Partner Communications Company Ltd.
Q4 2015 Earnings Call Transcript

Published: 14 Mar 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications’ Fourth Quarter and Year End 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:]

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 2015. 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 for 2015, and will say a few words about Partner’s strategic direction. 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 the Partner’s press release dated March 14, 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. We would also like to point out that Partner recently filed its annual report for 2015 on Form 20-F with the U.S. Securities and Exchange Commission. 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:]

Yes. Thank you. Good day, everyone, and welcome to our earnings conference call. 2015 has been a year of intense competition in the telco market particular in the cellular market and as a result of continuing the experience – in the experienced price erosion, which lead to decline in the cellular segment results. Despite the difficult market environment, our Post-Paid subscriber base increased in the fourth quarter and in 2015 in general. However, our Pre-Paid subscriber base continued to decline as a result of the intense competition in the market. We hope that the regulatory uncertainty in the cellular market will end in the near future and thus enable a rational and proportionate competition with equal enforcement of the license obligations on all the operators in the market. In the fixed-line segment, we experienced a significant change in 2015 with the launch of the wholesale Internet market reform by the Ministry of Communications in the first half of the year. Although our current operations in the wholesale market reflect our strategic outlook, the incomplete regulation and the implementation of the wholesale market is problematic for the company and our customers. We are not yet able to derive profits from the implementation of the wholesale market. We believe that the Ministry of Communications has the obligation to exercise its authority in order to enable the wholesale market reform to be achieved as intended. The year 2016 began with the rebranding process of most of the company's products and services under the Partner brand. As part of the branding preparation process, the company's vision and purposes were redefined and integrated with our strategic plan for the coming years in the ever-changing telco market. Our purpose, as a full telco group, is to make the connected digital life of private and business consumers simpler and accessible in every way. The unveiling of the Partner brand last month marked the beginning of the new path we are embarking on with our significant existing assets, such as our advanced network with the widest deployment in Israel, and the best customer service among telco operators in Israel. Finally I’m pleased to announce that we have signed a collective employment agreement with the employees’ reps. The agreement includes an organizational chapter that is for the period of three years and an economic chapter that is valid until the end of 2016. The agreement is a result of the understanding that the new path we have embarked upon is a shared path for all the managers and the employees of the company, and that success depends on our combined efforts working together as one entity. I would like now to turn the call over to Ziv Leitman for the detailed review of our financial results. Ziv, please.

[Ziv Leitman:]

Thank you, Issac. Before diving into the financial results for the fourth quarter, I would like to note that all comparisons I will make are to the third quarter of 2015 unless otherwise indicated. The financial results for the fourth quarter were affected by the number of items which negatively influenced operating profit and both the company to record a net loss of NIS 65 million for the quarter. The most significant factors are the negative impact of the seasonal roaming revenues and the impairment charge for the fixed-line segment of NIS 98 million. In spite of the negative seasonal effect, adjusted EBITDA in the fourth quarter of 2015 increased by NIS 21 million, compared to the previous quarter, mainly due to the one-time employee retirement planned expense of NIS 35 million, which was recorded in the third quarter. Regarding the impairment charge, the company decision to cease using 012 Smile trade name in 2017, induces to determine that an indicator of impairment existed for the fixed-line segment. The company reviewed the recoverability amounts of the VOB/ISP assets, and as a result, an impairment charge was recognized for the fixed-line segment which reduced the net profit in the fourth quarter of 2015 by NIS 72 million. Before the impact of the impairment charge, operating profit and net profit for the fourth quarter were NIS 50 million, NIS 7 million expected. Competition in the cellular market remains high. It can be seen from the churn rate in the third quarter of 11.1%, and the decline in ARPU to NIS 67 million. This decline mainly reflects the decrease in seasonal roaming revenues, in addition to the continued price erosion we’re experiencing in our airtime and data packages. That said, Post-Paid churn rate has been relatively stable over the past few quarters and as declined compared to the fourth quarter of 2014. In the fourth quarter, we reported an increase of 20,000 Post-Paid subscribers, and for the year 2015, after all, the Post-Paid subscriber base increased by 24,000. In spite of the positive growth in Post-Paid subscriber base, we continue to see an increase in the churn rate of Pre-Paid subscriber leading to a decline in Pre-Paid subscriber base by 143,000 subscribers for the year 2015. Gross profit from equipment sales in the fourth quarter of 2015 increased by NIS 9 million. This increase is mainly a result of a change in product mix, towards sales with higher gross margins. Free cash flow before interest payments in the fourth quarter totaled NIS 230 million, compared with NIS 291 million in the previous quarter. The decline in free cash flow primarily reflected the increase in working capital. This increase was partially offset by the increase in payment received in the fourth quarter from Orange of NIS 206 million compared with NIS 172 million that were received in the third quarter. Net debt at the end of the fourth quarter totaled approximately NIS 2.2 billion, a declined of NIS 437 million over 2015. Hot Mobile exercised its option under the Network Sharing partner to advance the payment date of the lump sum payment. Therefore, an amount of NIS 250 million is expected to be received during 2016. And from April 2016, capital expenditure and operating cost should be shared according to the mechanism set out in the Network Sharing Agreement. And Hot Mobile shall no longer make payments related to the Right of Use Agreement. Finally, the collective employment agreement, which Issac discussed, is expected to increase our expenses by approximately NIS 7 million in the first half of 2016, by approximately NIS 20 million in the second half of 2016, and by approximately NIS 3 million in 2017. I will now be happy to open the call for 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 Nicole Gilliat of Ion Asset Management. Please go ahead.

[Nicole Gilliat:]

Hi. You’ve bought CapEx down dramatically over last several years. Is it fair to think about 2016 CapEx going down further and using a run rate from 3Q or 4Q of 2015, as a run rate for 2016?

[Issac Benbenisti:]

Hi, Nicole. We didn’t give guidance for 2016, but I think it’s reasonable to assume that the CapEx of 2016 will not be higher than the number of 2015.

[Nicole Gilliat:]

Okay, I understand. And then the receiving the CapEx savings from Hot will kick in this year. But if we’re talking about free network savings, should we assume a run rate about NIS 50 million, NIS 60 million a quarter?

[Issac Benbenisti:]

So, ignoring the fact that starting April 1, the network CapEx will be shared between Partner and Hot 50-50. I think as I said before, the CapEx of 2016 should not be higher than the level that we faced in 2015.

[Nicole Gilliat:]

Okay. I have one more question for you. Can you give us an idea of what the rebranding cost will be in first quarter of 2016 and throughout the rest of the year due to rebranding some Orange to Partner?

[Ziv Leitman:]

What will be the cost of rebranding?

[Issac Benbenisti:]

Unfortunately we cannot disclose this number, but you can assume that’s the major fault of the rebranding expenses will be booked in the first quarter and this is the quarter that we launched the new brand.

[Nicole Gilliat:]

Thank you.

[Operator:]

There are no further questions at this time. We have additional question. The next question is from [indiscernible] of Goldman Sachs. Please go ahead.

[Unidentified Analyst:]

Hi. Yes, I have two questions. First is on mobile service revenue outlook for this year, 2016. It seems there were no signs of material segregation improvement to the market in the fourth quarter and that’s – as can you share any trends you see on the market in the beginning of 2016? And is there any sequential improvement or maybe deterioration in the competitive environment? And we’re like assuming the market structure as market participant’s behavior remains the same throughout this year. Do you think we may see another year of low double-digit service revenue decline in 2016? Next question is – my second question is on the wholesale. You’ve mentioned on the wholesale market you cannot make any profit so far. Can you elaborate a bit why it is so? Is it because of additional costs you have to take which more than offset the discount of the wholesale through retail or it’s rather because of more aggressive pricing you are implementing? Thank you.

[Issac Benbenisti:]

So regarding the first question, about the cellular prices of the ARPU, we haven’t seen yet the first quarter of 2016 any significant change in the market. So I believe that the regulator in Israel and the analyst and journalist and everybody that are involved in the market really understands that we faced, I mean, the worst part, I mean. The worst part of that is the ARPU erosion, because the prices are not the economic prices to maintain a network and to maintain a service and to take several of our business to the future in Israel. And I believe this understanding has been achieved, and the results, I don’t know when we will see. I don’t think that we will see a rapid change in the coming quarter, but there is a slight hope in this arena. Regarding the wholesale market, there are two reasons to why we cannot generate profit from these markets. One is the scheme of the margin squeeze, and the way they initiated here in Israel. And more than that is the implementation by the incumbent basic, I mean, the Ministry of Communications, they do not enforce basic to implement it correctly, so every customers that we convert to wholesale market, face dramatic issues with the infrastructure, and it’s very difficult for us to make it simple. I mean, such regulatory change can be achieved by making the situation seamless, that it would be easy to go, I mean, easy to go – to move from basics to the operators. That it was in the cellular market, that it was seamless…

[Ziv Leitman:]

Mobility

[Isaac Benbenisti:]

Mobility service between the companies, and it’s very far, far, far from meeting the wholesale market. So we have more expenses, the customer faces difficulties in the transaction. And this is the reason why we’re not profitable yet, and we work very hard with the regulator to explain it them to make the change.

[Unidentified Analyst:]

Thank you, very much.

[Operator:]

The next question is from Oren Robinson of Leumi Partners. Please go ahead.

[Oren Robinson:]

Hi, guys. Everyone question about the churn rates. After two quarters, it was down, in the last quarter, you just up. Pretty much explain why – what happened in the market? And if you see the churn rate is going to the next year?

[Issac Benbenisti:]

The churn rate, as we said the churn rate of the Post-Paid subscriber orders were stable in the last few quarters, we don’t see increase. The increase in the churn rate was for the Pre-Paid subscribers. But as you can see, the churn rate in the fourth quarter of 2015, it’s 11.1%, while last year in Q4 2014, it was 11.5%. As you probably know, the churn rate of the Pre-Paid subscriber some of it’s – you see some seasonality in the churn rate. For example, the tourist, the upcoming tourists in the summer, they are buying sim card and after they don’t use it for six months, they just – you see it in the churn rate.

[Oren Robinson:]

What was the churn rate for the Post-Paid?

[Issac Benbenisti:]

Unfortunately, we don’t disclose this number.

[Oren Robinson:]

Okay. Thank you, guys.

[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 scheduled to begin in two hours. In the U.S., please call 1-877-456-0009. In Israel, please call 03-925-5930. And internationally, please call 972-392-55930. The recording is also available on the company’s website www.orange.co.il. Mr. Benbenisti, would you like to make your concluding statement.

[Issac Benbenisti:]

Yes. I would like to thank you very much everyone to joining us in our earnings conference call and we look for a brighter future. Thank you very much.

[Operator:]

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