Partner Communications Company Ltd (PTNR) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Fourth Quarter and Full Year 2016 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to hand the call over to Mr. Gideon Koch. Please go ahead.

Thank you, and thank you to all our listeners for joining us on this conference call to discuss Partner Communications annual and fourth quarter results for 2016. With me on the call today is Isaac Benbenisti, Partner's CEO; and Ziv Leitman, our CFO. Isaac Benbenisti will first address the number of operational highlights from 2016 and say a few words about our plans for the coming months. He will then hand over to Ziv Leitman, who'll provide a more detailed overview of the financial and operational results for the fourth quarter. And finally, we'll move over to 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 U.S. Securities Act of 1933 as amended, Section 21E of the U.S. Securities and Exchange Act of 1934 as amended and the Safe Harbor provisions of the U.S. 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 the Partner's press release dated March 30, 2017, as well as Partner's filings with the U.S. Securities and Exchange Commission on Forms 20-F, F-1 and 6-K as well as the F-3 self-registration statement, all of which are readily available. I would also draw your attention to the fact that Partner filed its annual report for 2016 on Form 20-F with the SEC earlier today.

Please note that the information in this conference call related to projections or other forward-looking statements is subject to the previous Safe Harbor statements 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 partner.co.il.

If you have any further questions following the call, please feel free to contact our Head of Investor Relations and Corporate Projects, Liat Glazer Shaft, on 972-54-781-5051.

I will now turn the call over to Partner's CEO, Isaac Benbenisti. Isaac?

Good day, everyone, and welcome to our earning conference call. In 2016, we embarked on a new path as a comprehensive telco group, with the launch of the company's new brand. We improved the working relationship with our employees with the signing of a collective employment agreement. We extended our service platforms and added digital solutions to improve transparency and information availability for our customers.

In the cellular segments, Partner continues to lead the Israeli market with an advanced network and the widest 4G coverage. In 2016, the Post-Paid cellular subscriber base increased by 85,000 subscribers compared with an increase of 24,000 subscribers in 2015 and the churn rate continued to decline. We continue to implement advanced technologies in our core network, which offers differentiation, and in February 2017, we launched the first IoT network in Israel, called IoT Pro, which provides real value to the Israeli consumer. In addition, in the past year, we created a technological and operational base for 2 strategic company projects for the coming years. Partner's TV project and the deployment of an independent fiber optics based fixed line infrastructure. Those projects are expected to create new growth engines for the company, diversify our revenue streams and enable us to offer a full communication offerings over our own independent and advanced infrastructure.

The TV project, which will be launched in the coming months, will be based on an Android TV operating system. Partner operating system will allow our TV customers to enjoy the benefits of a wide range of content with an advanced interface adapted for the Israeli viewer.

Creating an alternative to the monopoly and duopolies that currently dominate the fixed line and multichannel TV market in Israel will benefit customers, of course. It is in the interest of the regulator, the consumer and the entire communication market to support and enable the entry of new players to those areas through the deployment of advanced infrastructures, thereby creating real improved and more advanced alternatives.

I will now turn the call over to Ziv Leitman, our -- for a detailed review of our financial results. Ziv, please?

Thank you, Isaac. Before I go over the financial results for the fourth quarter, I would like to note the total comparison I will make out of the previous quarter unless otherwise indicated. In 2016, the ongoing phone competition in the cellular and fixed line market continued to affect our results and the negative effect was partially mitigated by efficiency measures. Service revenues in the fourth quarter of 2016 were ILS 652 million compared to ILS 698 million in the previous quarter, reflecting the seasonality of roaming revenues and the continued price erosion of cellular service revenues as well as a decline in the fixed line service revenues. Operating expenses were stable at ILS 570 million. However, they included the one-time expense of the employee retirement plan in an amount of approximately ILS 12 million as well as a one-time expense of approximately ILS 7 million relating to the early termination of an operating lease. The decline in OpEx, excluding those one-time items, mainly reflected a decrease in network-related operating expenses, international telephony and interconnect expenses.

Regarding equipment sales, revenue in the fourth quarter were ILS 169 million compared with ILS 151 million, while gross profit decreased by ILS 10 million. The decrease in profitability was mainly related to the tightening of the company customer credit policy and the change in the product mix. EBITDA in the fourth quarter was ILS 164 million, a decrease of ILS 56 million, reflecting the decrease in service revenues and in gross profit from equipment sales. Free cash flow before interest payments in the reported quarter totaled ILS 269 million compared with ILS 215 million. This increase reflected the final payment of the lump sum from HOT Mobile in the amount of ILS 180 million compared to the payment of ILS 35 million in the previous quarter. The impact of this payment was partially offset primarily by the increase in the other -- in other operating working capital items and by the decrease in profit. In summary, a number of positive trends which we noticed during this year continue into the fourth quarter, such as decline in the pace of ARPU erosion, a decline in the cellular churn rate, continued growth of the Post-Paid subscriber base, continued decline in OpEx, a decrease of net debt which currently stands at ILS 1.5 billion and higher free cash flow.

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

(Operator Instructions) The first question is by Chris Reimer of Barclays.

I would like to know if you could give some more color on the launch of the TV, if there is any timing around that and maybe a projection of CapEx, how much it might increase.

I will say something, and then I'll let Ziv say something. This is Isaac. All we can say now is that we'll launch it by the end of H1, okay, in the coming months. And that we said, it will be on a Android TV platform. It will be on Android platform. This is the only things we can say. I don't think that we can disclose CapEx or any other investment that we put to this project. Ziv?

I can just elaborate that most of the CapEx investments are already included in our 2016 results. And when I talk about CapEx expenses -- expenditures, I'm relating to the back-end. The other part of the CapEx which relates to the TV operation is the set-top boxes and those set-top boxes are not included in the 2016 results. And the spending and the level of expense is depending on the level of subscribers. And you can figure out what this amount might be if the cost of the set-top boxes is relatively -- probably it's well-known, the range.

Okay. That's very helpful. Also, could you give a little color on any plans to invest in infrastructure you had mentioned also?

When you say infrastructure, what do you mean? What kind of infrastructure? Every year, we invest in the cellular infrastructure. We have the most advanced network and we keep investing in the network infrastructure.

The next question is by Michael Klahr of Citibank.

Ziv, wishing you good luck in the future and...

Thank you, my friend.

So yes, I was just wondering -- you mentioned some kind of positive comments on the outlook in mobile, or more positive than you have been in the past. You mentioned churn and also reduction in ARPU decline. Just wanting to ask you, given the current level of competition in the market or assuming it doesn't worsen markedly or remains at current levels, when do you think is the inflection point? Or when do the current lower prices, which are lower than your back book, how long until those work then that way through the base? When can we expect a low point for ARPU -- sorry, for service revenues based on current prices and competition levels?

So I think -- this is Isaac. I think that we spoke about it before, I think even in Q2 last year. We think now that we are at the point the market is changing. And the market is changing, we see that Golan moved out and was purchased by Electra. And the reason he moved out, he understood that the game is over. So there is nothing more to do in Israel in terms of recruiting new customers in a lower price. And the market currently is in a situation that the prices are very, very low compared to the -- what we see in the U.S. and Europe. I don't think that there is any other economic environment in Israel, any other, let's say, business in Israel or service in Israel that the prices are so low compared to the U.S. or compared to Europe. It's a 70% less than the prices in the U.S., and it's something like 60% to 50% less to Europe. This is of course something that cannot continue forever because we speak about companies that have to invest in technology and so. So now we are facing the situation, the market will be changing. When and how, what will be the curve, I can't say. And there are still the market movements and there are some companies that like to recruit more, more, more subscribers. So there are still focusing the market to keep the prices low. But I think that 2017 will be the year of a change. But after 2017, we'll see the change. I don't know to say how much it will increase, ILS 5, ILS 10, I really can't say. But I know that for us, it's crucial because if we'd like -- or I'd say for us, it's about the Israeli market, okay? It's even the regulator, because if we look to the future and we know that we'll have the 5G around the corner and we have to invest, not only Partner, but Cellcom and Pelephone, all the other companies and the regulator [ is aware of it ], we won't be able -- the regulator won't allow Israel to be far behind the world in terms of implementing 5G and so. So I don't know to say what will be the projection, what will be the angle of the curve. But for sure, I believe or I can analyze that we are now in a point that the market will change.

And then just on CapEx, your CapEx is quite low this year and just wanting to understand going forward and taking TV out of the picture, can mobile -- is this a new level for mobile CapEx? Can it remain at these levels? And do you expect a little uptick? You mentioned, 5G, which is in 2017, but can -- aside from that, can mobile CapEx remain where it is currently?

I can say about it. We do not give specific...

Guidance.

Guidance about the future. But I can say 2 things. One, that the lower CapEx that you see, it's not only because we physically invest less. It's -- part of it is because we did a lot of savings. We opened lot of contracts with third parties and we did lots of savings. So we do the same for less. This is part of it. But again, if we look to the past, I can assure that it will not go back to the levels that the company had been in. And otherwise, unless in few years from now, we'll have to invest in the 5G and the market will change dramatically. I don't know what -- how much we'll have to invest in the 5G, but this is 2020, 2021. So for us, it's a far future from now. So yes, we can stay with these levels, we can maintain the company. Part of it is savings, and I don't think this will go back to the levels of USD 500,000 or USD 500 million -- sorry, per year.

(Operator Instructions) There are no further questions at this time. If I ask Mr. Benbenisti to go ahead with his closing statements. I would like to remind the participants that replay of this call is scheduled to begin in 2 hours. In the U.S., please call 1 (888) 782-4291. In Israel, please call 039255930. And internationally, please call 972-39-255-930. The recording is also available on the company's website www.co.il

Mr. Benbenisti, would you like to make concluding statement?

Just I want to thank you for joining the call and looking forward for a brighter future. Thank you very much.

Thank you. This concludes the Partner Communications fourth quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.