Cellcom Israel's CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Cellcom Israel, (CEL)

Cellcom Israel Ltd. (NYSE:CEL)

Q1 2013 Earnings Conference Call

May 13, 2013; 09:00 a.m. ET


Nir Sztern - Chief Executive Officer

Yaacov Heen - Chief Financial Officer

Porat Saar - CCG Investor Relations


David Kaplan - Barclays Capital

Michael Clark - Citibank

Dov Rozenberg - Clal Finance


Ladies and gentlemen, thank you for standing by. Welcome to the Cellcom Israel Ltd. first quarter 2013 results conference call.

All participants are present in listen-only mode. Following management’s formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions).

I would now like to hand the call over to Ms. Porat Saar of CCG Investor Relations. Ms. Saar, would you like to begin.

Porat Saar

Thanks Sadena. I would like to welcome you all to the 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 summery of the main highlights of the first quarter 2013 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 Israel Securities Law 1968.

Actual results may differ from those discussed today and therefore we refer you to a more detailed discussions of risks and uncertainties in the company’s filings with the Securities and Exchange Commission included under Risk Factors in the company’s Annual Report for the Year Ended December 31, 2012, 20-F filed with the SEC.

In addition, any projections as per the company’s future performance represent management’s estimates as of today May 13, 2013. 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 first quarter 2013 earnings conference call.

As we anticipated, the competitive environment continues to negatively impact our results and we can see the aggressive competition in pricing plans over the past year taking a toll on our profitability. Despite the aggressive marketing campaigns, the pace of net portability of subscribers and new operators declined significantly. Likewise, the churn of post-paid subscribers for Cellcom Israel decreased.

Our focus on operational excellence remains unchanged and its in this area we maintain our impressive results. For the first quarter we continue to streamline our profits used, while leveraging synergies from the merger, achieving savings at an annual rate of over NIS 600 million compared with the end of 2011.

Cellcom Israel customer service continues to be in recognition. In the ministry of communications report for 2012 that was published in April of this year, Cellcom Israel was nominated as the leader of customer service in the cellular industry.

The company has also led the market in innovative fields, with its Cellcom Israel mobile store exhibition. In the full period to time approximately 100,000 visitors due to the most advanced technologies in the world presented in the cellular and electronics exhibit and received hands on experience with innovate gadgets and technologies in the fields of health, finance, photography, gaming and fitness. We expect such exhibits to enhance our brand value and strengthen our stance as a leading cellular operator in Israel.

In closing, we remain committed as always to maintaining Cellcom Israel’s position as the largest Israeli cellular company and leading communication group for the benefit of both our customers and shareholders.

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

Yaacov Heen

Thank you Nir and good day to you all. As you can see, the ongoing price competition in the market continues to significantly impact our revenues and operating results. In the third quarter of 2015 we saw a 20.6% drop in our revenues, which total NIS 1.26 billion.

We decreased our SG&A expenses by 18.1% year-over-year. From the beginning of the merger as we already noticed, this is accumulated to savings at an annual rate of over NIS 600 million as compared with the fourth quarter of 2011.

Additionally, we have generated free cash flow of NIS 168 million and a 14%, 15%, 17% increase compared to the first quarter of 2012. The increase in free cash flow in the first quarter of 2013 is primarily a result of the decrease in purchase of cellular organization, due to a significant decrease in sales of such handsets and the efficiency measures we implemented during the past year.

In looking ahead to the next quarter and the capital markets forecast for high inflation, we expect a material increase in financing the expenses, which if realized would cause a material decrease in net income. Furthermore we expect revenue erosion to continue into the next quarter, but we also anticipate it to occur at a more moderate rate than experienced in the previous quarters.

I will now give a review of our consolidated first quarter 2013 results. Revenues for the first quarter of 2013 totaled NIS 1.26 billion, decreasing by 20.6% year-over-year. The decrease in revenue is attributed mainly to a 16.9% decrease in service revenues, which totaled NIS 985 million and a 31.6% decrease in equipment revenues, which totaled NIS 273 million.

Operating income for the first quarter decreased by 49.5%, totaling NIS 139 million. EBITDA declined by 33.9% totaling NIS 315 million and net income decreased by 61.3% totaling NIS 67 million. Netvision’s contribution to EBITDA for the first quarter of 2013 totaled NIS 63 million, a slight decrease compared with the first quarter of 2012.

Turning to our KPIs. MOU for the first quarter of 2013 totaled 423 minutes, compared with 365 minutes in the same quarter last year, an increase of 18.4%. The increase in MOU primarily resulted from subscriber transition to marketing plans, which include unlimited air time minutes. ARPU for the first quarter 2013 totaled NIS 75.9, compared to NIS 90.5 in the first quarter last year, a decline of 16.1%

Regarding our gross debt; we seceded to reduce it by approximately NIS 700 million year-over-year. In addition, we took measures to strengthen our balance sheet as its reflected by an approximate NIS 300 million increase in the total equity, as compared with the first quarter of 2012.

The company’s Board of Directors decided not to distribute a dividend for the first quarter of 2013, in order to further strengthen the company’s balance sheet at this time of market uncertainty. The Board of Directors will re-evaluate its decision in the coming quarters as market conditions develop, while taking into consideration the company’s needs.

With that, I would like to open the call to questions. Operator.

Question-and-Answer Session


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

David Kaplan - Barclays Capital

Hi everyone. If you could a little bit about the competition in the mobile market that you’re seeing, it seems that the promotions have slowed down somewhat in the market in terms of headline pricing; that was still around NIS 100 per month for the most part, but we are seeing ARPU continuing to decline.

Is that the continuation of the back book risk as customers from higher priced packages are turning over to the newer ones, and if that’s the case, are we in a point yet where you’re seeing the end of that, where most or the vast majority of your customers are on new packages.

Nir Sztern

Well, hi David, this is Nir. In terms of market pricing, what we’ve seen in the last few months is that even though prices are around NIS 100, we have a lot of promotions for three months, six months, getting to as low as NIS 50 or two months free or things in that vicinity. So we are still seeing a lot of aggressive marketing campaigns to the new subscribers at lower prices than the NIS 100 that you said and obviously that has had its fall in terms of revenue and decline in ARPU.

In terms of customers, of our existence subscriber base moving towards the amenities plan, we’ve seen a vast majority of customers transition in the last few quarters and like we said, like Yaacov said earlier, we are still seeing a decline in the next quarter or we anticipate decline in the next quarter, but at a lower rate than we have in this quarter.

David Kaplan - Barclays Capital

Okay. Can you give us a little bit of color on what’s going on specifically with your business customers relative to the (inaudible), because I think that answer really focuses more on the retail side.

Nir Sztern

Well, we are seeing a slimier fixture and the business is the same as the residential. I mean, this is a small country; everybody talks to everybody. So we are seeing the same trends in both segments.

David Kaplan - Barclays Capital

Okay, great. Thanks very much.


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

Michael Clark – Citibank

A couple of questions. The first related again to ARPU, and just trying to understand, you mentioned in the report the churn and subscribers porting has slowed significantly. Is that coming – a promotions load as well or are you needing to maintain the same level of promotions in May as you were earlier in the year to keep that churn and subscriber got lower.

Nir Sztern

Like we said, we are seeing mass additions to the new operations going down. I think its mainly by the fact that a lot of people that were eager to move have already done the move or have lowered their prices in their existing server operators. So as time goes by and we are familiar, we are year since the (inaudible). A lot of people have already made their decision and as time passes by, we are seeing less and less of an impact of what we are doing and so we are moving customers from one operator to the other.

Regarding what you said about the ARPU, obviously ARPU for the first quarter is mainly the result of what happened in the fourth quarter of last year; that’s where we are seeing the full results of what happened last quarter and this quarter. So even though we are seeing a slowdown of movement of customers, it takes time to see them in the financial report.

Michael Clark – Citibank

But do you see yourselves have to promote less than you were three months ago or you’re still having to maintain the same level of promotions.

Nir Sztern

Same level basically.

Michael Clark – Citibank

The same level. Okay, thanks. And also, I’m not sure whether it’s seasonally, but there looks a bit of weakness in the ISP business. Is that just very high level of the completion or is there some seasonably because of pass over or what’s going on there exactly.

Nir Sztern

When you compare it to the first quarter of 2012, so part of it, it’s because of the competition. When you compare it to the previous quarter, so the business of Netvision is also impacted by the seasonality.

Michael Clark – Citibank

Okay, great. Thank you.


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

Dov Rozenberg - Clal Finance

Hi, thanks. Just one question if I may. You guy cut a lot in expenses, I was wondering going forward, if you expect to keep this sort of level of margins and also just as a follow-on, if you have any different perspective in CapEx for this year.

Nir Sztern

Regarding the CapEx, as we already said last conference call, we anticipate the lower CapEx level. You can see there in the third quarter, which is much lower than the corresponding quarter last year. It doesn’t represent the full year, but the level is lower than above the NIS 500 million, so it’s going to be much lower. So of course there is more efficiency and not just in the cost structure, but also in the CapEx.

Dov Rozenberg of Clal Finance

And regarding EBITDA margin or operating income levels?

Nir Sztern

Okay, the EBITDA margin is the outcome of the price erosion. Of course in the short term usually the price erosion is higher than our ability to reduce our cost. We believe that we have to keep our strength in the market regarding our services and also according to the Minister of Communication, we have the lowest number of complaints. So for all these we have to keep that -- our customers believe that our service is much better than the others, and that’s why we do very gradually and the way that we believe that its with our customer mix.

And regarding the expenses, we are pushing full steam ahead to cut down the cost and we are still working very hard on that. You have to remember that some of the things that we are doing, we are not seeing the impact yet.

For example, take for example the Netvision headquarters; we have Netvision headquarters in Rosh Ha'ayin. The building has been standing without any occupants for at least a year, because we haven’t been able to sublet it and as of April this year we have new, we let to the contract.

So a lot of things in terms of real estate were downsizing the number, the call centers and moving people here into the Cellcom headquarters; we are doing that. Even though in the immediate term we are not seeing the cost being cut down, but we will see them in the next quarter. So some of the things we are still doing, we are still pushing and some of the things that we have done already, we are doing to see the results in the coming quarters.

Dov Rozenberg of Clal Finance

Just to make sure I understand that you can see or you expect operating expenses to decrease sequentially then.

Nir Sztern


Dov Rozenberg of Clal Finance

Thank you very much.


(Operator Instructions). We have a follow-up question from Michael Clark, Citibank. Please go ahead.

Michael Clark – Citibank

Just a follow-up question, the last question on OpEx. You said it could decline sequentially. Does that mean you’ll be able to maintain EBITDA margins here or we should still – the fast decline sort of the faster the pay.

Nir Sztern

Its tough to answer the question. I mean we are doing very well I think in terms of cost cutting; we are pushing as much as we can. In terms of ARPU decline, I think we need to see what the prices in the market are going to have the bigger impact in terms of revenues. So its kind of hard to say right now, whether or not we’ll increase the margin or not.

Michael Clark – Citibank

Okay, all right. Thank you.


There are no more question at this time. Mr. Sztern would you like to make your concluding statement.

Nir Sztern

Sure. Again, thanks everybody for joining the Cellcom Israel’s first quarter 2013 earnings conference call and I look forward to hosting you again at our next call. Good day.


Thank you. This concludes the Cellcom Israel Limited, first quarter 2013 results conference call. Thank you for your participation. You may go ahead and disconnect.

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