Partner Communications Company Ltd.
Q1 2015 Earnings Call Transcript

Published: 20 May 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications' First Quarter 2015 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:]

And thank you to all our listeners for joining us on this conference call to discuss Partner Communications' first quarter results for 2015. With me on the call today is Haim Romano, Partner's CEO; Issac Benbenisti, our Deputy CEO and incoming CEO; and Ziv Leitman, our CFO. Haim Romano will first have a few words about recent events in the market and Partner's [focus] [ph] looking ahead. Ziv Leitman will then provide a more detailed overview of the financial and operational results focusing in on the first quarter and finally, we'll move on to the Q&A for which Issac will join as well. 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 20, 2015, 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. 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 Web site at orange.co.il. If you have any further questions following the call, please feel free to contact our Head of Investor Relations & Corporate Projects, Liat Glazer Shaft on 972-54-781-5051. I'll now turn the call over to Partner's CEO, Haim Romano. Haim?

[Haim Romano:]

Good day everyone and welcome to our earnings conference call. Our market environment continued to be extremely challenging, particularly in the server market. The first quarter was affected by the short-term step-up in the level of competition during the months of January and February as well as seasonality. This resulted another quarter of declining service revenue and profitability. In the short and the medium-term, we are working to address those reality by developing additional sources of revenues. In the first quarter revenues from equipment as sales grew by 30% compared to the parallel quarter last year. And on top of it, adjusting our cost structure to current revenue level, in the first quarter, we managed to cut operating expenses by NIS 57 million compared to the first quarter of 2014, 9% decrease. Our network sharing remained with HOT Mobile was approved by the Ministry of Communication a few weeks ago. This followed the approval granted by the Antitrust Commissioner a year ago and we already started the negotiation and the actions that we have to take with HOT. In the long-term the key of our success is transforming Partner into a telecommunication group which offer comprehensive basket of product and services. As I mentioned on our last call, Partner was the first among the large operator to take advantage of the wholesale market regulation. We launched the Internet One to customers offering them access to infrastructure through a single provider. The ability to combine different services is expected to improve stickiness among customers and address one of the biggest challenges in our market. Our activity in the fixed line market includes not only the retail segment, but also the business customers as well. Partner is in the process of transferring to a full telecommunication group with multiply offering to retail and business customers combining fixed model and other services. In the short-term, we expect the highly competitive environment and price erosion and high churn rate in the cellular market to continue and we will see year to come the impact of that. Now, I would like to turn the call over to Ziv Leitman for a detailed review and financial results. Ziv?

[Ziv Leitman:]

Thank you, Haim. Before diving into the financial result for the first quarter, I would like to remind everyone, the total comparison I discussed in my prepared comments are to the fourth quarter of 2014 unless otherwise indicated. The cellular market continues to be extremely competitive, reflected by the continuing erosion in cellular service revenues and an increase in the churn rate. The churn rate for the cellular subscriber during the first quarter increased to 12.7% an all time high for Partner compared to 11.5% in the fourth quarter. This was mainly a reflection of the aggressive service plan offered by our competitors and our reluctance to match such low prices. Due to the high churn rate, our cellular subscriber base decreased in the first quarter by approximately 63,000 subscribers of which 20,000 were postpaid subscribers and 43,000 were prepaid subscribers. The prepaid subscriber base and pricing of the prepaid plan are expected to continue to roll going forward for two main reasons. First, a step up in competition due to the entrance of new player to this market segment and second, the low level of pricing of the unlimited postpaid plans and therefore, the relative attractiveness of those plan compared to the prepaid plan. Cellular ARPU in the first quarter of 2015 totaled NIS 69 a decrease of 3% compared to NIS 71 in the fourth quarter of 2014 due to continued price erosion and seasonal effect. Equipment revenues and gross profit in the first quarter remained roughly at the same level as in the previous quarter. In the coming quarters, we intend to remain focused on equipment sale as we see this business as one of the main pillar of our strategy. On the expense side, OpEx totaled NIS 604 million in the first quarter down NIS 26 million compared to the fourth quarter. The decrease was largely the result of increasing headcount related cost marketing expenses and one-time items. The number of employees on FTE basis at the end of the first quarter was 3535, since we started implementing efficiency measures in the fourth quarter of 2011, the number of employees on FTE basis has been reduced by 5053 or 59% mainly by lowering the level of new recruits. EBITDA decreased by 9% or NIS 22 million compared to the previous quarter largely as a result of a lower service revenues which was partially offset by lower OpEx. Finance cost in the first quarter of 2015 totaled NIS 18 million down 50% compared to the fourth quarter mainly due to higher gain from CPI linked liabilities. These gains were partially offset by the one-time early repayment fee of NIS 6 million in the first quarter. Finance cost in the second quarter are expected to be significantly higher than in the first quarter due to the expected increase in CPI compared to a reduction of 1.6% in the first quarter. Net profit for the quarter totaled NIS 25 million compared to NIS 24 million in the fourth quarter despite a decrease in EBITDA reflecting lower finance cost in the quarter. Cash capital expenditure in the first quarter totaled NIS 127 million compared to NIS 89 million in the previous quarter. The increase mainly reflects payment to suppliers for fixed asset received during the second half of 2014. CapEx payments for the second quarter of 2015 are expected to include the payment for the 4G frequencies awarded in January. On an [equivalent] [ph] basis investment in fixed assets in the first quarter totaled NIS 50 million compared to NIS 145 million in the previous quarter. Free cash flow before interest payments in the first quarter totaled NIS 21 million compared to NIS 71 million in the fourth quarter of 2014. The decrease in free cash flow mainly reflected the increase in CapEx payment as well as a reduction in EBITDA which was partially offset by one-time smaller increasing working capital. We expect the free cash flow in the second quarter will be significantly lower than the free cash flow in the first quarter mainly due to the increase in working capital which reflects the continued negative impact of long-term installment plan to promote sales of equipment. Net debt at the end of the first quarter amounting to approximately NIS 2.7 billion which include a cash balance of NIS 969 million. Before opening the call to your questions, I would like to summarize our continued effort since the beginning of the year in connection with our debt. During the first quarter of 2015, we enter into four loan agreement totaling a principal amount of NIS 475 million. The terms of the loan vary from 5.5 years to 8.5 years. In May 2015, the company entered into a loan agreement in a principal amount of NIS 200 million. This loan is expected to be received at the beginning of July 2015. In addition, in January 2015, the company executed an early repayment of principal amount of NIS 177 million as part of bank loan which was to be repaid in December 2016. The company is also considering additional early repayment of bank loan as well as a buyback of it's publicly traded note payable as part of the continued process of increasing our debt duration. I will now be happy to open the call to questions. Moderator, please begin the Q&A.

[Operator:]

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question is from [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Hi, everyone. Just two questions, firstly, on the wholesale market the automatic churning center started to operate only several days ago, so I'm just wondering if this is going as smoothly as you had hoped. And also what is the pace of subscribers that are churning away from basic to you – I'm talking about 100s, 1000s, if you can give kind of the rough estimate? And then the question is on this cellular business, you have only – you have obviously cut a lot of costs over the last couple of years, I'm just wondering if there is any capacity for significant further cost cuts efficiency measures or this is basically the cost structure we are going to see going forward? Thanks.

[Ziv Leitman:]

Okay. Haim will start with the second question. And then I will ask Issac Benbenisti to answer the second one – the first one, sorry. So we think that we have more plans for efficiency measures to be taken. We have to find a way to cut our customer acquisition cost for example. Work through the digital environment more than dealers, this is one way to cut cost. There is another issue of man power cost that we have to address unfortunately, but although things have under the management attention and management plans and as we managed to cut NIS 57 million comparing to last year, we will have to find a way and we will find a way to make additional savings in the near future.

[Unidentified Analyst:]

Okay.

[Ziv Leitman:]

Now for the wholesale market, Issac please?

[Issac Benbenisti:]

Hi. As of May 17, it was a few days ago we started the automatic process in the wholesale market and we are happy to announce that we face dramatically change in the – process is a much more smoother and we face now that it's more – much easier to recruit a customer from basic infrastructure. We have few 100s daily that churn from [indiscernible] to our systems.

[Unidentified Analyst:]

Okay. Thanks.

[Haim Romano:]

As we are happy with the process but we wait to – then we will see to finish this job and – to solve the telephony issue. And we hope that the Prime Minister wouldn't stop that.

[Unidentified Analyst:]

Assuming that doesn't happen, assuming there is an issue with basic telephony, are you okay with offering the same kind of technology that Cellcom is offering now, voice-over-broadband, do you consider that to be good enough to attract subscribers?

[Haim Romano:]

Issac please.

[Issac Benbenisti:]

Yes. We surely have the same technology, but we are absolutely certain that this is not the choice. I mean this is not the same solution. It's much more expensive. It's not the same solution for the customer. And in terms of efficiency, this is not the way we want to go. We want to go on the highway to provide the customer the best service in the wholesale market including the fixed line telephony.

[Unidentified Analyst:]

Okay. Thanks.

[Operator:]

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Romano to go ahead with his closing statement -- I see that there is a follow-up question from [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Taking advantage of opportunity. If you look at the TV market one that you might enter in the second half of the year, are you basically waiting for [Gulaan] [ph] offering to understand what is the price environment you are going to operate in, or is it just the question of marketing putting together the offering and so on. I'm just wondering why Cellcom is offering, is trying to enter the market before you do? Thanks.

[Haim Romano:]

We are consistent. We said before that we will enter the TV market under some conditions. The first one is really wholesale market with the solution for [annuity] [ph] cost that we will be able to address the linear to broadcasting. And this was not implemented yet. There are several technical issues that the Ministry of Communication should solve before we launch a good enough product that we think that the product the Cellcom is launching maybe it's good for them; it's not good enough for us. And we are waiting for technicality issues and some marketing issues to be solved. We are not waiting for [Gulaan] [ph], we have our plans and we are working according to our plan. Our project is more sophisticated technology wise. But we need those terms to be implemented. I can assure you that at the end of the day when we will introduce the product it will be one that can compete with the best products in Israel in terms of technology and I hope in terms of the content as well. But there are some issues that should be solved regulatory wise and we still insist on that.

[Unidentified Analyst:]

Okay, good. Thanks.

[Operator:]

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 1-888-254-7270. In Israel, please call 03-925-5921 and internationally, please call 972-392-55921. The recording is also available on the company's Web site www.orange.co.il. Mr. Romano would you like to make your concluding statement.

[Haim Romano:]

Thank you. As we reported yesterday, Issac Benbenisti was appointed Partner's next CEO and he will officially take over on July 1. I'm certain that Issac's past experience in the fixed line business together with his time in Partner makes him the best candidate to continue leading Partner for the years to come. It's been honor to lead Partner during those challenging times. And I want to thank to take the opportunity to thank them – our employees that made it possible. I would like to wish Issac, the management team and the entire Partner family and of course, all of our audience the best of luck. Thank you and good day.

[Operator:]

Thank you. This concludes the Partner Communications first quarter 2015 results conference call. Thank you for your participation. You may go ahead and disconnect.