Partner Communications Company Ltd (PTNR) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company third-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, November 21, 2012. I would now like to turn the call over to Mr. Gideon Koch. Mr. Koch, you may begin.

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

We will open the call with Haim Romano, who will present the highlights of the quarter, together with an overview of Partner's strategic direction. Ziv Leitman will then provide a more detailed summary of our financial and operational results for the quarter. And finally, we'll move onto 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 Section 27-A of the US Securities Act of 1933 as amended, Section 21-E of the US Securities Exchange Act of 1934, as amended, and the Safe Harbor provision 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 November 21, 2012, as well as Partner's prior findings with the US Securities and Exchange Commission on Forms 20-F, S-1 and 6-K, as well as the S-3 shelf registration statement, all of which are of course readily available. Please note that the information in the 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 day, everyone. Welcome to our third-quarter 2012 earning conference call. I will start my short briefing with overview of the telecommunications market.

The cellular market is in a transitional period. The third quarter reflects the effect of the changes in Israeli communication market as well as our measures that we took during the last quarter and the last year.

Pricing is the key driver in our market and competition today. [Generating] increases across our industry as price-sensitive customers are looking for low-cost offers. However, after five months, it's clear now that price is not the only factor driving competition. Most of the customers are still looking for a higher level of service, added values, and they are willing to pay a small premium.

We continue to focus on our strategy to deliver an operational efficiency, network quality, and excellent customer service. With respect to the operational side, we have taken measures of efficiency over the last -- past year, which has us to tremendous results and outstanding results.

We have reduced our working force by 2700 positions over the past year, 850 out of them in the last quarter. Overall, we have decreased our OPEX by ILS600 million on an annual basis.

In the third quarter we continued to upgrade our network in preparation for 4G technology. We have invested ILS125 million in enhancing network capacity and speed. On top of it, the IT systems upgrades.

We continue to improve the customer service and customer relations, starting with a clear initiative, simple and transparent packages. We have succeeded to maintain high level of service while at the same time we reduce the cost in personnel.

The result of our strategy is based -- sorry. The result of our strategy is best reflected in the high ARPU level reported in this quarter -- the highest in the market, ILS97. We are trying to find the balance between maintenance, high ARPU, and level of service and market share.

We choose not to draw into a price war and maintain the clear policy which does not discriminate between new customers and existing customers. Therefore, we were able to maintain relatively high ARPU, as I mentioned before, at the cost of losing a minor, a small market share.

We launched the 012 model brand, digital model, targeting price sensitive customers that are satisfied with the digital service. We managed to add tens of thousands of customers to 012 over the past three months.

Turning to the fixed line, we completed operational merger with a 012 Smile. The merger enhanced our position as a leading full-scale communication group, and has increased the value given to our customers.

During the quarter, we launched a bundled service packages offering cellular, fixed line, ISP service -- services, which have been proven as a very successful one.

I would like to conclude saying that we are still in transition period. We believe that our strategy, policy and measures that we took to face the challenges in the uncertain environment were and still are the right approach. And now I would like to turn the call over to our CFO, Mr. Ziv Leitman. Ziv, please.

Thank you, Haim. The financial results of the third quarter compared to the previous quarter, reflect on the one end, the impact of increasing competition, and on the other end, the continued impact of efficiency measures we have implemented over the past year and seasonality effects.

As a result of the fierce competition in the cellular market, cellular service revenue decreased by 6% this quarter, compared to the previous quarter. The decrease mainly reflected the ongoing price erosion of cellular service in many of our key services, including voice, data, and roaming, as well as the transition of the customer to unlimited bundles. However, as a result, of the significant increase in roaming usage this quarter, roaming revenues were higher than in the second quarter.

The cellular trend rates rose further this quarter, which 10.4% reflecting increased churn in the months of July and August. However, it should be noted that the churn rate for September was lower than that for July and August. Revenue from cellular equipment sales continued to decline this quarter, totaling ILS157 million, a decrease of ILS50 million from the previous quarter.

In line with the second quarter, the main factors that led to the reduction, included increased competition for handset sales and a much stricter payment terms. We expect these new handset models, including iPhone 5, may increase revenues in the coming quarters.

Strong competition also continued to effect service revenues from our fixed and -- fixed line segment, including ISP and voice services, but to a lesser extent than in the cellular market. Total service revenue for the fixed line segment in the third quarter were ILS296 million compared with ILS300 million in the last quarter. However, mainly due to efficiency measures, the EBITDA of the fixed line segment increased to ILS73 million compared to ILS56 million in the second quarter.

Turning to expenses, the Company continued to with its efficiency measures this quarter, including adjusting its workforce to the changing market conditions. In the third quarter, the number of workers -- workforce positions was reduced by around 850 positions. And in total, from September 2011 to the end of October 2012, the number of FTE positions has been reduced by 2725 positions, most of which was achieved by reducing the level of new recruits. The number of positions at the end of October 2012 was 5863.

Operating expenses decreased in the quarter by approximately ILS60 million, reflecting the adjustment of the workforce and other efficiency measures as well as one-time decrease in expenses. The Company intends to continue implementing operational efficiency measures in the coming quarter in order to adjust the cost structure to the challenging market conditions.

As a result of reducing the revenue, which was partially offset by the impact of the efficiency measures, EBITDA for the third quarter totaled ILS401 million, a decrease of ILS22 million or 5% from the second quarter. Net profit was ILS110 million, a decrease of ILS10 million from the last quarter.

We were particularly pleased this quarter with the free cash flow results, which totaled ILS310 million after interest payment. As in previous quarters, cash flow was positively affected by a decrease in working capital following global equipment sales and [better] proportion of equipment sales by credit card and cash. Should these trends continue, working capital will continue to decrease, which will positively support the free cash flow in the coming quarters.

As most of you already know, in September the Board of Directors resolved to cancel the existing dividend policy for 2012. Rather, the Board will assess dividend distribution from time to time, depending on development in the Company's cash flow profitability, debt level, debt coverage ratio, and business environment in general. The Board did not discuss dividend distribution for the third quarter earnings. However, the Board will assess dividend for the reporting of the annual 2012 financial results.

Over the last five fiscal quarters, the Company reduced the level of net debt by approximately ILS800 million. The Company intends to take measures to reduce the level of net debt further, by around an additional ILS800 million by the end of 2013.

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

(Operator Instructions) David Kaplan, Barclays Capital.

Hi. Good evening, everyone. A little bit -- if you could, give us a little bit of update of where you are on the wholesale agreements with Bezeq, on the one hand. Also, even regardless for when exactly that's going to be signed, what your plans are and what your expected CapEx is for those projects? I guess that's my first question.

It's Haim Romano. We are, after the first milestone that we decide upon with Bezeq, first, we -- [the growth] with Bezeq has to be divided to three milestones. The first one is to agree on the technical part, and we signed a contract with Bezeq about -- an agreement about the technical part.

The second is to agree about the cost of services that Bezeq will distribute to us. And the third part is the cost of the wholesale itself. We decided to give 30 days of intensive negotiation about the second and the third milestone. And this is the stage that we are.

There was a big gap between our position expectations and regarding to what we think we would have to get from the wholesale market, and Bezeq position. Then you have to find a way to close the gap, or to go to the Ministry of Communication to take his -- to say his say in the decision.

We can't refer today about the CapEx because it will be according to the agreement with Bezeq. So it's too early to say if there is a significant amount of CapEx that we have to invest or not or where we go, especially we'll look at the TV market, at IP TV or on the OTT. So it's early to refer on that. Okay, David? Hello?

It appears the questioner has disconnected. We will move on to the next question. Gilad Alper, Excellence.

Hi, everyone. A question; as the ARPU in Q3 declined by ILS4 from Q2, should we expect an even sharper decline in ARPU in Q4 because of the combined effects of competition and seasonality? Thanks.

Yes. Looking at it, we estimate the ARPU will decrease further in the fourth quarter as a result of a seasonality effect and continued average price erosion in the market.

Okay. Okay. Thanks.

Michael Klahr, Citibank.

Hi, everyone. I've got a few questions. First is on the recent price cutting we have seen by Pelephone and Cellcom, who are now both below ILS100. My first question is, do you see yourself competing at those levels with the Partner brand, or you'll continue to do so with 012 Smile?

Hi, Michael. I think that we gave the answer yesterday, by launching new plan with 012, about (inaudible); 012 will be the answer for that. We don't have any intention to dilute our brand and to go to a price war. We declared about it before.

We paid the price of a small amount of reduction in our customer base, but we believe that enhancing the customer experience and giving them the right approach is the best way to tackle it instead of going to a price war. We discussed this a lot of times before and we stick to the strategy.

Okay. Thanks. And the second question is related, I suppose, but you lost 50,000 subscribers in 2Q and a similar number in 3Q. Is that slowing and is that rate of sub loss slowing in 4Q?

I can't refer about the 4Q, but I can tell you that we don't count just number of subscribers. You can get in the two months the same amount of subscriber [or double with] just the matter of price. So we look at the combination of a number of subscribers. Of course, it's important, though. Market share is not something that we under estimated, but the ARPU is not less important. So we try to balance between the ARPU and the number of subscribers.

We could go further in the bit of the IDS. It was our decision not to go there. So we could be at the same position as Cellcom, but with the ARPU of not ILS97, ARPU of ILS84 or ILS83, like our competitors. And remember that we don't have the cushion that Cellcom and Pelephone have from Golan and from HOT. So we have to be more careful about it.

Michael, without referring to the fourth quarter, but in the third quarter, as I mentioned before, the churn rate for September was much lower than the churn rate in July and August. So, most of the net loss was in July and August.

Okay. Thanks. That's helpful.

And if you call there might be other trends, positive or negative. But regarding the third quarter, this was the -- (technical difficulty).

Okay. And then just moving on, on margins, obviously you've done a lot of work on cost and we are seeing the results of that. Can you, for 2013, can you continue to this pace of cost-cutting? Can you maintain a 30% margin in 2013?

The margins are from revenues and from cost. So I can't be sure about the revenues, but I can assure you that we intend to go on with the cost-cutting and we believe that we are closely to half the way in cost-cutting.

So another --

Michael, Michael, just to be clear, it doesn't mean that now you can take the OPEX off the third quarter and cut it by 50% just because Heim said that we're in the middle of the way.

No, no, no. But just to remember that --

Because I know your models.

But you have to remember that the run rates today are different from the run rates of the beginning of 2012, of course. In terms of cost of wages, we are around mid-ILS20 less than we were -- ILS25 less than we were in the beginning of last year. So the starting point is much lower than it was in the beginning of 2011 -- or 2012, sorry.

Right. So when -- for example, in the quarter, if I look at OPEX excluding handsets and D&A, I think I -- excluding the one-time ILS30 million reduction in the third quarter, can we continue to see that rate going forward -- ILS30 million? Or does it seem to be getting tougher than that?

Michael, if your question is whether the cost will be lower than the [ILS820] per quarter? This is the question?

Yes.

We don't give guidance before next year, but it's not unlikely to assume the cost will be lower than [ILS820].

Okay. And then just two more questions, if you don't mind. First, you talk about net debt being at ILS800 million lower at the end of 2013. Does that include a dividend?

The guidance -- or the Company intends to reduce the net debt. Of course, if the cash flow will be higher, so the Company will be able to distribute dividend.

Okay. But that's a target, an ILS800 million reduction by the end of 2013.

Yes. Net debt after everything. (multiple speakers)

Yes. Okay. And then just lastly on the -- sorry. On the iPhone announcement, what is that exactly? Is that -- is there some sort of exclusivity here, or it's just a sale -- a purchase (multiple speakers)?

Framework. It's a framework agreement as it was in the previous -- three years ago.

Okay.

Unfortunately, iPhone don't give any exclusivity.

To Partner.

To anyone.

Okay. All right. Thanks very much everyone.

We have a follow-up question from David Kaplan of Barclays Capital. Please go ahead.

Hi. Sorry. I got disconnected in the middle of the questions last time. Haim, you were talking about the fixed line business. I also had asked you about what your potential investment is in that fixed line business. If you could talk a little bit about what that would be, that would be great.

It's hard to cover this issue today before we have an idea about the agreement with Bezeq. It will be according to the wholesale agreement, and then we will know, because there is a great variety of options ahead of us. So I can't really say on that.

But we are not sure there is going to be significant -- if you look at the approach of Bezeq today, [you can see it's] something significant that will change the market upside down, but we are willing and ready for the IP TV. And we said we -- in the past that we go there when it was mentioned fees will be reasonable and we can make money.

We want to invest in something that, in the end of the day, we want to see the ROI of it. This is something I can assure you. It's not just a strategy issue. It's an issue of the P&L at the end of the day.

Okay. And then, also, just on the mobile market. Michael, I guess, touched on this to a large extent. But it seems that the deterioration of pricing in the market is not yet over and I guess, while Partner has made it clear that they are willing to accept a higher churn rate in favor of higher ARPU, to what extent will that remain true? What are the boundaries or what are the borders that Partner is setting for itself, in terms of pricing and in terms of churn rates, before it would lower the headline pricing for its premium brand partner?

In the end of the day, quantity can become quality. So, of course, it's not something that we can tolerate for a long time, reducing our customer base in 50,000 or 60,000 every quarter. So we launched 012, trying to avoid this price war -- irrational price war.

We actually don't understand why the majors are doing that, but I believe that they know what they are doing. They are smart and maybe this strategy is good for them. It's not good for us. We'll stick to our strategy to improve our customer service, to improve our customer relation and experience, to improve the network, and to give our customers the reason why to stay with us even if they are paying ILS20 more.

It's not 100% above the market price. It's ILS20 or ILS25 without tweaks. And we believe that we can reach this target to maintain our important customers, even if they are paying ILS20 or ILS30 more than the lowest rate in the market, but they are paying a little bit more and then we have to give them much more. And this much more is what we do investing in our network, preparing the network for the LTE and the 4G, and investing and improving our customer experience.

And we have seen the results. Most of the customers don't churn. Most of the customers are willing to pay more and they buy the new packages. And every day we lose customers, but we gain customers from other companies.

The options of the customers is to stay at their network paying less. But still, every day thousands of customers are still churning to our network. So it's more balanced than it seems to be by the numbers, because numbers are affected for many reasons.

If you look at our competitor, Pelephone, the difference between our strategy and their strategy in terms of ARPU, you can see -- ILS97 versus ILS95, including the cushion that they have from HOT. In terms of net adds, they lost 20,000 and we lost 56,000. It's 36,000, so this is the gap.

And you have to ask yourself, does the strategy of ILS99, in the end of the day, is the right strategy that overall, all this initiative makes a difference of 36,000 subscribers in the end of the day. And our answer to ourselves is not, because it can affect your customer base. And we don't want to discriminate our customers from the customers of the other companies. And this is the approach that we don't adopt.

Okay. I just have a quick little housekeeping question, and then I just have one more question, if I can, on cash flow. When you talk about losing customers, I imagine 012 is also gaining some market share as well. Within Partner's numbers, how is that accounted for? Is that accounted as a sub lost and gained?

I think the big advantage of 012 is that 012 -- and as I said before, we have thousands of customers in 012, but the big advantage of 012 is the low cost maintenance of our customers. They are customers that are willing to get their service in a digital way. They are not very sensitive to the service. And the average ARPU there is quite good. And it's not like what we see in other companies that are -- on that basis, they are getting ILS99 and even below when they are doing the rebate. We don't do that.

But I think if -- your question was regarding whether it's gross or net?

Yes.

It's net, when churn is out of Partner's Group. It's not out of Orange and coming to the 012.

And the churn includes the prepaid.

Okay. Great. Thanks. That was good.

If I could just move on, just a quick question on the free cash flow. We've seen sequential declines in equipment sales almost every quarter since the beginning of first quarter 2011. To the extent that I don't really -- it's not really clear where that number is going to settle out. Where do you see -- what is the appropriate amount of equipment sales?

I mean, clearly, that has had a positive impact on free cash flow. And so I'm just trying to, in terms of thinking forward or thinking ahead, where is the right amount of equipment sales per quarter on a sustainable basis, so that I can kind of [mellow] out my cash flow going forward in changes in working capital?

Unfortunately, unfortunately, we cannot disclose the budgeted numbers, but I can tell you the following. We will not see the numbers of 2011. On the other hand, I don't think that the third quarter number of ILS157 million, that this number really represents the future sales.

But is there new equipment coming into the market that you would expect to give a boost? Or was it just a one-time effect of something in third quarter that caused such a (multiple speakers) type number?

It's Haim. I think that in 2013, we will see more sales of handsets from all the three major companies -- you know, the iPhone 5; and the Microsoft, the Windows 8, and the Galaxy IV and others will do some changes in the market. And people are willing to buy now to renew their handsets to more than smartphones.

Is that to say that buying is essentially in a holding pattern right now, just waiting for the new equipment to come out?

Yes. Yes. But (multiple speakers). Okay. But if you want to refer to the cash flow, we protect ourselves by conducting a policy that obligate (multiple speakers).

Like I said, much more stricter payment there, which means (multiple speakers) more sales are done via credit card rather than by their monthly invoice.

They are very strict in that.

Great. Okay. Thanks very much.

(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 1-888-782-4291. In Israel, please call 03.925.5904 and internationally please call 972.3.925.5904. Mr. Romano, would you like to make your concluding statement?

No, I just want to thank everybody for joining the third-quarter 2012 conference call, and have a nice day.

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