Partner Communications Company Ltd.
Q2 2015 Earnings Call Transcript

Published: 12 Aug 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications' Second 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 hand 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' second quarter results for 2015. With me on the call today is Issac Benbenisti, Partner’s CEO; and Ziv Leitman, our CFO. Issac Benbenisti will first discuss Partner’s strategy for both the cellular and fixed-line markets. He will then hand over to Ziv Leitman who will provide a detailed overview of the financial and operational results for the second 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 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 August 12, 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 will now turn the call over to Partner's CEO, Issac Benbenisti. Issac?

[Issac Benbenisti:]

Hello, everybody. Good day and welcome to our earnings conference call. The second quarter results reflect the continued competition in the teleco market in Israel, alongside of seasonality effects and the positive impact of the company's continued focus on equipment sales. We continue our strategy to becoming a full-service teleco group offering quality services and sustaining our technological excellence. We’re adjusting our business model to the changing teleco market while operating in various aspects within the market, and improving value to our customers. As part of these process sales, we have launched additional services among others [ph]. For the business segment, we have launched a new data center in the beginning of July 2015 in many services model and we have started offering more significant integration solutions. For the private segment, we’re offering bundles under the Orange and 012 brands, which include both cellular and Internet services in addition to our wholesale offering of broadband and ISP as one offering. Looking ahead, we’re intent on becoming a significant player, furthering competition in the fixed teleco market, however, in order to become a significant player, the regulatory environment needs to set the ground for fair competition between all players in the market. In the cellular market, there is a need to enforce on all the players the obligations to invest in infrastructure, and this is very significant. In the fixed-line market, the Ministry of Communications needs to implement in full the service portfolio, which was recently determined as part of the wholesale market reforms. Furthermore, essential conditions for effective competition in TV, fixed telephony, and broadband markets are the [indiscernible] barriers to competition and the preservation of the existing structural separation requirements of Bezeq and HOT, up until the point that the new market players have reached a significant market share, and this is something very significant as I mentioned before. In conclusion, we are already beginning to experience the benefits from offering added value to our customers through our wholesale offerings. Past investment in our 4G sites will be realized in full now that we have received the frequencies awarded to us in the 4G frequencies tender. Together with the frequencies allocated to HOT Mobile, we’re able to realize a full 20 megahertz band and enable our customers to enjoy a significantly improved data experience. We will continue our efforts to bring our customers additional value in the telco world. And now, I will turn the call over to Ziv Leitman for a detailed review of our financial results. Please, Ziv.

[Ziv Leitman:]

Thank you, Issac. Before diving into the financial results for the second quarter, I would like to remind everyone that all the comparison I discuss in my prepared comments are to the first quarter of 2015 unless otherwise indicated. The competition in the cellular market continued to erode service revenues. However, this was partially offset by the effects of the seasonal roaming revenues. In comparison to the intense competitive environment in the first quarter of 2015, the level of competition eased slightly as demonstrated by the decrease in the churn rate for cellular subscribers. The churn rate stood at 10.9% in the second quarter compared to 12.7% in the previous quarter and 11.4% for the same quarter of last year, reflecting a decline in postpaid subscriber base. Cellular ARPU totaled NIS 70, a slight increase from NIS 69 in the first quarter of 2015, which reflects the impact of seasonal roaming revenues as I have just mentioned. Equipment revenues decreased by NIS 8 million compared to the previous quarter. However, gross profit from equipment sales increased by NIS 8 million, mainly due to improvements in supply chain and a change in product mix. Operating expenses decreased marginally by NIS 3 million, primarily reflecting our continued efforts to reduce the cost structure. EBITDA increased by NIS 9 million compared to the previous quarter, mainly reflecting the improvement in equipment sales profitability. Finance costs, net, totaled NIS 46 million, an increase of NIS 28 million compared to the previous quarter, mainly due to higher linkage costs from the significant increase in the Consumer Price Index level. Profit totaled NIS 9 million compared to NIS 25 million in the previous quarter, despite the increase in EBITDA, mainly reflecting the increase in finance costs. CapEx payments totaled NIS 110 million compared to NIS 127 million in the previous quarter, a decrease of 13% despite the one-time payment for the 4G frequencies. The decline in CapEx was mainly due to lower level of payments to suppliers for fixed assets received in previous periods. On an accrual basis, investments in fixed assets totaled NIS 84 million, including NIS 34 million for the 4G frequencies, compared to NIS 50 million in the previous quarter and NIS 94 million in the same quarter of last year. Free cash flow, before interest payments, totaled NIS 24 million compared with NIS 21 million in the previous quarter. The increase in free cash flow mainly reflected the decrease in CapEx payments together with the increase in EBITDA, which were partially offset by a larger increase in working capital. For the first time in four years, free cash flow after interest payment was negative totaling minus NIS 28 million due to the continuous reduction in EBITDA, increase of working capital, and semiannual interest payments. Net debt at the end of the second quarter amounted to approximately NIS 2.6 billion, which reflects the increase of NIS 45 million as a result of the negative free cash flow and the impact of the increase in CPI. Last month, the company reached understandings with employee representatives and the Histadrut labor organization regarding a retirement plan. This was the first step to a collective employee agreement. As a result, the number of full time employees is expected to decline by approximately 350 and a one-time expense of approximately NIS 35 million is expected to be recorded in the third quarter of 2015. We expect that the company may record a loss in the third quarter of 2015 due mainly to the one-time expense of the employee retirement plan as well as the negative effect of the continued intense competition in the teleco market, partially compensated by the revenues from the new framework agreement with Orange. 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 Gilad Alper of Excellence. Please go ahead.

[Gilad Alper:]

Hi. Just a question assuming for a second the best case scenario, let’s say the Ministry of Communications stays tough with Golan and insists that Golan Telecom invest a lot of money in their own network, and as a result, Golan decides to exit the market. And then you have sort of a consolidation, the number of operators drops from four to five. How fast and how high do you think ARPU can ride if something like that happens? Thanks.

[Issac Benbenisti:]

I believe that if – and this is of course if Golan will go from the market, then I don’t believe – by the way, this will happen even if the Ministry of Communications is even forcing to make the investment. But if it will happen, I don’t believe that in the short term, we’ll see an increase in ARPU because Golan is not the only competitor in the market. We have four other competitors that are very aggressive, but I do believe that if something like this will happen, then I do believe now when the Ministry of Communications is saying that they will enforce Golan to invest and not allowing them to continue acting without a license, it affects the market and there are signs, okay, that in a point – it might be a point that the ARPU will increase. When it will happen, what will be the effect, it’s early to say.

[Gilad Alper:]

Okay. Thank you.

[Operator:]

[Operator Instructions]. There are no further questions at this time. Before I ask Mr. Benbenisti to go ahead with his concluding 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 1-888-326-9310. In Israel, please call 03-925-5901, and internationally, please call 972-392-55901. The recording is also available on the company's Web site at www.orange.co.il. Mr. Benbenisti, would you like to make your concluding statement.

[Issac Benbenisti:]

So I just want to thank you very much for attending this call and thank you very much.

[Operator:]

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