Partner Communications Company Ltd (PTNR) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company second-quarter 2012 results conference call. (Operator Instructions). As a reminder, this conference is being recorded August 14, 2012. I would now like to turn the call over to Mr. Gideon Koch. Mr. Koch, please begin.

Thank you, and thank you to all our listeners for joining us on this conference call to discuss Partner Communications' results for the second quarter of 2012.

With me on the call today is Haim Romano, Partner's CEO; and Ziv Leitman, our CFO. Haim Romano will be opening the call by sharing some thoughts on recent developments in the markets and Partner's strategic direction. Ziv will then discuss our financial and operational results for the quarter, and finally we'll move onto the Q&As.

Before we begin, I would like to draw your attention to the fact that oral 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 August 14, 2012, as well as Partner's prior 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. If you have any further questions following the call, please feel free to contact our head of Investor Relations in Israel, Yaffa Cohen-Ifrah, on 972-54-909-9039.

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

Thank you, Gideon. Good morning, good afternoon, ladies and gentlemen. Please allow me to welcome you to our second quarterly 2012 conference call.

I will start my short briefing with a review of the recent events in the telecommunication market in Israel. Firstly, I will describe the competition in the cellular market, and say that during May, last May, two new cellular operations launched, HOT Mobile and Golan Telecom.

The new operators offered to the customer unlimited plans at aggressive price of NIS98 and NIS99. The launch was heavily promoted by PR campaigns, supported by the Israeli media and the Ministry of Telecommunication.

Existing cellular companies responded also by launching unlimited packages. The strategical approach of Pelephone was trying to maintain the market share almost at any price, offering an unlimited plan at the price of NIS99. Cellcom offering bundles of services fixed and mobile, aggressive offers to the business customers, and determined to maintain their customers almost at any price.

Partner's strategy was maintaining ARPU even at the price of churn; offering unlimited plans at the price of NIS125 and NIS135, the highest plan in the market; and launching 012 mobile sub-brand for customers who are only sensitive to the price, but not to service, and they are willing to stay with a service that is based on the Internet. The outcome of our strategy, we managed to maintain the ARPU at NIS101, the same as at Q1.

As for the MVNOs, there is no doubt that the MVNOs are the main losers for the entry of the new operators. Currently they are also offering unlimited plans.

Moving to the fixed-line markets, we face increasing competition in the ISP market. The competition in the HOT.net launch caused the decline of our market share from 33% to 32%. The rate of the market share's decline slowed down towards the end of the quarter.

In the last quarter, we accelerated full operation merger with 012 and we start offering to our customers a telecommunications bundled service, fixed line and mobile.

In respect to the operational efficiency, in Q2 2012 OpEx decreased by NIS100 million compared with Q3 2011. We managed to reduce 2,100 positions from October 2011 until July 2012, and there is not there -- it's not the end of our efficiency plans. On annual base, we managed to save something like NIS250 million annually.

As for the technology progress, we are continuing the network upgrading, optimizing and enhancing the network towards the LTE. Currently 70% of our network was upgraded to LTE ready. In addition to that, and to respect with the IT systems, the Board of Directors approved the investment of NIS60 million for our next generation of the CRM version of Siebel 8.

In respect with the TV, we continue with our preparation to launch a television service over the top, OTT. Once the condition will be matured, and at the end of the day it's in the hands of the Ministry of Communication to solve the problem of our relationship with Bezeq and HOT, and it's in -- as I said before, it's in the hands of the Ministry of Communication. After that, we'll be able to introduce to the market an innovative and attractive solution.

Wholesale market. We are in the middle of negotiation with Bezeq. There is not a really genuine negotiation with HOT about the wholesale market, and the same as the [TZ]. In the end of the day, we think that without the involvement of the Ministry of Communication we won't see significant progress with the wholesale market.

In closing, we are continuing to focus in our assets, our valued customers, employees, and Orange brand. I would like to hand over the call to Mr. Ziv Leitman. Thank you, Ziv.

Thank you, Haim.

In view of the big changes in the cellular market over the past year, I will focus my remarks on the results of the second quarter compared with those of the first quarter of 2012.

This quarter, revenue declined mainly due to a sharp drop in the quantity of cellular equipment sold, which led to a decrease in equipment revenue of NIS150 million. The main factors that led to the reduction included fierce competition for handset sales, increasingly strict customer payment terms, a general decrease in market demand, and an end to the use of special rebates for customers compared to the [senior handsets].

Service revenues for the cellular segment decreased by NIS40 million in the second quarter of 2012, compared with the first quarter. But this also includes seasonal effects. ARPU remained unchanged at NIS101.

Churn continued its upward trend, reflecting both the impact of the aggressive pricing strategies of the new entrants and the Company's policy not to discriminate between existing customers and new customers. However, given that the new operators entered the market during May, the ARPU and the churn rate for the second quarter of 2012 do not reflect the full impact of the increased competition.

Service revenues for the fixed-line segment decreased by NIS20 million, or 6%. This reflected the impact of the increased competition on the subscriber base and price level mainly in the ISP and local fixed-line market. In addition, revenues for the fixed-line segment were reduced in the quarter by NIS8 million due to the change in interim segment charging for transmission services. The cellular segment expenses were reduced by the same NIS8 million, so there was no effect on the consolidated results.

Group operating expenses decreased in the quarter by approximately NIS19 million, mainly reflecting the continued focus on efficiency measures and our strict control of the cost structure. Our new agreement for transmission services with Bezeq contributed approximately NIS10 million to the reduction in expenses. But from the other end, there was a one-time expense in a similar amount related to reduction in workforce.

Total EBITDA for the second quarter was NIS423 million, a decrease of NIS50 million compared with the first quarter, which is a result of the service revenue reduction in the cellular and fixed-line segment together with equipment sales reduction, partially offset by savings in costs.

Net profit was NIS120 million, compared with NIS146 million in the first quarter, a decrease of NIS26 million. As well as the factors I have just described, the decrease in the net profit also reflected higher financial expenses due to the increased linked expenses from the increase in the CPI index level of 1.2% this quarter, compared with no change in the previous quarter.

Free cash flow after interest payments was relatively strong this quarter, totaling NIS270 million. Around a third of the free cash flow was due to a decrease in working capital. Working capital continues to be supported by the low level of equipment sales. As long as this trend continues, together with a high proportion of the equipment sales by credit cards and cash, working capital will continue to decrease, which will positively impact on free cash flow.

The Company's net debt at the end of the quarter totaled NIS4.2 billion, reflecting a decrease of around NIS700 million over the last 12 years -- 12 months. Capital investment in the first half of the year totaled NIS246 million. The Company continued to make investment in infrastructure and network and IT, and intend to invest at the higher rate in the second half of the year than in the first half.

In view of the relatively high cash flow balance, we decided after the quarter-end to take a number of measures to reduce the level of debt and financial costs. These measures include early repayment of bank loan, the reduction of credit facility, and a debt buyback plan.

Due to the new royalty regulations, the average quarterly royalty expense in the second half of the year are expected to be lower by approximately NIS12 million, compared to their royalty expenses in the second quarter.

Turning to dividend, the Board of Directors authorized a dividend distribution for the first half of 2012 in the total amount of NIS1.03 per share, or ADS, approximately NIS160 million in total (multiple speakers) dividend of 60% of the Company net profit and one-third of the free cash flow for the first half of the year.

And now, I will be happy to open the call to questions. Moderator, please begin the Q&A.

(Operator Instructions). David Kaplan, Barclays Capital.

Hi, good afternoon, everyone. This question, I guess, is for Haim. Haim, you talked about how you believe that the regulator's going to be required in order to get into a final solution on the wholesale operations. Yet one of the fixed-line operators said that they believed that there would be an agreement before the end of the year. So can you talk a little bit more about why you believe it will require intervention on the part of the regulator in order for us to see those wholesale agreements signed?

The regulation promised the revolution in the TV markets, and there will not be any successful revolution unless the price of the wholesale market will be different.

All our meetings with the minister, he said that he is determined to finish this issue until the end of -- before the end of the year. He give us six months to settle this issue with Bezeq and HOT. We are quite progressing with Bezeq, and we have an agreement. And overall, most of the items about the engineering regarding to the wholesale, and still this agreement about the cost.

The problem that -- there is not for any of the sites, there is not a reference or a benchmark. But different from the cellular, in the cellular market when the MVNOs started negotiations, they had the reference. The reference was the interconnect.

We don't have reference for this negotiation, and we ask the Ministry of Communication to give us the reference and they haven't done it yet.

So we believe that voluntary, nobody reduces income just because he's a nice guy. They need the pressure of the Ministry or the benchmark from the Ministry of Telecommunication. The Ministry of Telecommunication promised reform and promised a revolution in the wholesale market in general, and in TV markets in the specific terms, and I believe that he means it.

Okay, I guess this might be for Ziv. Just thinking about the TV market and the over the top, the investment that will be required there, can you talk a little bit more about what the requirements will be for you guys to roll out a full fixed-line operations? On wholesale, of course.

We didn't disclose the amount of CapEx that will be required, but we are not talking about significant amounts. I would guess we're talking about a few dozens of millions of shekels in CapEx, not more.

We have no plans of spending hundreds of millions of shekels buying content and paying in advance. (Multiple speakers)

Right, well, if we look at what the TV operators currently pay for content and we see it's hundreds of millions of shekels, it's not a small number at all.

Yes, but it's not our approach. We're not talking about hundreds of millions in content, and actually we are very careful in signing contracts. And we decided not to sign any contract before we have the full improvement about the prices that we have to pay for the interconnect or for what we call the wholesale market. But investments are not hundreds of millions, much less than that.

All right, thanks. I'll let the line go for now. Thanks.

Simon Morris, Citibank.

Hi, everyone. Good afternoon. Just a couple of questions. You spoke about working capital improvements from -- in terms of equipment sales, but we haven't actually seen any actual numbers. I mean, this quarter, there was only a NIS7 million working capital benefit from inventory reductions. When can we actually expect to see a significant impact from this?

There was a reduction in the working capital of around NIS70 million, NIS80 million, total decrease in working capital.

Yes, but just in terms on the inventory line, can you just -- I was assuming that's where most of it would come from. No?

(Multiple speakers). Most of the reduction is coming from reduction in AR.

Okay, fine. Okay. Just another question, on your dividend. You said your dividend for the first half is going to be 60% payout. I was just trying to understand in terms of -- you say your policy is 80%. I mean, has that changed or are you going to make up the shortfall in the second half?

There is no change in the dividend policy, which is at least 80% on a yearly basis. So currently, the decision was to pay NIS160 million, which is around 60% of the net profit for the first half and it's about one third of the cash flow for the first half.

So if the dividend policy hasn't changed, what does that mean? How come is it 60%? And just to clarify, I'm trying to understand, does that mean there will be -- you will make up in the second half if the policy hasn't changed?

The policy, it's on a yearly basis. Every quarter, this issue is discussed by the Board, and they make the relevant decision.

There is no commitment whatsoever that the additional 20% will be paid. It might be more, it might be less. The decision will be made by the Board in one of the next meetings.

Okay, all right. Thank you very much.

Liat Glazer, Excellence.

Hi, it's actually Gilad Dattner. Just a question on the overall model. I mean, you guys are making some gradual cost cuts and you're making some adjustments to the business model. But all in all, you're working, I think, pretty similarly to the way you did last year, two years ago.

What needs to happen in the market in terms of either market-share loss or in terms of a decline in profits for you to completely change the way you do business? In other words, what needs to happen for you to embrace the business model of Golan Telecom, which is, you know, a workforce, a head count, which is a lot smaller than what it is now, you know, an Internet-based business model. What needs to happen for you to do that? Thanks.

First, I'm not sure that the business model of Golan Telecom is sustainable.

And you see what happened yesterday with -- when HOT released their results, and you can see that there are no free meals. So you don't see what they are doing. They are not transparent, not Golan and not HOT Mobile. You can see the ARPU of Hot Mobile, you can see the ARPU of the Golan, and you don't really understand their expenses and revenues. So, it's still to be proved.

We changed our model. We don't work as last year. We don't invest such amount of labor in our value chain. And we managed to reduce 200 -- sorry, 2,100 positions without reducing our service level. On the contrary, our service level is best -- is better than it used to be in the last two or three years.

The news are in our campaign with 012. 012 is the way that we introduce to the market the service that is a local service. You can be activated by the Internet, and we -- by this segment and by this promotion, we understand that we can approach the customers that are not sensitive to service, but are very, very price sensitive and willing to get their service via the Internet.

We feel that using the 012 brand as a known telecommunications brand is the right -- was the right decision, instead of reducing the ARPU in our customer base of Orange to the people that are asking for service.

So we have our two arms. We have a long one with Orange, traditional brand, with much more investment in self-service and simplifying their service and the way we do business, being much more efficient. And the other arm, the short one, is the 012 with full service via the Internet, using mainly the chat. You can activate yourself, you can get the Sim card from any Yellow store in the country, and you don't have shops, you don't sell handsets and such.

So we have the two options. One similar to Golan, but we think that we are very, very efficient. For example, if you take the Golan system, if you lose your phone, it takes you three or four days to be without handsets. I don't know if you're aware of it because they will send you the Sim card by the mail. We don't do that, and this is the easiest way to see the churn.

So our customers in the 012, they can get at any time the Sim card from shops of Yellow, for example. So we are even better than Golan in our way of doing business.

Okay, thank you.

David Kaplan, Barclays Capital.

(Technical difficulty)

(Operator Instructions). There are no further questions at this time.

Before I ask Mr. Romano 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 1-888-295-2634. 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?

Thank you very much. We appreciate your time, and see you next time.