Partner Communications Company Ltd.
Q1 2016 Earnings Call Transcript

Published: 23 May 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications’ First Quarter 2016 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. I would now like to turn the call over to Mr. Gideon Koch. Mr. Koch, please begin.

[Gideon Koch:]

Thank you and thank you to all our listeners for joining us on this conference call to discuss Partner Communications’ first quarter results for 2016. With me on the call today is Issac Benbenisti, Partner’s CEO; and Ziv Leitman, our CFO. Issac Benbenisti will first present a number of highlights from the quarter and say a few words about the current regulatory requirements. He will then hand over to Ziv Leitman, who will provide a more detailed overview of the financial and operational results for the quarter. And finally, we will 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 U.S. Securities Act of 1933 as amended, Section 21E of the U.S. Securities 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 Partner’s press release dated May 23, 2016, 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 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 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, Issac Benbenisti. Issac?

[Issac Benbenisti:]

Good day, everyone, and welcome to our earnings conference call. The first quarter of 2016 was marked by our decision to part with the Orange brand and to launch the Partner brand. This decision was part of a strategic move to transform from a cellular focused company into a full communications group that offers both retail and business customers a variety of communication solutions in addition to cellular services. As part of the changes that the group is undergoing, we intend to unite the fixed line activities of the Partner Group under the Partner brand and, as a result, to cease using the 012 Smile brand in 2017. Over the coming weeks, we will begin to update our customers regarding the unifying of the Company’s operations. The unification of the operations under the Partner brand is expected to streamline systems and improve the customer experience. Over the past quarter, a number of reports were published stating that partner’s customer service is the best among the several companies in Israel. Our cellular network is the fastest in Israel with a widest deployment and that we are the most reliable company among several other operators. We’ve put many efforts regarding the high level of service we wish our customers to experience and we work hard to maintain and strengthen the Company’s infrastructure and customer service. During the first quarter we signed the collective employment agreement with employees’ representative and the Histadrut New General Labor Organization. The agreement balances between the desire to improve the welfare of the Company’s employees and the challenges that the Company is facing. At present, one of our main challenge is the lack of clarity regarding anticipated regulatory decisions. Only after there is a regulatory certainty that creates equal enforcement on all players in the market will we will be able – we be in a position to invest in an advanced technological infrastructure that will enable the citizens of Israel to enjoy advanced services similar to world trends. In addition, it is of vital importance that all the components of the wholesale reform in the fixed line market such as broadband, fixed-telephony and the passive infrastructures will be fully enforced, since partial regulation and problematic implementation of the reform are currently harming the Israeli customer who continues to pay high prices for those services. The regulatory reality today reinforces the monopoly currently existing within the market, and prevents the establishment of a balanced competitive market which would allow healthy competition between the various telcom groups. I would like now to turn the call to Ziv Leitman for a detailed review of our financial results. Ziv please.

[Ziv Leitman:]

Thank you Isaac, before diving into the financial results of first quarter I would like to note that all comparisons I will make are to the final quarter of 2015 unless otherwise indicated. During the first quarter the competition in the cellular market continued to erode service revenues. However, this was partially offset by an increase in revenues related to the network ROU Agreement with Hot Mobile In the first quarter cellular churn rate stood at 11.2% compared to 11.1% in the previous quarter reflecting a marginal decline in Post-Paid churns offset by a increased in Pre-Paid churns. Cellular ARPU totaled NIS 67 unchanged from the fourth quarter of 2015. As I just mentioned, this reflected the additional revenue related to the RoU Agreement which offset the continued decline in revenues resulting from the erosion in prices for cellular services. Starting from the second quarter of 2016, the RoU Agreement will no longer be in effect for future use by HOT Mobile of the network. However, it will be replaced with the mechanism to share capital expenditures and OpEx costs between Partner and Hot Mobile, as well as with income related to the NSA, in an amount of approximately NIS 8 million each quarter which will continue over approximately the next eight years. EBITDA in the first quarter of 2016 increased by NIS 5 million. This change mainly reflected the increase in other income with respect to the settlement agreement with Orange and additional revenues related to the RoU agreement with HOT Mobile. This was partially offset by three main factors

[Operator:]

Thank you. [Operator Instructions] The first question is from Michael Klahr of Citi Bank. Please go ahead.

[Michael Klahr:]

Hi, everyone, good afternoon, few questions. Firstly on the mobile side, can you tell us what you’re seeing currently in terms of the deals and promotions in the market from the various players whether the market is getting less competitive – as competitive as it was than in previous quarters. Secondly on the reported Golan Telecom deal, that’s been reported in the press that Golan was looking to become perhaps an MVNO player when you’re opposition for that being permitted. Could you tell us a bit about that as well? Thank you.

[Issac Benbenisti:]

So, I will answer the first question. The question, it’s an important question regarding the prices in the market. So it’s a mixed answer regarding it. As we can see in the market, the trends of the journalists and even the regulators and of course the market itself faced that the reality that the prices are too low. You can hear it from everywhere and they can see it as a tipping point. I cannot say how much time it will take that the prices will go up and what will be the effect, how much it will go up and when. But, for sure, we face a situation that the market realize by all means that the prices are too low, it’s not an economic prices, we cannot invest in such prices. So the pressure is that the prices, I believe, will go up. I cannot say when. I cannot say how much time it will take. I cannot say how dramatic it will be. But even the customers in Israel now realized that the prices that they are paying in Israel cannot stay at this level no longer, but it will not go dramatically higher than this. Having said that, we’re seeing the market still pressure, as you mentioned, regarding the deal that might be between Golan and Cellcom. We opposed the option that Golan will became an MVNO after dropping its MNO license and giving it back to the government, its unacceptable from our side and we believe it’s illegal. But besides that, there are other players in the market that still keep the prices low and there is a competition beside Golan in the market. So this is in the other hand. But as I said before, we see that – we can realize that now it is a tipping point in the market in terms of prices. And I believe that the prices will go up, but I don’t know to say what – how much time it will take and what will be the effect. Regarding the deal between Cellcom and Golan, we cannot add more than what we read together with you in the press, we don’t know what will be the deal. But as I said before, we’ll oppose any deal that will not be similar to what we have done with HOT in full year agreement on the network, the HOT purchase part of the network, and we got into an agreement that we hold together in network, any other agreements such an MVNO or national roaming, we’ll oppose and we went to the Supreme Court, as you know. We think it’s illegal and immoral as well.

[Michael Klahr:]

Okay, thanks. And just if I could switch to the fixed side of your business. The revenue seems to holds up while costs came down. How are you able to achieve that given or from what I understood that the switch in each wholesale customer or in each existing ISP customer into wholesale was actually bad for margin. Can you explain to us the different underlying trends there in your fixed business?

[Issac Benbenisti:]

The fixed business relates a lot to the wholesale – as I said before, the wholesale implementation in the market. Unfortunately, we face currently a lot of difficulties implementing the wholesale in the market. We work on it very hard. We make ourselves more efficient and we reduced costs and we increased the level of customers that we have in the wholesale market. But it’s far, far behind what we find to be suitable for the Israeli market due to a very soft regulation and difficulties that Bezeq is the incumbent and the monopoly in the market doing to stop us or not to stop us to – it’s not stopping, it’s making it difficult for us and especially for the customers. So we do a lot of regulatory work. We work together with the regulatory towards Bezeq to improve it. And we find the landline business, and ISP and wholesale business being very significant for us in order to provide the market full telco solutions as a telco company and not only a cellular company. So now we are in a – face lots of difficulties, but we believe in the future we’ll resolve some of the problems.

[Michael Klahr:]

Okay, thank you.

[Operator:]

The next question is from Nicole Gilliat of Ion Asset Management. Please go ahead.

[Nicole Gilliat:]

Hi, Issac and Ziv. You mentioned just now your view and your goal to evolve into a full service telecommunications provider. Can you share with us your views on entering the TV market and if you think the economics there make sense?

[Issac Benbenisti:]

Yes, we believe in general speaking that being a telco company we must have the TV solution in order to provide the residential segment full solution. Of course, we will not be able to do it without a TV solution. We work on it. I believe that we will shortly find the right way, the right approach to enter the market. But I must say unfortunately that again it has to do with regulatory because in the Israeli market we have two issues, big issues, to compete with the duopoly in the market. One of it is the lack of OTT services on the channel that we can provide on OTT, you know that we have this VTT solution now that we cannot compete really with HOT and YES on the broadcast channels. In the other hand, we work now with the regulatory – in the regulatory environment with the telecommunication officers in Israel to provide must sale, mainly on sport and for children channel. We are in a situation that I believe that we can resolve those two issues shortly and come with a TV solution in order really to become a telco company with a comprehensive solution to the residential market.

[Nicole Gilliat:]

Okay, thanks. Turning to your balance sheet for a moment, you [indiscernible] net debt dramatically and have announced further Notes buy-back. What leverage levels that you’re comfortable with? And what are your views on incorporating shareholder returns?

[Issac Benbenisti:]

Ziv, can you answer this question, please.

[Ziv Leitman:]

We feel comfortable with the current leverage level. The net debt is around NIS 2.1 billion and we feel comfortable with this level. It might be a little bit higher. It might be a little bit lower, but the current level we feel comfortable.

[Operator:]

[Operator Instructions] The next question is the follow-up from Michael Klahr with Citi Bank. Please go ahead.

[Michael Klahr:]

Hi. Thanks. In response just a follow up to the last question, you said you’re happy with the current ratios. Does that mean that you’re consider paying dividends in 2016 or 2017?

[Ziv Leitman:]

Hi, Michael. As you recall, in order to pay dividend in Israel, you must fulfill two conditions according to the law

[Michael Klahr:]

Okay, thanks. Thanks a lot.

[Operator:]

There are no further questions at this time. Before I ask Mr. Benbenisti to go ahead with his closing statement, I would like to remind participants that a replay of this call is schedule to begin in two hours. In the U.S., please call 1-877-456-0009. In Israel, please call 03-9255-930. And internationally, please call 972-392-55930. The recording is also available on the company’s website www.partner.co.il. Mr. Benbenisti, would you like to make your concluding statement?

[Issac Benbenisti:]

Yes, I would like to thank you very much for participating in this conference – earnings conference call. And see you again in a brighter future in the next quarter. Thank you very much.

[Operator:]

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