Partner Communications Company Ltd (PTNR) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company second-quarter 2013 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 August 28, 2013.

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 today on this conference call to discuss Partner Communications' second-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 an overview of the quarterly results and developments. Ziv Leitman will then provide a more detailed explanation of our financial and operational results. And, finally, we'll move on to the 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 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 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 28, 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 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?

Good day, everyone, and welcome to our second-quarter 2013 results conference. Our second-quarter results continue to reflect the ongoing impact of the competition in the market and the results of the intensive efficiency measures taken by the Company in order to lower our costs. At the same time, we continue to invest in infrastructure and improving our customer service.

Our subscriber base declined this quarter by only 11,000 subscribers compared to the previous quarter, due to the decrease of the prepaid subscriber base. However, our postpaid subscriber base increased this quarter for the first time in eight quarters. Our ARPU this quarter totaled ILS83, a slight increase compared to ILS28 -- ILS82, sorry -- in the first quarter, for the first time in two years.

Our revenue totaled ILS1.130 billion, a decrease [in only] 1% compared to the first quarter. This reflects a decrease in our revenue erosion. Our cellular service revenue slightly increased in this quarter compared to the previous one. OpEx we managed to decrease by ILS20 million compared to the previous quarter, and ILS153 million compared to the second quarter of 2012. Overall, we have decreased our OpEx by around ILS600 million on an annual basis.

Our EBITDA this quarter increased by 4% compared to the previous quarter for the first time in the last eight quarters. Net profit totaled ILS20 million. Despite the improvement of the EBITDA, this is due to the increase of ILS22 million in finance expense.

We reported a very strong cash flow of ILS287 million compared to ILS203 million in the previous quarter. We have reduced our net debt by ILS176 million compared to the first quarter, and by ILS763 million compared to the second quarter of 2012.

I would like to conclude by saying that we will continue to invest in our advanced network, quality of customer service, and advanced technology. And we will continue to improve our -- and to implement our efficiency measures and to adjust the Company's structure in order to successfully cope with the current and the future challenges.

And now, I would like to turn the call over to our CFO, Mr. Ziv Leitman. Ziv?

Thank you, Haim. The financial results of the second quarter reflect the impact of the continued competition in the telecom market, as well the seasonality effect and the Company's ongoing efficiency measures. Service revenues for the cellular segment were ILS726 million, broadly unchanged from the first quarter. This was mainly explained by seasonal roaming revenues, which more than offset the continued price erosion in services.

The churn rate for the second quarter was 9.4% compared with 10.4% in the first quarter, and the churn rate of postpaid subscribers declined for the third quarter in a row. Equipment revenues in the second quarter of 2013 totaled ILS180 million, a similar level to the previous quarter. Equipment profitability improved compared to the previous quarter, mainly due to the decrease in subsidy of handsets to large corporate customers, which don't meet the capitalization criteria according to IAS 38.

Service revenues for our fixed line segment were ILS277 million, a 2% decrease from the previous quarter, mainly reflecting the continued strong competition in the market. In view of the continued price erosion and tough market conditions, the Company continued to adjust its cost structure and implement operational efficiencies, which has required a reduction in the workforce by over one-third during the last 12 months.

As a result of the operational efficiencies, operating expenses in the second quarter of 2013, excluding cost of equipment sold and depreciation expenses, totaled ILS700 million, compared to ILS720 million in the first quarter. We plan to continue to implement additional operational efficiency measures in the coming quarter in order to reduce operating expenses further. Mainly reflecting the reduction in operating expenses, the EBITDA for the second quarter of 2013 increased to ILS280 million compared to ILS268 million in the first quarter.

Financial expenses in the second quarter of 2013 were negatively affected by two factors. First, linkage charges, which increased by approximately ILS15 million due to the higher CPI level. And second, a one-time expense of approximately ILS9 million due to early repayment of bank loans. In total, net financial expenses increased by ILS22 million compared to the previous quarter.

Free cash flow after interest continued to demonstrate robustness, totaling ILS193 million this quarter, largely unchanged from the previous quarter. Free cash flow was positively impacted by improvement of operating cash flow, but was partially offset by a semiannual interest payment. As I mentioned, the Company made an early repayment of bank loan in the second quarter in an amount of approximately ILS490 million, out of which approximately two-thirds relates to 2014 and one-third relates to 2015.

Net debt at the end of the second quarter of 2013 amounted to approximately ILS3.4 billion, compared to ILS4.2 billion at the end of the second quarter of 2012, a decrease of approximately ILS0.8 billion and a decrease of ILS1.4 billion from mid-2011.

My last comment is to note the S&P Maalot certification of the Company's AA-minus credit rating, and the revision of the outlook from negative to stable, mainly due to the expected leverage reduction in 2014.

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

(Operator Instructions). Gil Dattner, Bank Leumi.

Hi, good afternoon, everyone. I have a question regarding working capital, which we saw improve in the second quarter by ILS95 million. Assuming that the top line remains relatively stable at this stage, how much further do you expect working capital to reduce? Thank you.

The positive effect of the working capital is due to the fact that the sales of equipment three years ago were a higher than the current level of equipment sales. In addition, currently the level of sellthrough credit cards is higher than the level of percentage of credit card that they were three years ago. I would assume that we can see some positive effect of the cash flow in the next few quarters, but that's it. For instance, in a year from now, we will not see that positive impact anymore.

Okay. So, in terms of what is representative for the business going forward, what kind of level of working capital as a percentage of revenue do you expect is more representative? Since at the moment, like you said, the working capital is still carrying the liabilities from the period of high equipment sales in 2011. So what percentage of revenue should it be at? (Multiple speakers). Roughly, you know.

Under the assumption that the current revenues will remain the same, so the level of working capital will remain the same. We will not see further reduction or further increase. In addition to the positive effect that we will see in the next few quarters, but after that it will be stable.

Okay, all right, thank you.

This is under the assumption that the equipment level will remain the same.

This is under the assumption that we want to create the level of selling the equipment, and this is not our intention, because we just announced that we had an intention to launch the new division and to increase our sales regarding to equipment. So what Ziv mentioned is due to the fact that this is the current situation. It's not our plan for the future.

Yes, okay. Thank you.

Gilad Alper, Excellence.

Hi, thanks for taking my call. The OpEx in this quarter is down ILS20 million. And the quarter before that was ILS24 million; and then, before that, ILS50 million. And so the pace of reduction is coming down, which is natural, I guess. But the point is, going forward, assuming that the top line isn't going to increase by much, do you have any other way to expand profits significantly in the future without reigniting this process of cost cuttings? Is there any way for you to reaccelerate cost-cutting to get some profits in the future? Thanks.

We have some plans. Of course I can't [emphasize] on that, but it's not the end of the road yet, and we will be able to introduce in the future additional cost-cutting. Not necessarily on the same areas, but cost of sales, for example, we are looking for future reduction in that area and other changes that we intend to do in our operational model. So we will see more operational reduction in some areas that we didn't touch yet.

If I can just follow up quickly. Is there any stage that you might consider -- and I think I asked that before -- that you might consider adopting the Golan Telecom business model for the private consumers, which basically includes a very thin cost Internet-based structure with very, very few contact center agents? Are you getting closer to the point of just understanding or believing that this is the way forward, and there's no other way to get a lot of cost out of the Company?

No, we have the model similar to the Golan. We use it with 012, and very successfully. We recruit hundreds of subscribers every day to this plan. And it's allowed us to reduce the cost of service and the cost of acquisition, of course. But it's not necessarily good for the most of the country, of the customers.

Still, most of the customers are moving from the big guys, and between the big guys, not to Golan and HOT. The churn is around those three major operators. So, for those that are not sensitive to service, and they are more price-sensitive, we have the solution of 012. And we are very satisfied with that, even though some were skeptical about the solution.

And for those that are willing to pay more and to enjoy the service, we just launched the One club, and it's a very successful one. We have more than 14,000 subscribers in this club. And we intend do more, and to add more benefits to this initiative of the One club. So on one hand, we're going to take care of our premium customers, providing them premium service. And in the other hand, we have 102 (sic - 012) is the solution for price-sensitive or digital customers that are willing to use just the chat or the digital chance of communications.

Okay. Thank you very much.

Dov Rozenberg, Clal Finance.

Hi. Thank you for taking my call. On the top line, I'm just trying to understand ARPU trends going forward. You mentioned that part of the increase in the ARPU was on roaming, which usually has a higher impact in the third quarter. Has that moved over -- or let's say, more substantially, what do you see ARPU going from here? Have we reached the bottom?

First, I mentioned that there is a decrease in the erosion of the ARPU and of the revenues of the service revenue overall. Many in the postpaid, but not just in postpaid. So a combination of a decrease in the erosion of the ARPU, and on top of it the roaming and, yes, you are right. The main impact of the roaming is on the third quarter. But you saw some of that in the second one in the holidays. So, the combination of those two -- the seasonality and the slight erosion that we are facing now -- comparing to what we had before, I think we can be more optimistic than we used to be in the past.

Okay. And then I think you mentioned a few -- what measurements you're taking to improve equipment sales.

What we decided is to change the organizational structure towards what we called B2C, to being more -- concentrate on B2C market and change the model. We're going to do some changes in our business model regarding the shops and the service centers. It's too early to declare about it in more details, but the idea is to be more concentrated on the retail chain than in our service chain.

Okay. Will that have an impact also on margins, on equipment margins, which are very low at the moment?

The equipment margins will be improved if you will improve our sourcing. And this is another reason that we are tackling now. We have to improve our sourcing, otherwise the margins won't be that great, mainly because of the [parlay] market. So the combination of reducing the cost of sales, doing the better sourcing, and improving our distribution channels -- go to the digital chains and such.

Okay. If I can, one or two more quick ones. The cut in costs this quarter were mostly on the cost of revenues, or all on the cost of revenues. Sales and marketing and G&A, they sort of stayed still or even went up a little bit, excluding the other income.

I was wondering if, first of all, if you think it's wrong to look at this on a quarterly basis, and if not, if we should expect further reduction in sales and marketing and pure OpEx?

You should look at it on a yearly basis and not on a quarterly basis. This is why we provide the total number of OpEx, which includes the cost of sales, excluding equipment depreciation and amortization and SG&A together. Because there are some one-time items that you see in one quarter and you don't see in the other. So all together, you need to relate to the total OpEx, which was ILS700 million compared to ILS720 in the previous quarter; and ILS853 million in the second quarter of 2012.

And let me just remind you that the number in the third quarter of 2011, before we started the efficiency plan, it was ILS952 million. Which means the total savings on a quarterly basis, it's ILS250 million; on a yearly basis, it's ILS1 billion, the total savings.

Yes, okay, thanks. One last question. You guys reduced the debt by almost ILS180 million. Are you still standing by your goal towards finish the year with ILS3.3 billion? Is there a different goal? And as part of that -- last of my questions and then I'll yield the floor -- is there any different perspective on dividends going forward?

Definitely, we are going to stand behind our intention that the net debt by the end of the year will not be more than ILS3.3 billion. And you can see that we are very close to this target. Regarding dividends, this is a decision that should be taken by the Board of Directors. Let me remind you that in order to distribute dividends, there are two conditions required by the law, by the corporate law -- which is the profits are test in a maturity test, and of course we need those two tests. But in addition the Board of Directors should look at the whole strategy of the Company, and the leverage level. So we cannot relate what might be the decision by the Board of Directors regarding this view.

All right. Okay, thank you.

Michael Klahr, Citibank.

Mr. Klahr, are you on the line?

Sorry. Yes I am. Good afternoon, everyone. A few questions. Firstly on the handset sales and the need for strategy. Do you see a revenue opportunity, or is it more defensive? What's the rationale behind this change from you?

We see a revenue opportunity in sales of handsets and accessories in one hand, and improving the margins. And what I mentioned before is improving the sourcing and finding different ways of purchasing and procurement of handsets, and improving the logistics chain and all the service chain.

Okay. Is there a cost associated to the new strategy, a material cost? Or is it just a case of moving existing costs elsewhere?

No, there will be a cost reduction as well. There will be investments in CapEx in changing the distribution channels, but the ROI is very short.

Okay, so there will be additional CapEx associated to that?

(Multiple speakers) there will be a slight amount of additional CapEx, but then a very high ROI in a short period of time.

Okay. And when do you expect that to be up and running?

Yes, we will start -- actually we started it; and we start changing the look and feel of the shops and the size of the shops. We start shrinking them. And you'll see the full implementation overall the chain in 10 months, up to one year from now.

Okay. All right, thanks. And on the subscribers, you said the prepaid subscribe -- sorry, postpaid subscribers were flat. Is that correct?

Slight increase.

Slight increase in postpaid.

Slight increase. Can I ask about 012 Smile? Was there an increase there? Or if you break our 012 from that, what do subscribers look like?

(Multiple speakers) You ask about 012 in cellular, or --?

In mobile, sorry. Yes, in cellular.

The increase is in 012, and in Orange as well, in the total of the postpaid. The postpaid -- we count the postpaid together, 012 and Orange. We don't differentiate between those two brands when we declare about the postpaid customers.

Okay. So you're not breaking out where the --

No.

Where they come from?

We still say the same proportion of recruitment in 012 and Orange segments.

Okay, thanks. And then just about the current selling environment, and what you're seeing on the ground. I know the 12-month offers, at least at your competitors, seem to be coming to an end now. And they say they are getting some improvements in ARPU from that. Are you seeing the same? What are you seeing at the moment in terms of selling?

What we see is part of them stayed with their plans, and we see they are increasing of the ILS14. Some of them, you see some churn, not anymore than we used to see before. And some of them are looking for cheaper rate plans. So as we declared at the last meeting, we have quite good proposal for most of them.

They can find a better rate plan if they want to. They can stay in the new additional ILS14, and then enjoy the One campaign. Some of them, unfortunately, are looking for different companies and brands, and vice versa with the [color] of competitors. But, truly, this is part of the decrease in the erosion of the ARPU in the market. This is just the beginning of that.

Right, but in (multiple speakers).

At the end of the day, it will be due to the behavior of all the players in the market, if they will still introduce special benefits for people that will churn from companies and special campaigns for new customers. We don't differentiate between our customers and new customers. And this is our strategy from day one, and we stick with it. But as long as the other competitors are encouraging the churn, it's going to stay a problem.

All right. Okay, and then am I right, your 1 gigabyte package, the unlimited package, is it still ILS135?

ILS139.

Okay, so you've actually got a -- and your -- okay, so you've actually got a small increase.

But we have to be generate -- and said that we have a lot of promotion anyways so it's not (multiple speakers).

Okay, but the headline price has gone from ILS135 to ILS139?

It's not the straightforward market price, because we have a lot of promotions. But different from the others, we give this promotion to our customers' base as well, so we don't differentiate. If you go to the marketplace and come to our Company, you're going to get a discount for several months, similar to what everybody is doing.

All right. And then (multiple speakers).

(Multiple speakers) don't differentiate.

Okay. And then just lastly on the RFP side, you continue to lose subscribers. Obviously there's very high levels of competition there. What's going on there? Do you need this wholesale thing to develop very soon? I think you're at a negative 6% run rate in subscribers.

First, there is an improvement now. We see an improvement in that respect. And we hope that the next quarter will be better. Second one, we look forward to see the decision to -- to get the decision of the MOC about the wholesale market. I think the wholesale market will change the picture. We suffered; we used to suffer; we suffered less than we used to, especially for the aggressive offers of HOT.

Combining cellular and ISP together and offering that in ILS49 together, actually giving the ISP free in this package. And this of course impacts our customer base; not just ours, but all the market. We hope that we find a way to find the solution. We do bundle as well, and we will see an improvement in our customer base in the future. I'm sure of that. And we start seeing that.

Well, what have you done? What are you doing differently to -- I mean, that offer is still in the market. We still see there. Cellcom have an ISP/mobile offer in the market. What have you done (multiple speakers)?

You consider a reduction in revenues in Cellcom as well, if you saw the last quarter results of Cellcom in the ISP.

Yes.

In the fixed line, you can see that they have a -- suffer from a reduction in revenues as well. So it's a very competitive market, and those guys that don't have infrastructure actually suffer a little bit more. But I think that we'll find a solution. Bundling is one of the ways that we tackle this. We are more regretting in that respect, and we feel that we'll find a way to stop the bleeding in that area.

Okay. And just lastly, what's your best estimate for a wholesale price in a working wholesale market?

I don't know. I hope it's going to be very close to our request, not less than we asked for. Not less than (multiple speakers).

Sorry, I meant timing. What's your best estimate for timing?

The timing, they said -- the Minister said that it's going to be immediately after the holidays. They didn't say what holiday.

(Laughter). Okay. All right, thank you very much.

David Kaplan, Barclays Capital.

Hi. Haim, I think in the last quarter you guys talked a little bit about how some of the promotions were going to be rolling off in the third and fourth quarter, if I'm not mistaken. It may have actually even been the second quarter.

How is that back book rolling off? Is that coming off the way you expected it to? Are the prices -- are customers taking those price increases, or are they coming back to you with -- pushing back on you, and maybe even switching out to 012?

Some of them do; some of them don't. But we don't see -- and you need to remember we just talked about it in our conference. We don't see that there was an increase in churn on the country. So for some of those that are sensitive, we have an alternative. And they can find themselves in better options than the ILS14 of increasing directly.

For the others that stay, the new [red linen] enjoying the One club and the benefits that we introduce to them. Having the One club is the full service, and other benefits that we just declared about. And it's just the beginning of the development of our customer club, the One.

Okay. All right, great. That's actually it for me. I'll see you guys tomorrow.

(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 03-925-5921. And internationally, please call 972-3-925-5921.

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

I want to thank everybody for joining our Q2 2013 conference call, and have a good day. Thank you very much.

Thank you. This concludes the Partner Communications Company second-quarter 2013 results conference call. Thank you for your participation. You may go ahead and disconnect.