Partner Communications Company Ltd (PTNR) 2013 Q1 法說會逐字稿

Thank you. And thank you to all our listeners for joining us on this conference call to discuss Partner Communications' first-quarter results for 2013. With me on the call today is Haim Romano, Partner's CEO, and Ziv Leitman, our CFO. Haim Romano will open the call by presenting the operational and financial highlights of the quarter. Then Ziv Leitman will present a more detailed summary of our quarterly results. And finally we will move on to the Q&A.

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 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 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 22, 2013, 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 S-3 shelf registration statement, all of which are readily available. Please note 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 orange.co.io. 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?

Good day, everyone, and welcome to our first-quarter 2013 results conference call.

Our first-quarter results reflect the continuing impact of the competition and the results as a result of the price erosion in the market and led to the decline of our revenues and profits. Despite the decline in our revenues and profits, the company continues to, as planned, to invest in our assets. Our investment in the first quarter was approximately NIS130 million, mainly into solar network and development of the technology and advanced infrastructure.

During the quarter, we launched Orange ultranet, the most advanced and fastest cellular network in Israel. At the same time, we have continued the efficiency -- continued our efficiency measures which led to a decrease of NIS152 million in OpEx, excluding equipment, compared to the first quarter of 2012 and a decrease of the NIS600 million in annual returns.

The company reports its quarterly strong free cash flow of NIS203 million. Having said that, we have reduced the net debt by approximately NIS190 million compared to year 2012.

In this quarter, we have witnessed a decline in our churn rate. Our cost of subscriber base has remained at similar level as it was in the fourth quarter of 2012. The decline in the company's subscriber base is the result of the decline in the prepaid subscriber base, reflecting the seasonal changes and the continual trend of customers shifting from prepaid to postpaid packages.

I would like to conclude my brief saying that we will continue to implement efficiency measures and adjusting the company structure to the changes in the market conditions in order to successful cope the current and future challenges. We will continue to invest in the company assets, in our network quality customer service, and advanced technology.

Now I would like to turn the call to our CFO, Mr. Ziv Leitman.

Thank you, Haim. The financial results of the first quarter of 2013 compared to the previous quarter reflect on one hand the continued revenue erosion resulting from the fiercely competitive market condition, and on the other hand the continued impact of the efficiency measures the company implemented over the course of the quarter, which partially offset the revenue decrease.

Service revenues from the cellular segment were NIS724 million, an 8% decrease from the previous quarter. The decrease was mainly explained by the continued price erosion in services, including lower daytime roaming and the transition of customers to unlimited packages. As a result of the above, ARPU decreased to NIS82 in the first quarter of 2013 compared with NIS87 in the previous quarter.

The churn rate in the first quarter of 2013 was 10.4%, an improvement on 10.9% in the previous quarter as a result of the reduction in the postpaid churn rate, which was partially offset by an increase in the prepaid churn rate. The company's cellular subscriber base at the end of the first quarter of 2013 totaled 2.93 million with our postpaid subscriber base remaining stable while our prepaid subscriber base continues to decline.

Equipment revenues in the first quarter of 2013 decreased to NIS183 million from NIS222 million in the previous quarter, mainly reflecting the decline in the number of handsets sold. The gross profit from equipment was also negatively affected by the sale of subsidized handsets to large corporate customers which didn't meet the capitalization criteria according to [YAS 38].

Service revenues from our fixed line segment, including ISP and voice services, were NIS283 million, decreasing by 4% from the previous quarter, reflecting the continued strong competition in the market.

In order to mitigate the impact on profit of the decline in revenues, the company continues with the efficiency measure which we began 18 months ago. In particular, we have continued to adjust the level of workforce to the changing market condition and the size of the workforce to the 4772 on an FTE basis by the end of March 2013. As a result of the decrease in the workforce and other efficiency measures taken, operating expenses decreased by approximately NIS24 million compared to the first quarter of 2012. The company will continue to implement additional operational efficiency measures in the coming quarter in order to further reduce operating expenses.

The outcome of the bad effect was that EBITDA for the first quarter of 2013 amounted to NIS268 million compared to NIS340 million in the fourth quarter of 2012. Financial expenses in the first quarter of 2013 increased by approximately NIS11 million, mainly due to increased linkage charges as a result of a greater increase in the CPI index compared to the previous quarter. In consequence, net profit totaled NIS31 million in the first quarter, compared with NIS102 million in the previous quarter.

Free cash flow, after interest, remained robust this quarter, totaling NIS192 million. Following the trends of the last few quarters, cash flow was positively affected by a decrease in working capital.

And finally, the company continues to lower net debt. Over the last 12 months, our net debt has been reduced by approximately NIS800 million in total and stood at NIS3.6 billion at the end of the first quarter.

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 everyone. I actually have a whole bunch of questions, so feel free to stop me. I can get back online if you like. The first one has to do with the gross profit from equipment sales for cellular. You talked about (technical difficulty) you said in your prepared remarks about the capitalization. Can you quantify for us what that number was, what you normally would have capitalized, and is that something you expect to continue on this year, given the competition in the market, or do you expect to be able to capitalize some of those costs in Q2?

We didn't disclose the number of -- the amount of subsidies for the handset. Therefore, we cannot disclose it now, but we don't expect this trend to follow in the future.

Okay. The second question also, clearly the company has been reducing its overall leverage, but if you look at the leverage ratios because the decline in EBITDA was so drastic, I guess because of the capitalization this particular quarter, it's I guess a related question where now net debt to EBITDA seems to be well over 3. Is there something the company is going to plan to do to manage that or again, does it just have to do with the timing, given the capitalization question I asked earlier?

As you recall, at the end of the third quarter 2012, the company said it's our intention by the end of 2013 the net debt will be not more than NIS3.3 billion. Now, when you annualize the debt to EBITDA ratio, in my opinion, you shouldn't take one quarter. You should take a much longer period, let's say one year. So if you take the last four quarters, it's a total different ratio, other than taking just the last quarter.

Right. No, I agree with that. I just think at a point in time also it does jump out at you and I don't know how much of it is cosmetic because of the capitalization question or how much of it is something that we need to keep our eye on.

These are the reported results. We don't change the reported results.

Okay.

But I don't think it's the right way to calculate the debt to EBITDA according to one quarter.

Okay. Third question is about seasonality in the business. With the price erosion we've seen over the last couple of years, what was once upon a time normal seasonality has kind of disappeared from the results. Is that continued erosion something you would consider working or would expect to see for the rest of 2013, or do think we might see some semblance of seasonality come back during this year?

Seasonality is part of the business, especially in the roaming segment. So you can expect seasonality and still expect seasonality. It's true that the main customer base is unlimited, but still we can expect effect of seasonality. Actually, you saw it in the first quarter. The first quarter traditionally is a slow one.

Right. But the third quarter is generally a strong one, and if you look back over the last two years, they have been sequentially down, both 3Q 2011 and 3Q 2012. And I'm wondering if 2013 we should expect the same as we've seen over the last two years, or is the market kind of calming down. And because there are so many people on unlimited with roaming revenues expected to increase in the third quarter, given normal seasonality, should the third quarter again be -- or the second half I guess be a stronger half relative to the first in 2013?

The roaming is still a relevant item to be expected. I can't refer to that or other issues, but the roaming will be I think still a relevant item.

Okay. Great. I'm getting to the end here. The last two are actually pretty quick. On inventories, you said the build in inventory had to do, again, with the competition in the market. Was any of that specifically related to the iPhone 5 launch, or is there a buildup of inventory of iPhones that you expect to kind of work your way through in Q2?

Yes, the iPhones and iPads as well. But we have some plan to reduce it anyway.

Okay, great. And then the last one, just the normalized tax rate, I know there was a one-time that kind of caused this quarter to be high. Do you expect come back towards closer to the 25% range over the rest of the year?

Usually part of the expenses are not recognized by the tax authorities. But this amount is in shekel terms; it's not in percentagewise. So when the profit before tax is let's say for example is NIS150 million, but percentagewise it's rather small. While when the profit before tax is let's say NIS50 million, the percentage is much higher for the same amount of shekels. So, you cannot expect the tax rate to be exactly according to the corporate rate, which is 25%. Always it was higher.

No, not always, like the first quarter or the fourth quarter last year, but when we think about a normalized tax rate, is 25% the right number to use?

On a yearly basis, it's always higher than 25%, and shouldn't expect that it will be 25%.

Great, thank you.

Gilad Alper, Excellence.

Thanks for taking my call. Just on the headcount, the headcount in Q1 is down by 600 employees. Should we expect a similar rate of decline in headcount over the next few quarters? And at what stage do you reach the point where you need to change completely the way Partner does business? Do you need to at some stage give up maybe service for private consumers, and does that happen when you reach 4000 employees, 3500? How should we think about that? Thanks.

Wow. It's a very tough question. If we --

A tough market, huh?

Yes. We reviewed something like almost 700 positions, and it wasn't reflected fully in the annual -- in the quarterly results, because it was spread over the quarter. You will see it in the next quarter of course, but it's hard to tell.

Of course, the markets are changing and the way of getting service is changing. And we are adjusting ourselves. I don't have the time to put the situations that I can describe the vision of the company regarding the next generation service, but no doubt it's going to be a different ballgame.

Okay. My follow-up I guess --

It's more digital. It's more self-service.

Yes.

It's not just the service. It's the salesforce and the way you do business and incorporate. The whole model is changing. We are not waiting. We are doing everything we can to face the future.

Okay. I mean, my follow-up is kind of related to that I guess. Basically, do you guys see any signs of stabilization? I mean the churn is slightly down. Do you see maybe the two newcomers having a bit of a smaller impact on the market? Any reason for optimism?

You know the difference between an optimist and pessimist?

No.

Pessimist is someone who used to be an optimist before. So we used to be optimists about the new players in the market, and we better to be -- better be realistic. And we prepare ourselves to the current situation. There is a reduction of the amount of turnover in the market. And we see that our pull out is lower than it used to be. And actually as you mentioned and Ziv said before, in our customer base, the postpaid is quite stable. And less subscribers are leaving us. And of course, we sell less but this is good news. So we see kind of stability in the customer base in the postpaid and the reduction of the turnover. I hope that this is a good sign we see. But you know we have some experience from the past, so I don't want to be too optimistic about it. I hope that this atmosphere will be sustainable in the market, but is a reduction of the (inaudible).

Okay, thank you.

Michael Klahr, Citibank.

Hi. I've got a few questions. Firstly, can you tell us a bit about the 012 Smile business? I mean in the mobile, the sub-brand, and some indication, I don't know, in terms of numbers of subs. Is it tens of thousands, hundreds of thousands? And also what type of subs are they? Or what share of those subs would be ex-Orange?

It's a very tough question because we don't explain our -- I try to deliver this first. We almost ended the merger between 012 and Partner operationally-wise. And this is something very important that allowed us to reduce the cost for both companies.

012 Mobile, we are very satisfied with the results of 012 Mobile. And I can't tell you the exact numbers, but they are significant numbers, not hundreds of thousands, but more than maybe the market expected. It's a very efficient business because they pay less, but they are low cost customers in all means. The demand of service there is very low, and it's a very efficient business. It allows us to maintain our customer base without driving down all our Orange customers ARPU-wise. Most of the customers are not Orange customers. This is the next one that I can --

Okay. That's very helpful. My second question is on the efficiency measures going forward. Can you give us some concrete examples of measures not yet introduced or not fully in the numbers, apart from just talking about the broad headcount numbers, but rather initiatives? What's left to do or what you can continue to do?

The main initiatives that you can't see or you couldn't see in the last quarter, like in assets for example that reduce the amount of assets, the amount of meters that we ramped, and other issues, but unfortunately I can't elaborate on that, but there are.

Okay. And then on the fixed business, I see you've added some fixed lines, but the ISP subs has been falling. I just wanted to understand those dynamics a bit better. Is that part of the strategy or is it just due to heavy competition and what is actually going on in that business?

Compared to last year, the main problem was the penetration of HOT-NET, and we see that we managed to overcome this in the last quarter. The results are better than they used to be, but still we have some adjustment to do and we are working on that. We are not too satisfied from the results of the ISP business, and we have some work to do and we are working on that.

Okay. My last question is again on the inventory. I see the handset sales are coming down, and you had the big boom with iPhone or the introduction of iPhone in Q4. So I don't quite understand why inventory is going higher.

First, the iPhones started in Q4, but they were actually introduced in the end of Q4, but most of the sales were in the first quarter. And on top of it came the iPad inventory. But, Ziv, if you want to elaborate on that?

As you recall, in the first quarter, there was a shortage of shipment from Apple. So, practically, it was a situation almost like a stock-out, which is not normal that you don't have stock in the shops and in all the channels. And most of the shipments arrived in the third quarter.

So, did the shipment kind of arrive too late -- I mean would you say that demand for the iPhone 5 is perhaps a bit less than you had anticipated?

It started very strong and it slowed down, but we don't suffer from a huge inventory in iPhone. It's not a slowdown of the demand that made the inventory coming up to that. The exception was Q4 with shortage of inventory, and the truth is we will be in the middle of that. We won't see the same amount of inventory, I believe, but we won't come back to NIS90 million, because we are very short inventory at that time.

And you'll be able to do that without the impact on the gross margin and the equipment -- on the equipment side? So without the hit that you took in the first quarter or the subsidies you --

It is not --

It is not related.

It is not related.

There is no connection between the level of inventory and selling subsidized handsets to large customers.

It was a one-time hit. It's not --

Okay, thank you.

(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 1-888-326-9310. In Israel, please call 03-92-55-904. And internationally, please call 9-723-9255-904.

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

Thank you everybody. I want to thank you for joining our Q1 2013 conference call. Have a good day.