Partner Communications Company Ltd.
Q4 2013 Earnings Call Transcript

Published: 10 Mar 2014

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company Fourth Quarter and Full Year 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 March 10, 2014. I would now like to turn the call over to Mr. Gideon Koch. Mr. Koch, please begin.

[Gideon Koch:]

Thank you to all our listeners for joining us on this conference call to discuss Partner Communications’ annual and fourth quarter results for 2013. With me on the call today is Haim Romano, Partner’s CEO, and Ziv Leitman our CFO. Haim Romano will first present the operational and financial highlights of the year, Ziv Leitman will then provide a more detailed explanation of the financial and operational results of the fourth quarter. And finally we’ll move on 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 forward-looking statements are contained in Partner’s press release dated March 10, 2014 as well as Partner’s prior 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. We’d also like to point out the Partner is due to file its annual report 2013 on Form 20-F with the SEC very shortly. Please note also 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 orange.co.il. I will now turn the call over to Partner’s CEO, Haim Romano. Haim?

[Haim Romano:]

Hello and welcome to our annual and fourth quarter conference call. This year we have witnessed a continuation of the strong competition in our market, facing increased competition from incumbents and as well from new comers in the market. We continue to invest in our network and IT infrastructure in order to secure our technology advantage. We have launched our new and most advanced mobile network in Israel and is called Orange ultranet and we are now the first to operate and we are ready to operate the 4G. We look forward to receive the necessary frequencies we need to provide this advantage to the service and service to the market, it’s already available in more than 90 countries. In addition we continue our investments in IT systems and digital platforms in order to guarantee the superiority of our services. In order to enhance the quality of the service we set a new retail division, it enable us to enhance sales of equipment. We believe that [clearance] demonstration of our customer recognition to our service and advantages is the fact that we have managed to increase our Post-Paid subscriber base by 31,000 subscribers during 2013. Looking forward we believe that the regulator decision regarding the fix line wholesale market will enable us to become a major player in all the key communication markets. We are determined to continue and expand our customer offering and maximize the potential of our services while leveraging the technology [quality] and the service advantage that are right offered to our customer base. And now I would like to turn the call to our CFO, Mr. Ziv Leitman. Ziv, please.

[Ziv Leitman:]

Thank you, Haim. In the fourth quarter service revenue decreased by 3% compared with the previous quarter both for the cellular and fixed line segments. The decrease was mainly explained by seasonal effects. Our Post-Paid subscriber base continues to grow in this quarter by 6,000 subscribers in line with the positive trend that started a year ago. The Pre-Paid subscriber base remain unchanged from the previous quarter, this was despite an increasing cellular churn rate which reflected the recent further rise in intensity of competition. The increase in churn was the first; following three consecutive quarterly reductions in the churn rate, nevertheless it should be (inaudible) that the churn rate was still lower this quarter than in the fourth quarter of last year. In line with the decrease in service revenues ARPU decreases by NIS 3 from the previous quarter due to seasonal effect. Equipment revenues in the fourth quarter of 2013 were NIS 205 million, an increase of 23% from the previous quarter. The increase was mainly explained by an increase in sales of iPhone and by the effort of the retail division which was established only recently. On the expenses side, the company continues to adjust its cost structure and to implement operational efficiency measures. In the fourth quarter this measure together with other items led to a decrease in operating expenses of NIS 21 million compared with the previous quarter. The number of employees on FTE basis at the end of the fourth quarter was 4,045 compared with 4,153 employees at the end of the third quarter. Since we started the efficiency measures in the fourth quarter of 2011, the number of employees on FTE basis was reduced by 53%, mainly by lowering the level of new [records]. EBITDA decreased by NIS 2 million, largely a result of the lower cellular service revenues due to seasonality effect which was partially offset by the decrease in operating expenses. Finance cost in the fourth quarter decreased from the previous quarter by NIS 60 million, mainly due to lower CPI linkage expenses which was partially offset by lower gains from foreign exchange movement and by a onetime fee of NIS 8 million related to early repayment for bank loan which I will explain shortly. The decrease in finance cost led to a rise this quarter in profit by NIS 8 million to a total of NIS 46 million, despite the slightly lower EBITDA. Free cash flow after interest payment for the fourth quarter was NIS 209 million. Over 2013, the company generated NIS 860 million in free cash flow. Cash flow continue to be supported by changes in the working capital which this quarter decreased by NIS 105 million, reflecting the decrease in trade receivables. Cash CapEx investment over 2013 totaled NIS 475 million, a level broadly unchanged from last year. As a percent of total revenues CapEx total was 11% of total revenue this year compared with 9% in 2012. Non-cash capital expenditure addition totaled NIS 413 million in 2013 with the difference between cash and non-cash CapEx being explained by large investments at the end of 2012 which were paid in 2013. Net debt was also reduced this quarter by further NIS 2,008 million. This quarter, we made an early repayment of bank loans in an amount of NIS198 million with original repayment schedule was in 2015 and thereafter. Over 2013, the company has made early repayment of loans in total amount of NIS 617 million. Overall, net debt was reduced by NIS 812 million in 2013. Our net debt at the end of the year stood at approximately NIS 3 billion, implying a decrease of nearly NIS 2 billion since the highest level in mid-2011. I would now be happy to open the call to questions. Moderator, please begin the Q&A.

[Operator:]

Thank you. (Operator Instructions). The first question is from David Kaplan of Barclays Capital. Please go ahead.

[Unidentified Analyst:]

Hi. This is [Trish Reimer] for David Kaplan. Thank you for taking my question. What do you think the impact to working capital will be and to CapEx when you begin operations in the wholesale market?

[Ziv Leitman:]

The investment in CapEx should not be a big investment under the assumption that we will use mainly the [big three models]. So, we shouldn’t expect huge investment in the wholesale market. Regarding working capital, also for working capital, we should not see huge increase, but this depends on the level of sales. But anyhow, the payment terms of wholesale when selling the infrastructure should be short-term payment terms, as we use in the cellular and it’s not long-term payment terms as we see in equipment. Therefore, the effect on the working capital should be minor.

[Unidentified Analyst:]

Thank you very much.

[Operator:]

The next question is from Gilad Alper of Excellence. Please go ahead.

[Gilad Alper:]

Hi everyone. Just a question on the wholesale market, just I was wondering how you guys look at it overall. Is this a way for you to preserve the current business just to make sure that the ISP business doesn’t going away, although it’s going to be named differently, but it’s basically going to be the same business. So is it just to preserve the business or is it really a growth opportunity for you to take a big share of the fixed line markets overall? Thanks.

[Haim Romano:]

Thank you, very good question. It depends on the end of the day and the prices and the mechanism that the Ministry of Communication will set in the end of it, because then I think preserving is one thing and expanding is another thing. And we look forward to expand our business of course and look at the TV, for example OTT is opportunity. So our goal is to convince the Ministry of Communication to let us expand our business, not just to preserve it. At the end of the day it depends on the wholesale agreement.

[Gilad Alper:]

Okay. Just second and last question if I may, on cost cuts you are saying that the pace of cost cuts is coming down very fast from the beginning of 2013 until now. So the question is can you guys cut cost significantly more than you’ve done so far without completely changing the business of the company or you’re now just banking on the government approving the network sharing agreement and that’s basically where all of your cost cuts are going to come from? Thanks.

[Haim Romano:]

The network sharing agreement is of course a big portion of our cost cutting and other and revenue generation because the first three years we are going to get some revenues from national roaming with the HOT. We have other plans, of course we are not as aggressive as we used to be in 2012, 2015, but still we have way to go in the field of sales service and transmission, two areas that we think that in our plans they can find more efficiency that we are executing now.

[Gilad Alper:]

Okay. Just a quick follow-up and I’ll get offline, but assuming the words, assuming that the regulator for whatever crazy reason decides not to approve network sharing agreement, is there any way for you to go back to the same pace of cost cuts that we’ve seen three or four quarters ago or is that just beyond the capability of the company, that’s like ongoing concern? Thanks. I am going offline?

[Haim Romano:]

Okay. It’s a very tough question because if we’ll have to do some more cuts, we’ll have to do it and we’ll do it. Our plan today is to go in the way that we declared two years ago and a year ago, we do some cost cutting in the way that it won’t affect our customer service and our customer loyalty. And still to be the market leader in terms of technology and service. So we hope that, we won’t be needed to go there.

[Gilad Alper:]

Okay. Thank you.

[Operator:]

The next question is from [Cathy Seidman] of Citibank. Please go ahead.

[Unidentified Analyst:]

Hi. I wanted to ask according to press report, your meeting with Golan owners in France, there are rumors of potential merger. So I wanted to ask, is it something you would think to pursue?

[Haim Romano:]

Unfortunately, we don’t know anything about it, so sorry for not answering your question.

[Unidentified Analyst:]

Okay. And another...

[Haim Romano:]

You can ask Golan about it.

[Unidentified Analyst:]

Maybe I will. And another question please what are you thinking are the chances for regulator approving the network sharing with HOT? And when do you expect the decision?

[Haim Romano:]

We can’t see why they won’t approve it. I just want to refresh your memory and say that the regulator asked us to do that. And one of the terms to get the frequencies for the fourth generation was the demand of the Ministry of Communication to go for network sharing. So, we did it. So, we can’t see why the regulator won’t approve it at the end of the day? I think it’s for the good of everybody, customers and the country as well.

[Unidentified Analyst:]

And when do you expect the decision?

[Haim Romano:]

We expect it to be and they said it’s going to be in the end of the March, beginning of April. We hope that until Passover, it will be done deal.

[Unidentified Analyst:]

Thank you.

[Operator:]

(Operator Instructions). The next question is a follow-up question from [Cathy Seidman] of Citibank. Please go ahead.

[Unidentified Analyst:]

Thank you. Another question please; I wanted to know how many 012 Smile subscribers do you have, and are you still seeing the sub-base increasing in the last quarter and the first quarter of 2014?

[Haim Romano:]

Unfortunately you have asked two questions that I can’t answer.

[Unidentified Analyst:]

You can’t answer, okay. And do you have -- can you please update on plans to focus on equipment sales and retail you were talking about in the past?

[Haim Romano:]

Yes. As we declared last quarter, we decided under the Genesis concept that we launched that we’re going to put some more attention in the retail area. And as you see in the results of Q3, we increased dramatically the sales of equipment comparing to the third quarter. So, we work hard and we believe that the results will be even better in quarters to come.

[Ziv Leitman:]

We increased the equipment sales by -- from Q3 to Q4 by NIS 38 million and the profit, the gross profit was increased by NIS 9 million.

[Unidentified Analyst:]

Okay.

[Operator:]

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 U.S., please call 1-888-295-2634. In Israel, please call 03-925-5921 and internationally please call 972-3925-5921. Mr. Romano, would you like to make your concluding statement?

[Haim Romano:]

Thank you for being with us for our conference call. And have a great day.

[Operator:]

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