.

Michael, as you recall, according to our (inaudible) financials, the average -- the ARPU of the pre-paid on a year over year, on a yearly average is around ILS50. We disclosed these numbers on a yearly basis.

Okay. Can you just tell me, in the weeks since the launches of the two new operator launches where are you seeing the most churn or the most movement? Is it on the prepaid or the postpaid side?

The battlefield now is in the postpaid and the offer of ILS89. You and I we know he exactly what is the meaning of this offer for (inaudible) and we understand why they are doing that. We understand that it's not a sustainable offer, but what we are trying to do now is to minimize the effects of this campaign.

But we understand very well that when someone is offering ILS89, because we don't trust that this offer is good enough. (inaudible) company that can tempt any customer to churn to (inaudible) or Golan unless he is reducing price to a ridiculous one of ILS89. And it will come out in the papers, I don't think that I have to add on that.

Okay. Just if you break down the customer base between residential and business customers, part of the attraction, I think, of Golan offer is the long distance telephony where you get 29 countries -- calls to 29 countries and do you also get far lower roaming prices. I wanted to understand, have you seen any impact on the business side or all the -- I know business customers are tied in by longer contracts, but --

It was just a declaration. They don't have the license for that. Actually they ask us to be their -- 012 to be their operator. We know how to give you that+ ADs- we can match it and we don't think that this is our threat.

We don't look at Golan as the big story in the market today that we will -- we would be surprised, but we don't look at it as a big story. They have many, many problems -- service and operational problems. They are not prepared to the situation and you can read it in the papers and decide.

I think that -- as I said to you when we met, Mirs is a different story. They have a company that has a customer base, Mirs and Hot, and we take them more seriously than we take Golan. But we have the answers as you have seen, because you could ready in The Globe exactly the numbers of the turnover of each and every company.

The problem is the cost of this earning and losing of customers. This was the main problem today. Not just losing customers, because we don't lose customers as in the papers, but retention costs and the acquisition cost is something that we look at very carefully.

Thank you.

(Operator Instructions) David Kaplan, Barclays Capital.

Haim, if you can talk a little bit -- you talked a lot about subscriber acquisition and subscriber retention. Can you talk a little bit more about -- can you split that up for us and tell us where we are seeing subscriber losses?

And with all the new competition in the market, the new pricing, and Partner's new pricing are you seeing the number of calls or I should say the percentage of calls that are coming in and asking about new pricing or, in theory, looking to leave, how many of those are actually staying and coming onto new plans at Partner? And how many of those at the end of the day do you guys estimate are leaving? And I guess that is the first half of the question.

Second half of the question is, is there any point price or is there a point at which Partner has said we are not willing to chase you any further+ADs- if you want to go, you are free to go?

The number of calls has been double every day and now we handle most of the calls using IVR and self-service and Internet. What we see -- and we listen to our customers very carefully. I think I can all the customers, most of the customers they are not asking to leave+ ADs- they aren't asking to get a better offer. Because the market now is booming and they are trying to get the best offer in the market.

We see that the majority of the customer, when you give them ILS125 or ILS135 they are satisfied with it and don't want to leave because they appreciate the service. And for them adding ILS35 or ILS45 and getting a better service level it's okay.

So the main problem is not stopping the churn. The main problem is billing and taking care of the customers that are calling us. We have some service levels today (inaudible) because we want to answer to all our calls, but you don't feel that the customers are calling and they are asking you to reduce their packages or their deals or otherwise they will leave. They are not threatening that.

The atmosphere and the relationship between our customers and the Company is not like it is described in the media. Most of the customers are satisfied. The customers that left the Company and came back after one or two days because they were disappointing from what they have faced in the new company.

So I think in many customers are just waiting to see what is going on and see if these new players will keep their promise or not. You have to remember that the perception about Hot as a very bad service provider is (inaudible) very good customer service approach. For the cellular industry customer service is a big deal, but Golan most of the people look at it as a gimmick until now. Let's look at him and see in the future (inaudible).

Okay. So if I think about your answer and what you are describing, but then I look at total subscriber loss for Partner in the first quarter those two things don't necessarily match.

No, (inaudible). It's not just loss. The reason that you said the numbers is from two issues. The first one is our retention plan. We decided not the market here and I decided to close the retention department because I decided that the first offer that you get is the last offer that you get. You don't shop.

If you call and say, listen, I want to get an offer and if not I will leave, there is not a better offer that you will get. We did it with the Clear package and we were very consistent in that. This is one big deal that we did and we managed to stop the bleeding and the dilution in our ARPU.

This is the reason that the ARPU of our company would increase in terms of Pelephone's because their +AFs-you see+ AF0- bargaining with the customers and we decided to try to stop this market approach. This is one reason.

The second reason is that we, as I said mentioned before, we decided not to subsidize handsets by giving special offers when you buy handsets or not buying handsets. The offer is the same if you upgrade your handsets, buying handsets for us. We don't give discounts for new customers that we don't give to our customers.

If you see the level of churn on postpaid and ignore the prepaid, the level of churn of postpaid, us and Cellcom and Pelephone is around the same number. You don't see that we -- that the numbers of the new customer, the acquisition, was lower because of the acquisition costs and because of thee strategy that you don't give the new customer, the other company customers something that you don't give to your customers. Because of those two main reasons.

We manage it because our estimation is that we know that 30,000 subscribers are ILS1 in the ARPU. And if you manage to return most of the customers with reducing the ARPU -- and I am not talking about what is going on today, it's a different ballgame, but it was relevant to be first quarter and the second quarter -- we preferred to keep our ARPU and not bargain with customers that are getting better offers from our competitors. And you can see the results in the numbers.

You see that service revenues for Partner are the highest in the market, although we have less than I think 200,000 subscribers than Cellcom. And see our revenues are higher and our MOU is higher than Cellcom. So if you take out the revenues from handsets and look at the ARPU and look at the service revenue, you see that if you go down there the major challenge is still in the OpEx.

Okay. Then just lastly, can you give us a number, a percentage of the number of customers of Partner that are currently on a Clear program?

250,000 subscribers already in the Clear program and every day there are more than I think the 5,000 that are joining this new Clear program.

Okay, great. Great, thank you very much.

There are no further questions at this time. Before I ask Mr. Romano to go ahead with his closing statements, I would like to remind participants that a replay of this call is scheduled to begin in two hours. In the US please +AFs-call+ AF0- 1-888-326-9310, in Israel please call 03-925-5918 and internationally please call 972-3-925-5918.

Mr. Romano would you like to make your concluding statement?

Just to say thank you to everyone for their participation and for your questions and see you soon.

Thank you. This concludes the Partner Communications Company first-quarter 2012 results conference call. Thank you for your participation. You may go ahead and disconnect.