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Cellcom Israel, Ltd. (NYSE:CEL)

Q2 2013 Earnings Conference Call

August 19, 2013 09:00 AM ET

Executives

Ehud Helft - CCG IR

Nir Sztern - CEO

Yaacov Heen - CFO

Analysts

Gilad Alper - Excellence

Maura Shaughnessy – MFS Investment Management

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Cellcom Israel Ltd. second 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). As a reminder this conference is being recorded August 19th, 2013.

I would now like to hand the call over to Mr. Ehud Helft of CCG Investor Relations. Mr. Helft, would you like to begin?

Ehud Helft

Yes, thank you. I would like to welcome you all to the conference call and thank Cellcom Israel’s management for hosting this call. With us here are Mr. Nir Sztern, the CEO; and Mr. Yaacov Heen, the CFO and Mr. Shlomi Fruhling, the Company’s new CFO. Mr. Sztern will open by providing a summary 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 discussion 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 August 19, 2013. Cellcom Israel assumes no obligation to update these projections in the future as market conditions change. You should have all by now received a copy of the company’s press release. If you’ve not yet received so, please call CCG Investor Relations at 646-233-2161.

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

Nir Sztern

Thank you Ehud Helft. Good day and welcome everyone to our second quarter 2013 earnings conference call.

The second quarter results reflect the significant change in our marketplace in comparison with the second quarter of 2012 and its effect on our results of operation. But at the same time, the second quarter results show an increase in most of our parameters including service revenues and ARPU when compared with the first quarter of 2013.

In our results, we see some improvement in relation to the first quarter of 2013 including a 5% increase in ARPU and a 4.2% increase in our service revenues excluding Netvision. This along with our ongoing efficiency measures help us generate a quarter-over-quarter 8% increase in EBITDA despite the continued market competition. However, we would caution that these improvements may not continue in future quarters.

Our merger continues to create synergies for us in our comprehensive communication solutions toward Cellcom Total packages which combine cellular, home landline telephony, international calls, and internet into one product and in one bill. These extensions are loyalty of the customers’ increased customer satisfaction.

With regards to our efficiency measures, our focus on streamlining and process improvement continues to bear fruit. Following the merger and compared with fourth quarter of 2011 results, the company achieved savings at an annual rate of approximately NIS660 million, out of which approximately NIS50 million at an annual rate were achieved during the second quarter of 2013.

Finally, looking more specifically at market competition, we have noticed a significant slowdown in the scope of net portability between the cellular companies. Well, this is a positive development; we do continue to see strong market competition with continued price erosion, although at a lower level than before.

Our commitment remains as always to maintain Cellcom Israel’s position as the largest Israeli cellular company and to create a leading communications group for the benefit of both our customers and shareholders.

Before I handover the call to our CFO, Yaacov Heen, I want to take a moment to thank Yaacov for all of his years in office and significant contribution to Cellcom Israel. Yaacov has been a most valuable member of Cellcom Israel’s management team, and I’m confident he will continue to succeed in his future positions. I would also like to welcome Shlomi Fruhling as the new CFO to our team and wish him the best of luck with us going forward.

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

Yaacov Heen

Thank you Nir for (inaudible) and good day to all of you. As Nir mentioned, we saw an increase in revenues from services, ARPU, and EBITDA this past quarter as compared with the first quarter of 2013. This is attributable to a decrease in price erosion, seasonal increase in roaming charges, as well as an increase in revenues from service not included into their basic packages.

I will now give a review of our consolidated second quarter 2013 results as compared with the second quarter of 2012. Revenue for the second quarter of 2013 totaled NIS1.24 billion, decreasing by 17.5% year-over-year. Netvision's contribution to revenues for the second quarter of 2013 totaled NIS233 million compared with NIS259 million in the same quarter last year. Operating income for the second quarter decreased by 40.1%, totaling NIS169 million. EBITDA declined by 28.5% totaling NIS339 million and net income decreased by 44.6%, totaling NIS67 million.

Turning to our KPI, MOU for the second quarter of 2013 totaled 468 minutes compared with 375 minutes in the same quarter last year, an increase of 24.8%. ARPU for the second quarter of 2013 totaled NIS79.7 compared to NIS90.3 in the second quarter of last year, a decline of 11.7%. Amounted expenses in the second quarter of 2013 decreased due to lower inflation in the second quarter compared with the second quarter of 2012 as well as due to a reduction in our debt level by over NIS700 million. The company continues to take measures to strengthen its balance sheet as total equity increased from NIS280 million at the end of the second quarter of 2012 to NIS633 and NIS36 million at the end of the second quarter of 2013.

The free cash flow generated in the second quarter of 2013 totaled NIS345 million, a 21.5% increase compared with second quarter of 2012. The increase in free cash flow can be primarily attributed to a decrease in the purchase of cellular handsets due to a significant decrease in sales of such handsets and the efficiency measures implemented over the past year.

The Company’s Board of Directors decided not to distribute the dividend for the second quarter of 2013 in order to further strengthen the company’s balance sheet. The Board of Directors will re-evaluate its decision in the coming quarter as market conditions develop and taking into consideration the Company’s needs.

As this is my last quarter with Cellcom Israel, I wanted to take a moment to thank management, our employees, and our shareholders for a challenging and rewarding time with the Company.

The cellular market is incredibly dynamic and fast changing, and along with this, we have also faced the fastest regulatory challenges our industry has ever known. At all times, it was important for us to keep our investors updated on this development. I would like to wish Shlomi Fruhling, the new CFO, my excellent team in the finance division, the management team, and the company the best of luck in the coming years.

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

Question-and-Answer Session

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 – Excellence

I had a question actually not about the cellular market but rather on the fixed-line market. You said in the past that if the hosting market -- the fixed line market actually starts, you will do it very cautiously, very gradually, because of the opportunities and grades. If actually the electric company deployed their new network as we probably think it’s going to happen and as it seems to be defined at this stage, is there a chance that you’re going to change your strategy? [Does] (ph) the opportunity through the electric company, the fixed line market be there, will you maybe consider doing something more aggressive than you had planned to do with the wholesale markets? Thank you.

Nir Sztern

First of all, I don’t recall a thing specifically that we won’t be aggressive entering the fixed line market. Having said that, in regards to the electric company, I think the limitation on how fast and how aggressive we can deploy services over the electric company services mainly depends on their roll out. And having to roll out fiber to the home is going to be a very long process, I think, for their side. So obviously we are very anxious and eager to see them entering the market, and we’ll be doing the utmost to gain share over their network, but I think the rate of deployment that they’re planning isn’t very fast.

Operator

(Operator Instructions) The next question is from Maura Shaughnessy of MFS Investment Management. Please go ahead.

Maura Shaughnessy – MFS Investment Management

Just had a couple of questions, just on feeding from the last one, can you just talk about just the overall wholesale strategy in terms of whether there is any likelihood of being able to sign a deal with Bezeq? First question.

Secondly, if things were to improve in the Israeli telecom market, you obviously eliminated the dividend for very good reasons. But what would your balance sheet have to look like before you would ever consider reinstituting a dividend.

And then the third question is just can you talk about the company's philosophy on M&A. Obviously, there has been a lot of rumors surrounding Cellcom and comments subsequent by your majority holder, but just wondering just overall (inaudible) because it probably doesn't make a whole lot of sense to have as many players in this size market that Israel is. So, thanks again and Yaacov thanks for all your help.

Yaacov Heen

Okay, I will start with the first question regarding the wholesale and then whether or not we will be able to sign with Bezeq. As we previously stated in the last conferences, we've had a lot of negotiations with Bezeq and weren't able to reach an agreement in terms of the pricing of the wholesale, and we gave it back to the Ministry of Communications, and right now they are doing a lot of work with their people and other experts from outside to come up with a price for wholesale. We're still waiting on that, we have been actually waiting on that for over six months, even a year now, but from what we understand, prices for wholesale should be coming out within the next three, four months, but I can't talk about that.

We have done the most we can in terms of negotiations, but weren't able to reach an agreement. Obviously the entrance of the electric company to the business is going to give us opportunity to have competition between the two or even if we could (inaudible) between the three, which is again good news for us regarding the wholesale prices, but unfortunately things are going a little bit slower than we would like them to go. So, I think we'll probably be able to tell you more in the next quarter conference call. Hopefully, we'll have more news on that.

In terms of dividend, the dividend policy of the company hasn't changed, and our Board of Directors are examining whether or not to distribute dividend each quarter. Thus far over the last year, they have decided not to distribute dividend. We can't say right now, what the decision of the Board of Directors will be in the next quarter. And obviously they will examine the competition where the Company is in its results, and based on all these we'll decide whether to distribute dividend.

The final question in terms of M&A, we heard some of the rumors and the Company immediately issued a statement that these rumors are not based on anything that we heard from our shareholders, and that said there is no negotiations in terms of M&A, so these are rumors just like many rumors that are out there. So, we can't say anything other than that, and again we restate what IDB said that there are no negotiations with anyone to sell this.

I hopefully answered all the questions, right?

Maura Shaughnessy – MFS Investment Management

Yeah, it is awesome, thanks so much.

Operator

The next question is from Alex Blockman of Goldman Sachs. Please go ahead.

Unidentified Analyst

Yes, good afternoon, I have two questions if I may. First is your posting in terms of the mobile service revenues, well the first growth sequentially for a very long time. I am just wondering to what extent the growth is coming from your old subscribers being more and galumphing more. Do you just see that your NVNO partner paid you more and that's why the growth is there or you also see your core subscribers (inaudible). And my second question is actually on Golan, do you think that in the medium term, Golan will try and build their own network or you would rather assume that they will stay and use your network?

Nir Sztern

We cannot refer to the Golan plans, because it's better to ask them. The revenues from Golan is not significantly higher than previous quarters, and we continue to invest according to its plan, you can see it in the Internet. That's what we can say about Golan plans.

Operator

There are no more questions at this time. Mr. Sztern would you like to make your concluding statements?

Nir Sztern

Yes, again thank you everyone for joining Cellcom Israel's second quarter 2013 earnings conference call. I look forward to hosting you again at our next call. Again on behalf of everybody, I am sure and good luck to Yaacov and lots of luck to Shvili, they both have challenging times ahead and have a good day everybody.

Operator

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

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