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Cellcom Israel Ltd. (NYSE:CEL)

Q3 2012 Results Earnings Call

November 13, 2012 9:00 AM ET

Executives

Porat Saar - CCG Investor Relations

Nir Sztern - Chief Executive Officer

Yaacov Heen - Chief Financial Officer

Analysts

David Kaplan - Barclays Capital

Dov Rozenberg - Clal

Michael Clark - Citibank

Operator

Ladies and gentlemen, thank you standing by. Welcome to the Cellcom Israel Limited Third Quarter 2012 Results Conference Call. All participants are at present in listen-only mode. Following management’s formal presentation instructions will be given for the question-and answer-session. (Operator Instructions)

As a reminder, this conference is being recorded, November 13, 2012. I would now like to hand over the call to Ms. Porat Saar of CCG Investor Relations. Ms. Saar, please go ahead.

Porat Saar

Thank you. I would like to welcome all of you to conference call and thank Cellcom Israel’s management for hosting this call today. With us here are Mr. Nir Sztern, CEO; and Mr. Yaacov Heen, CFO. Mr. Sztern will open by providing a summary of the main highlights of the third quarter 2012 results followed by Mr. Heen who will review Cellcom Israel’s financial performance in further detail.

Before I turn the call over to Mr. Sztern, I would like to remind our listeners that in this call management’s prepared remarks contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions.

Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995 and in the Israeli Securities Law 1968.

Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of the risks and uncertainties in the company’s filings with the Securities and Exchange Commission, including under Risk Factors in the company’s annual report for the year ended December 31, 2011 20-F filed on March 7, 2012 with the SEC.

In addition, any projections as to the company’s future performance represent management’s estimates as of today, November 13, 2012. Cellcom Israel assumes no obligation to update these projections in the future as market conditions change. You should have by now received a copy of the company’s press release. If you've not yet received so please call CCG Investor Relations at 1-646-233-2161.

I would now like to hand the call over to Mr. Nir Sztern. Nir?

Nir Sztern

Thank you, Porat. Good day, everyone. And welcome to our third quarter 2012 earnings conference call. In our third quarter results, we see the successful continued implementation of the company’s strategic plan which includes the Netvision merger, our drive for operational excellence and our strengthening of the Communications Group.

We also see the continued impact of our aggressive efficiency measures on our results which so far have led to an annual savings run rate of approximately NIS 480 million in comparison with the fourth quarter of 2011.

We continued to offering our business and residential customers attractive communication services, including mobile and landline telephony, international long distance call and Internet, leveraging the comprehensive services we provide in the Communications Group.

We continue to see great success with our Cellcom Total marketing plan, which offers landline and mobile telephony to the family, which was launched in July of this year. Followed by, we also successful Cellcom Total for Business. The success of Cellcom Total contributed to the Group’s record growth of private landline telephony subscribers.

Likewise, Netvision's contribution to the company's success is recognized, while presenting the third quarter EBITDA of NIS 75 million, through leveraging Cellcom-Netvision synergies and reducing cost redundancies between the companies.

Despite the intense competition we recruited approximately 5,000 new cellular subscribers in the third quarter. This impressive achievement is attributed -- is attributable to the Cellcom Total success, as well as to our winning of the Israeli Defense Forces tender. We have began transferring the IDF subscribers to our network this past quarter and expect to complete the transfer of the majority of the IDF subscribers in the following quarters.

We remain committed as always to maintaining Cellcom Israel’s leading position in the communications company for the benefit both of our customers and shareholders.

With that, I would like to turn the call over to our CFO, Mr. Yaacov Heen for review of our financials. Yaacov, please?

Yaacov Heen

Thank you, Nir, and good day to all of you. As anticipated in the previous quarter, we continue to see revenue erosion due to the transfer of subscribers to the new marketing plan, which were launched during the second and third quarter of 2012 in response to the increase competition.

We expect to see erosion continue into the fourth quarter as well. At the same time, we are continuing to implement efficiency measures in order to continue adjusting our expense structure revenue levels.

Now turning to our consolidated results. Revenues for the third quarter of 2012 totaled NIS 1.45 billion, decreasing by 13% from the third quarter of last year. Netvision’s contribution to revenue totaled NIS 2,061 million -- NIS 261 million. Without Netvision’s contribution revenues would have declined by 24.3%.

Operating income for the third quarter decreased year-on-year by 31.5% totaling NIS 239 million. EBITDA decreased by 19.9% year-on-year totaling NIS 430 million. Netvision contribution to EBITDA for the third quarter of 2012 totaled NIS 75 million. Net income decreased by 37.7% year-on-year totaling NIS 124 million.

Turning to our KPI’s, MOU for the third quarter of 2012 totaled 399 minutes, compared with 357 minutes in the third quarter of 2012, an increase of 11.7%.

ARPU for the third quarter of 2012 totaled NIS 86.7, including revenues from national roaming services compared with NIS 105.1 in the third quarter of 2011, a decrease of 17.5%.

Our free cash flow for the third quarter of 2012 increased by 58% year-on-year totaling NIS 414 million. The increase is primarily due to a continued decrease in handset sales and inventory levels, as well as our continued efficiency measures.

With that, given the changing competitive environment the company’s Board of Director decided not to distribute a dividend for the third quarter of 2012, the Board of Directors will re-evaluate its decision in the coming quarters.

I would now like to open the call to questions.

Question-and-Answer Session

Operator

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

David Kaplan - Barclays Capital

Hi. Good afternoon. If we can talk a little bit about the wholesale businesses both mobile and handsets, give us an update on where negotiations are for you guys vis-à-vis HOT and Bezeq, but for the bit access -- bit-stream access agreements?

And then on the mobile side, can you tell us of either your MOUs or of your volumes and your network, what percentage of that is coming from wholesales, or it was not necessarily off of your networks?

Nir Sztern

Hi, David. This is Nir. Regarding the first question, we are having really good negotiations there with Bezeq. We also started talking with HOT just recently. And I can tell you that on many levels there the negotiations is going very well but I think we still have quite a bit of a long way to go before we conclude them.

Like many negotiations there, there are little bit of touch and go. So it’s kind of hard for me to say right now whether we’re going to come to conclusion in the near future or not. The only good news I can tell is that we’re working on it. Both sides are working very hard to getting these agreement signed.

So once we have any news to say, we’ll probably say it. In terms of the usage or share of traffic by the national roaming, obviously, unfortunately, I can’t disclose the direct information.

David Kaplan - Barclays Capital

Okay. A follow-up on fixed line side, do you think that there is a likelihood that there will be a commercially agree -- without commercially agreeing to price between Cellcom and/or HOT and Bezeq prior to the regulator having to step back and/or do you think that there is a possibility regulator have to step back in. And if he does have to step back in to it connect, what’s the likelihood of that will happen before the elections on in January?

Nir Sztern

To be honest, David, I wish I knew, I mean, we think our best to reach an agreement without the regulator. But if we won’t then we’ll call him and ask for his assistance, whether or not, we’ll -- that will happen before the election or not, it’s -- I can’t say right now.

David Kaplan - Barclays Capital

So that’s availability, we are waiting for your phone call. No, he won’t get involved unless Cellcom and/or partner ask for help?

Nir Sztern

He’s involved into whole process that we’re in and all the time. And I think both from our side and his side and everybody’s side, it’s only beneficial to everybody if we reach an agreement without him. But there we know that. Bezeq know that and should we need their help, we won’t hesitate to use the regulator itself.

David Kaplan - Barclays Capital

Okay. If I may just, back to the mobile side for a quick second. If you can talk about the national roaming, can you tell us what the Cellcom customers split is between those that are on unlimited plan versus those who are not?

Nir Sztern

I’ll let Yaacov say that we can. But we can’t, sorry.

Yaacov Heen

Most of the new sales are of course mainly competitors with unlimited brackets, I mean, the three big operators. They knew also in the low-usage level. So this is about the new offer that we have right now. We don’t give the specific number about total number of subscribers regarding our install base.

David Kaplan - Barclays Capital

Okay. Great. Thanks very much.

Operator

The next question is from Dov Rozenberg of Clal. Please go ahead.

Dov Rozenberg - Clal

Hi. Thank you. I was wondering if you can give any more color on the trends on or quantify the agreement with the Army. How that impacted, how much that impacted the subscribers or what impact it will have on ARPU et cetera?

Nir Sztern

We just -- this quarter -- in the second quarter, we started adding the ISP is rallied for far base and we haven’t -- we just began. That’s the only thing I can say. We still have most of the ideas to join and we will see them joining the subtle network in the fourth quarter and the rest following the final few in the first quarter of next year.

In terms of revenue, it’s something that -- obviously I can’t disclose. Anyway, we’re just on the first, one or two months, it’s something that we need to look at in the coming months.

Dov Rozenberg - Clal

All right. Thank you. And then just on cost cuts, you guys saved a lot of money. I was wondering going for it also -- would you expect -- if you can quantify also how much of sales et cetera?

Nir Sztern

I can tell you that we’re working full team ahead just as we have in the last few quarters to get to the maximum operational efficiencies that we can. We see a lot of things that we’re doing both in headcount in terms of processes, in terms of negotiation with vendors and we’ve seen -- as you can see from the results we’re seeing a lot of cost cutting.

We will definitely continue to do that. I’m not sure -- I'm pretty sure that we won’t be able to maintain or to continue the exact same rate. But it’s definitely something that we won’t stop doing in the next year.

Dov Rozenberg - Clal

All right. Thank you.

Operator

The next question is from Michael Clark of Citibank. Please go ahead.

Michael Clark - Citibank

Hi everyone. A few questions from me. First we can view the Cellcom total deal. Can you -- how it’s different revenue from that attributed into the mobile and the fixed business? That’s standard NIS 350 package. How is it spread?

Yaacov Heen

We don’t give this split. But it’s according to the average prices that we sell than new for the customer. So this is how we split between the ISP and the landline services and of course, the three users, the cellular users in the plan.

Michael Clark - Citibank

So roughly let’s say 300 cellular and 50 to the fixed line. Is that so?

Yaacov Heen

It’s fair to assume it.

Michael Clark - Citibank

Yeah. Okay. Thanks. And the second question is on the subscriber levels, so my mathematic with apple we’ve got HOT and Golan telling us they’ve added around 400,000 and 450,000 subscribers to the end of the third quarter.

We’ve got you and Bezeq telling us you’re down 60,000 and we’ve got that lease of the capital about 240,000. So you’ve got about 60,000 the quarter from U.S., which gives me a capital of about 240,000. And I’m assuming that’s not from Cellcom. What’s going on, on a subscriber level in the market? What’s the quality of your growth stats in the quarter?

Yaacov Heen

In Cellcom, there is no real change that you can say that now we could totally different customers. When you analyze it to new competitor, they say that half of deals are low users. So I assume that it’s a new users in the market. So our perspective, we are also focused on the data users.

So if the population grows and Israel is about 2.2% and beside there is a penetration rate and the young generation is higher than the oldest and besides the new data, pure data users because you can find more and more tablet users and other modem users. So it means that for any single customers, you can find more than one device. So we don’t see it as a strange number.

Michael Clark - Citibank

Okay. Can you give us any color on what your average ARPU is on the data user, just the dongle for the laptop?

Nir Sztern

We have few plans between NIS 50 to NIS 100 of expense on the data package. Sometimes, it includes also some rebate regarding the handsets. So according to that, you can have a sense about the ARPU, but generally the ARPU is lower than the average.

Michael Clark - Citibank

Okay. And just a follow-up on an earlier question about GSM. The MOU on your hosting, I know you went, tell us at what percentage but will you tell us whether you are hosting MOU is higher or lower than your incoming average?

Nir Sztern

Unfortunately, we can’t. It’s also -- it’s not completely related to commissions. The company that we are hosting on our network on floor, we will be happy to answer you.

Michael Clark - Citibank

Okay. And then lastly, sorry to hold the call, but just lastly on working capital. How much more working capital benefit is there from falling receivables and rising payables like we saw in this quarter?

Nir Sztern

If you look at one year ahead, we have right now more than NIS 3 billion in receivables and this is not new. And if the handsets sales level will be lower, like we’ve seen in this field that the rate is about NIS 300 million per quarter comparing to more than NIS 400 million per quarter last year. So we recommend that we can expect a positive working capital during the next 12 months.

Michael Clark - Citibank

Okay. Thank you.

Operator

(Operator Instructions) The next question is a follow-up question from Michael Clark. Please go ahead.

Michael Clark - Citibank

Hi. Yeah. Just on the pricing plans yesterday that I saw on your website yesterday. So, I see you’ve caught the -- your 1 gigabyte package, unlimited package from NIS 119 to NIS 19 shekels -- to NIS 99 shekels. And just one thing from that, what’s driving that?

Nir Sztern

This is just a seasonal promotion that we have and it is discounts for customers who are switching to number portability. And you can see in the last two or three weeks and in the market, there’s been a few new plans in the market both by supplementals who are the competitors. So it’s just something that usually towards the end of the year, we’ve seen these kinds of plans.

Michael Clark - Citibank

What’s driving given that you have been under so much APRU strain? What is driving -- when you talk about some sort of the stabilization, so what’s driving these cuts? I mean, they are quite aggressive. It’s kind of 18% on the headline front?

Nir Sztern

Well, I think if you have been following partners in the market in the last few months, you can see that Cellcom has been standing pretty much alone and with higher prices in our competitors. We’ve tried and maintained prices at a premium compared to both the new competitors and the incumbent.

And even now with these prices, we still are probably a little bit higher than everybody else in the market. We feel that we give the customers a lot of value for that money. So we are pretty secured with that. But even that’s sometimes, especially if the market is offering two months or four months free for sellers, and we need to react in order to maintain our or to reduce our churn rate and to maintain a total number of subscribers that we have.

Michael Clark - Citibank

So do you see any pricing stability on the horizon or not yet, given what’s going on?

Nir Sztern

I’d love to say that. I do, but it’s still -- it is not something that I can guarantee. I believe that we will see it, but I’m not sure if that’s going to happen.

Michael Clark - Citibank

Thank you.

Nir Sztern

Okay.

Operator

The next question is a follow-up question from Dov Rozenberg. Please go ahead.

Dov Rozenberg - Clal Finance

Hi. Thanks. Just a thing on your CapEx, what do you think is an extreme level?

Nir Sztern

Can you repeat the question? We didn’t hear you well.

Dov Rozenberg - Clal Finance

Yeah. On CapEx, just if you -- I mean, you were in I think, 420 or 430 so, year-to-date. You expect to maintain this level or previous year it was 600, 500. What level should we expect going forward?

Nir Sztern

The level -- let’s say for the consolidated company, assuming that we consolidated from the beginning of 2011, the level was about NIS 600 million. We expect this year to be lower by around NIS 500 million. CapEx for the total year of 2012 and for the next year, we expect it to be this level and even lower.

Dov Rozenberg - Clal Finance

Great. Thank you.

Operator

The next question is a follow-up question from David Kaplan. Please go ahead.

David Kaplan - Barclays Capital

Hi. If we can talk a little bit about the opportunities that are heading into 2013, even 2014 on the wholesale side, I imagine there are going to be some investments either can be made by Cellcom either CapEx or OpEx, either on the content side, on the equipment side. Can you talk a little bit about what the plans are or when you think you will be able to give us guidance on those types of issues?

Nir Sztern

Well, I think first thing first. We need to see when we sign the agreement with the court. After we sign the first, there is still quite a bit of a way to make sure that the services work. I think, what we are seeing through the negotiation and the talks between us and Bezeq and including that of the MOC, that it’s doing wholesale and same time, it’s a lot more complicated.

They are doing it on the mobile. And there is a lot of technical issues that we need to resolve even prior to the pricing and even after we do resolve them in terms of the agreement, there is still a lot of experiment and free trials that we need to do before we start selling the first service. So it’s still early days for me to say or give any guidance. I think we’ll be a lot more -- we’ll know a lot more once we sign the agreement and see some of the free trials working out in the field.

David Kaplan - Barclays Capital

Great. Thanks.

Operator

There are no further questions at this time. Mr. Sztern, would you like to make a concluding statement?

Nir Sztern

Yeah. Thanks. Well, again, I want to thank everybody for joining Cellcom Israel’s third quarter 2012 earnings conference call. And as usual, I do look forward to hosting you again at our next call. Have a good day.

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