Partner Communications Company's CEO Discusses Q4 2012 Results - Earnings Call Transcript

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 |  About: Partner Communications Company Ltd. (PTNR)
by: SA Transcripts

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company Fourth Quarter 2012 Results Conference Call. All participants are at present in 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 February 27th, 2013.

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 annual and fourth quarter results for 2012. With me on the call today is Haim Romano, Partners’ CEO; and Ziv Leitman, our CFO.

We will open the call with Haim Romano who will present the highlights of the year and quarter together with some comments on partner’s strategic direction. Ziv Leitman, will then provide a more detailed summary of our 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 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 in the forward-looking statements are contained in Partner’s press release dated February the 27th, 2013; 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 S-3 shelf-registration statement, all of which are readily available. Please note, 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 www.orange.co.il. If you have any further questions following the call, please feel free to contact our Head of Investor Relations in Israel, Yaffa Cohen-Ifrah on 972-54-909-9039.

I will now turn the call over to Partner’s CEO, Haim Romano.

Haim Romano

Good day, everyone and welcome to our fourth quarter and annual 2012 results conference call. As we all know the last year, the level of competition in the Israeli market is greatly increased. As a result of that we see a significant price erosion in the market that has affected our business results. Yet we have maintained strong free cash flow while continuing to invest in our cellular network and advanced infrastructures.

We’ve also taken significant deficiency measure which led to a deduction of our operation expenses. However, we’ve improved our organizational processes and quietly our customer service.

In the fixed line business we completed the organizational integration with 012 Smile and you can see now an improvement in the fixed line segment in the fourth quarter results comparing to the previous quarter.

Our annual revenue totaled NIS5.8 billion, a decrease of 20% comparing to the last year. Our OpEx including equipment totaled NIS4.1 billion, a reduction of NIS844 million compared to last year an improvement of 17%. Here the redemption in OpEx did not fully compensated their reduction on revenues. Our EBITDA totaled NIS1.6 billion and our net proceed totaled NIS478 million.

I would like to conclude by saying that cellular market is still in the position period. The trend that we have seen in the last year and especially in the few last months we will continue in the first quarter of 2013.

We believe that our strategy together with measures that we have taken and we will take in the future reducing our costs and will help us to face the challenges in the market for the next year to come.

And now, I’d like to turn the call over to our CFO, Mr. Ziv Leitman.

Ziv Leitman

Thank you, Haim. In light of the detail obtained we have witnessed over the last 12 months I’m going to focus my remarks on the results over the fourth quarter of 2012 compared to the third quarter of 2012.

In line with the previous few quarterly results we experienced downward pressure on revenues in the fourth quarter resulting from increasingly intense competition was impact was partially offset by deficiency measures we continue to implement.

As a result, the continued price erosion and the condition of customer to unlimited packages as well as seasonal factors mainly related to roaming revenues, sales revenues in the cellular segment decreased by 12% in the fourth quarter compared to the previous quarter.

In parallel, ARPU 10% to a total of NIS87, while the churn rate increased in the fourth quarter to 10.9% from 10.4% in the third quarter. This reflected highest churn of Pre-Paid subscriber, but the churn rate of Post-Paid subscriber actually decreased quarter-on-quarter.

Cellular equipment revenues in the fourth quarter increased by one-third, mainly reflecting the impact of the iPhone 5 launch in December 2012. Service revenues from our fixed line segment, including ISP and VOB services remain broadly unchanged from the third quarter.

The company have continue to adjust its work force to the change in market condition and in the fourth quarter of 2012, the number of position was reduced by approximately 700. In total, from September 2011 until the end of 2012, a number of reported position was reduced by 3,192 position of 37% of the company workforce, mainly by lowering the level of new recruit. The number of employees on FTE basis at the end of December 2012 was 5,400 versus 7,900 year ago.

Operating expenses of the company, excluding the cost of equipment, depreciation and amortization decrease by approximately NIS50 million in the quarter, mainly reflecting the impact of efficiency measure, as well as one-time reduction in site-rental expense of NIS18 million, compared with the peak level for operating expenses in the third quarter of 2011, the company have succeeded in lowering quarterly operating expenses by approximately NIS200 million. As a result of the above effect, EBITDA for the fourth quarter of 2012 totaled NIS340 million, a decrease of 15% from the third quarter.

Net profit was NIS102 million, a decrease of 7% from the third quarter, reflecting lower operating profit, partially offset by lower financial expenses due to lower CPI, as well lower tax expenses due to utilization of previously unrecognized tax losses and other temporary differences against taxable income.

The competition in material price erosion that adversely affected our financial results for the fourth quarter of 2012 are continuing in the first quarter of 2013 and may continue further into the year, which could have a material adverse effect in our financial result in the first quarter of 2013 and going forward.

The company continues to report strong free cash flow after interest payment which totaled NIS 255 million this quarter. Over 2012, the company generated free cash flow after interest payment of approximately NIS 1 billion.

As in previous quarter, cash flow in the fourth quarter was positively affected by a decreasing working capital. In light of a strong free cash flow, the company made an early repayment of bank loans during the fourth quarter in the amount NIS 300 million.

In 2013 therefore, only repayment of bonds remain in the amount of approximately NIS 300 million. The level of net debt at year-end was NIS 3.8 billion, a decrease of approximately NIS 1 billion from the peak level 1.5 year ago.

I will now be happy to open the call for questions. Moderator, can you please begin the Q&A?

Question-and-Answer Session

Operator

Thank you, sir. 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 – Excellence

Hi, thanks for taking my call. In 2012, you managed to lay off I think almost 2,500 employees. Is there any reason or any possibility from you to lay off a similar number of people also in 2013? Or putting it differently is there any structural reason why you can’t continue to cut costs at the same pace in 2013, as you did in 2012? Thanks.

Haim Romano

I think the starting point of 2012 is different one from 2013. When we started 2011 – end of 2011 our head count was something around 9,000. Today as we mentioned in our report, we finished the year with a head count including ‘012 of around 5,400 position and this is a starting point from 2013. We have plans to increase – not to increase to go on with our efficiency plan, but of course for the same volume as we have seen at the past. But there is still ways to go in our efficiency plan infinite here.

Gilad Alper – Excellence

Okay. I mean, at one stage – at what stage do you actually need to change your business model, change the service that you give customers, dial down even more the handset business or I mean, can you again, if there are any structural reason to think that you can’t fire or lay off as many people?

Haim Romano

First, we prefer not to fire people, we love people, we prefer to do it in a what we call a natural way...

Gilad Alper – Excellence

But I am sorry, it sounds a bit harsh. but...

Haim Romano

This is a reason that we did it in very you know, sensitive and mild way. We changed the way of providing services, more digital, more self service, less friction points with customers because we have an unlimited packages. So less questions about the deals and other. So, first we are more transparent and more straightforward to our customers.

Second, we see that with significant increase of customer satisfaction they are not calling as much as they use to call and they are not complaining as much as they use to because of obviously it brings your call center to kind of an normal situation, not as we use to have at the past that does our calling every hour. It doesn’t have substance.

So, the plan is to go on with efficiency. We lay off people when we don’t have any choice. But doing so we reduce the number of employees by going forward to digital centers, self service and such initiatives. But there is – there are not any structural barriers to those efficiency vertical.

Gilad Alper – Excellence

Okay. Thank you very much.

Operator

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

Dov Rosenberg – Clal Financial

Hi, thank you. First if I can have one quick follow up if you were to estimate what percentage of your efficiency plan do you see is completed at this stage?

Haim Romano

You can ask where the prices can go and then you’ll get the answer.

Dov Rosenberg – Clal Financial

Okay. Fair enough. As far as ARPU, would you say the fourth quarter was impacted also by seasonality or one to mobile if there are any other factors or the second half of that question is, if it is seasonality can we expect fidelity or even a little increase in the first quarter?

Ziv Leitman

I don’t. If you look at the figures of last year, so you see that from Q3 2011 to Q4 2011 the ARPU was reduced by NIS 5. And that time we could say that most of the reduction was due to seasonality, most of the reduction. So, and seasonality it means the sum here in Q3 we have more roaming revenues, incoming and outgoing. So now the NIS 10 reduction in ARPU in the fourth quarter because of it – from seasonality and the other part is from the price erosion. So if you take the benchmark of last year it may be 50:50 or 60:40.

Now regarding Q1, we said that we think that the – we will see the same trend as well in the fourth quarter. I’m not sure it’s reasonable to assume that the ARPU in Q1 will remain at the same level as the first quarter.

Dov Rosenberg – Clal Financial

Okay. You guys are reducing debt very nicely so far, I was wondering is there any target, and is there any sort of debt target or when you reach that you will resume dividends?

Ziv Leitman

So as we said last quarter the company intends to reduce the debt level by NIS 800 million from the level of September 30, 2012 till the end of 2013, which means that the net debt will not be more than NIS 3.3 billion at the end of 2013. Right now we are at 3.8.

Dov Rosenberg – Clal Financial

Okay. And I was wondering as far as CapEx plans for 2013 and also if those numbers that we were at about 492, I think in 2012 and there are expectations for them to go down a little bit, I was wondering what your plans are and if that includes some sort of LTE deployment?

Haim Romano

First we are almost accomplished our natural way, regarding the 3.5, 3.9 network preparing the network to LTE. It doesn’t include the LTE from existing license. But it includes overall our plans for engineering and for IT as we planned in our strategic plan.

Dov Rosenberg – Clal Financial

I’m sorry, I mean, it doesn’t include – did you give a number or just lower than this year...

Haim Romano

It doesn’t include LTE frequencies if there will be a deed about LTE frequencies but it includes LTE inside of engineering most of it because it’s part of the project.

Ziv Leitman

As we said in the past in the previous quarter by the end of 2012, we’ll finalize the upgrade of the network in most of the populated areas in Israel and the rest will be done in 2013.

Dov Rosenberg – Clal Financial

Okay.

Ziv Leitman

Now in order – and the LTE is in the status of – it’s kind of an LTE ready now in order to implement an LTE network we need the frequencies and we need the superiors of minor investment in each one of the sites, we need to replace few cards and a minor investment in the backbone. But it’s not a huge investment as we said in the past. It’s a relatively minor investment and this does not include the frequency standard.

Haim Romano

The answer about the LTE is more complicated. There are some issues about the LTE that we can’t talk about them today and it’s a method of our relationship of our all the bid with the Ministry of Communication and other divisions. So we can’t elaborate on that.

Dov Rosenberg – Clal Financial

Okay. And as far as, is there any sort of not guidance but sort of high end, low end kind of thing as far as where cap is combined it should go down annually?

Haim Romano

No, sorry. No, we don’t.

Dov Rosenberg – Clal Financial

Okay. And then last question for me, is there any developments on the wholesale market on negotiations?

Haim Romano

We almost finalized our negotiation with Bizet about the engineering side. We have some differences between our approach and salesmen approach but they are – from our point of view they are not major they are minor differences. The main issue of today is the price, the price of the wholesale and this is the big issue between us and Bizet and laid forward the Ministry of Communication to stand for his promise.

Dov Rosenberg – Clal Financial

Okay. Thank you very much.

Operator

The next question is from Alex (inaudible) of Goldman Sachs. Please go ahead.

Unidentified Analyst

Yes, good afternoon. I have a question on the competitive positioning and your strategy related to that. I think that neither is it bid I understand in the market that the competitive intensity can be lower after the newcomers pass their milestone in terms of the market share uptake, which is 2014 like early 2014, do you think that is the case and do you have a plan B if actually the comparative intensity is not going down. What would you do on a market if the new comers remain aggressive with your ratio? Thank you.

Haim Romano

Our basic assumption today is that it will stay. Whether to stay aggressive or they will try to get a market share even more than they need for getting back their guarantees. So this is our basic assumption and we don’t want to take a very optimistic assumption. We see that the behavior is not what we call a rational one. They have their rational behavior especially in Milan and so we want to be conservative about it.

Unidentified Analyst

May I ask then if you don’t expect them rationality, how do you feel about the roadmap for the recovery of Windows economics over say next couple of years. Thank you.

Haim Romano

If you look at what happened in other countries after a year or two of price where you can see kind of stabilization and that market is getting more rational, but any guess is a good guess.

Unidentified Analyst

Okay. Thank you.

Operator

The next question is from Sabina Podval of Leader Capital Markets. Please go ahead.

Sabina Podval – Leader Capital Markets

Thank you. Hi good evening. I have two follow-up questions and one new question, so I will start from the new one. I was wondering regarding the cost of revenues during the fourth quarter, it seems like despite the efficiency plan and despite the decrease of the cost of revenues that were seen in the third quarter, the cost of revenues and I am talking about sale or services, it remains stable in the fourth quarter compared to the third quarter.

So I just wanted to understand what happened there because I actually expected that it would go down a little bit. And so my question is just a little elaborate regarding the breakdown or maybe the fixed and the variable cost there. And then I will ask the other question. Thank you.

Haim Romano

If you recall in the Q3 results, we had very low expense for royalties, or it was even revenues, towards a negative expense royalties, since there was reduction in the royalties rate.

Sabina Podval – Leader Capital Markets

Okay.

Haim Romano

And the royalties’ expense for the fourth quarter, it was according the regulation 1.3%. This is a major issue. This is what the major issue for increasing the cost of sales. If you are looking at the total cost of sale, if you take also into account, the cost of equipment.

Sabina Podval – Leader Capital Markets

Yes. But I am trying to understand, I am looking at the services segment and I am trying to understand, also you are not following me, I am trying to understand the breakdown, I understand the thing regarding the royalties, but since you also continued to decrease the number of employees and so we don’t see it in the cost of revenues, we see it all in the operating expenses. There are no variable costs in the cost of revenues that should go down because your service revenue is down about 100 million from Q3.

Haim Romano

You should see the efficiency in both in total OpEx, part of it is in SG&A and part of it is in cost of goods sold.

Sabina Podval – Leader Capital Markets

Okay.

Haim Romano

But there are all kinds – always every quarter we have like one time items, it’s like the 80 million reduction in rent that we had in the fourth quarter.

Ziv Leitman

Yes, right.

Haim Romano

So there is a timing difference between one quarter to another.

Sabina Podval – Leader Capital Markets

Okay.

Haim Romano

But the total – the saving, you see it in the total OpEx.

Sabina Podval – Leader Capital Markets

Okay.

Haim Romano

As you see it in the summary table, the total OpEx excluding equipment depreciation and amortization, in the fourth quarter it was 744 compared to 793 for the third quarter.

Sabina Podval – Leader Capital Markets

Okay.

Haim Romano

So it’s almost there, ILS50 million lower.

Sabina Podval – Leader Capital Markets

Okay, understood. Thank you.

Haim Romano

This is the total efficiency.

Sabina Podval – Leader Capital Markets

Okay. And I have another quick question, please, regarding the 012 brand. Can you please just elaborate a little bit on that? It’s – development of the sales under this brand is according to your original estimates? Are you satisfied with your achievements there, because your churn rate is going up and I was actually estimating or hoping that maybe the low priced brands would support or may be support more.

Haim Romano

You want to talk about the 012 mobile?

Sabina Podval – Leader Capital Markets

Yes.

Haim Romano

Compared to the 012 Mobile. We are satisfied with the 012 mode, especially in the last three months and as we’ve said before, there’s a reduction of the churn rate in the postpaid customers. So we see the effect of 012 model starting from quarter four in last year and we will see it more than that in year to come.

Sabina Podval – Leader Capital Markets

So...

Haim Romano

We are very satisfied with 012.

Sabina Podval – Leader Capital Markets

So – other follow-up to question have been asked before but I just – I’m trying to understand for basically despite the high competitive environment, shall we expect an improvement in the churn rates during the 2013?

Haim Romano

I can’t tweet around that, sorry.

Sabina Podval – Leader Capital Markets

Okay. Great, thank you very much.

Operator

The next question is from David Kaplan of Barclays Capital. Please go ahead.

David Kaplan – Barclays Capital

Hi everyone. Gideon actually I think you just started mentioning something that I found it interesting being about the churn rate you said it stands like you were saying something that the churn rate in prepaid is higher than the churn rate in the postpaid and I guess that makes sense. Are you seeing fewer prepaid customers as a percentage of your total sub? What’s going on in the prepaid market in general, can you talk a little bit about that?

Haim Romano

The prepaid market is under a big question mark, starting from last May because many of our customers not just our zone markets can get a surprise from the market in unlimited packages from six or seven operators, at least six or seven operators, and we – and the new comers. So we see kind of removes from the prepaid to the postpaid in our customer base and others. This is one issue.

The second one is people, the inbound of roamers that are using our Sim cards for one week or two and then they are leaving and of course after six months you are going to see them in churn, but it’s not a real churn, this is a non-churn. So those are the two reasons that you see an increase of churn this quarter comparing to the further quarter, the third quarter in the prepaid. Unlimited and the new MVNO’s and the new MVNOs and seasonality, but there is an improvement in the postpaid as I mentioned before, and we are very optimistic about it.

David Kaplan – Barclays Capital

Then improvement in churn in the both cases, I want to just clarify?

Haim Romano

Yes, comparing to the third quarter.

David Kaplan – Barclays Capital

Okay. Great. And then just my – and my other question. Can you talk about the deployment I mean, I know the timing of that is uncertain and it’s not even up to you it’s up to the government. But can you talk a little bit about the plans are for LTE for Partner, is it going to be a premium service or the relative data speeds available to customers going to be much higher? Is it really more about just offloading congestion from a current network and off on to new spectrum. Can you just talk a little bit about what LTE means that I think from my understanding it sounds like it’s going to mean something little bit different in this local markets than it means in the other markets back in the U.S.?

Haim Romano

No, Its where we’ve really have feed. It’s a long answer for short question. I am not sure that this is the place or the time that we can provide with this information but we will be happy to do that. What I’m going to say that our network is at LTE-ready and we invested in our microwave that after we’re going to solve the issue of frequencies this will and other we will meet into the first one to launch the LTE. The other items should be discussed in different circumstances.

David Kaplan – Barclays Capital

Okay. Great. I’ll look forward to that meeting and thanks for everything. I’ll talk to you soon, bye.

Operator

(Operator instructions) We have a follow-up question from Dov Rosenberg of Clal Financial. Please go ahead.

Dov Rosenberg – Clal Financial

Hi thanks. Just one quick follow-up. Was there any special impact from currency changes this quarter, just because there were a lot of changes in the currency market, I was wondering if there was any impact on you guys?

Haim Romano

No, there was not any material effect of foreign currency this quarter.

Dov Rosenberg – Clal Financial

All right. Thank you very much.

Haim Romano

Thank you.

Operator

There are no further questions at this time. Before I ask Mr. Romano to go ahead with his closing statements, I will like to remind participants that a replay of this call is scheduled to begin in two hours. In the U.S., please call 1888-782-4291, in Israel, please call 03-925-5904 and internationally, please call 972-3925-5904. Mr. Romano would you like to make your concluding statement?

Haim Romano

No, I just want to thank everybody for their time and for joining us for our 2012 annual and fourth quarter conference call and have a good day.

Operator

Thank you. This concludes the Partner Communications Company fourth quarter 2012 results conference call. Thank you for your participation, you may go ahead and disconnect.

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