Cellcom Israel's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov.12.13 | About: Cellcom Israel, (CEL)

Cellcom Israel, Ltd. (NYSE:CEL)

Q3 2013 Earnings Conference Call

November 12, 2013 10:00 AM ET

Executives

Porat Saar – CCG Investor Relations Israel & U.S.

Nir Sztern – Chief Executive Officer

Shlomi Fruhling – Chief Financial Officer

Analysts

David Kaplan – Barclays Capital Israel

Dov Rozenberg – Clal Finance

Gilad Alper – Excellence Nessuah Brokerage Services Ltd.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Cellcom Israel Ltd. Third 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 November 12, 2013.

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

Porat Saar

Thank you. I’d like to welcome all of you 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. Shlomi Fruhling, the C.F.O. Mr. Sztern will open by providing a summary of the main highlights of the third quarter 2013 results, followed by Mr. Fruhling, who will review Cellcom Israel’s financial performance in further detail.

Before I turn the call over to Mr. Sztern, I’d 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 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, 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 November 12, 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 1646-233-2161.

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 2013 earnings conference call. During this tough quarter, we continue to see positive developments resulting from a strategy and ongoing efficiency measures indicating to us that we remain on track with our approach. For the third quarter of this year, we saw improved results over the previous quarter’s operational results despite the intensified competition in the market.

EBITDA, operating profit and free cash flow, increased compared with the previous quarter and service revenues were maintained at similar level as in the previous quarter. This is the second consecutive quarter of increasing EBITDA after four quarter’s of decrease. The improved results are the product of our continued efficiency measures and a seasonal increase in revenue from roaming services, which were partially offset by the ongoing price erosion.

Likewise our strategy has also yielded positive developments. Since our merger with NetVision, we have redefined ourselves as a communications group by expanding our communication offerings and leveraging our capabilities. In the last quarter, we launched a significant marketing campaign which offers our cellular customers free home landline telephony for one year. This is a significant milestone for the future competition in the landline market, which constitutes one of the company's growth engines.

In addition we believe in the regulators willingness to encourage real competition in this market and hope to see positive developments here going forward. Our strategy remains as always to maintenance Cellcom Israel’s position as the largest Israel cellular company and to create a leading communication group generating improved results, leveraging synergies and implementing additional efficiency measures for the benefit of both our customers and shareholders.

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

Shlomi Fruhling

Thank you, Nir and good day to all of you. As Nir mentioned we saw improvements in our operational results when compared with the previous quarter results in EBTIDA, operating profit, and free cash. By this slightest improvement we also saw net income decrease as a result of increasing financing expenses and tax expenses.

The increase in the financing expenses result mainly increasing the CPI linkage expense sales related to the company debentures, increase in the tax expenses result one-time deferred tax expenses of approximately NIS7 million recorded in the third quarter this year following the enactment of a law, increasing the corporate tax rate to 26.5% starting in 2014.

I’ll now give a review of our consolidated third quarter 2013 result as compared with the third quarter of 2012. Revenue for the third quarter of 2013 totaled NIS1.22 billion, decrease by 15.5% year-over-year. Net Vision contribution to revenue for this quarter totaled NIS224 million, compared with NIS246 million in the same quarter last year. Operation income for the third quarter, decreased by 27.6%, totaling NIS173 million. EBITDA declined by 19.3%, totaling NIS347 million and net income decreased by a 58.1% totaling NIS52 million.

Turning to our KPI, MOU for the third quarter of 2013 totaled 461 minutes compared with 399 minutes in the same quarter last year, an increase of 15.5%. ARPU totaled NIS79.6 compared with NIS86.7 in the third quarter last year, a decline of 8.2%.

During the last year and a half, we act rigorously to strength the company equity structure and repaid approximately NIS1.3 billion to our debentures holders. As of the end of the third quarter, we had an outstanding debt of NIS1.5 billion and cash balance of over NIS1.3 billion. The free cash flow generated in the third quarter of 2013 totaled NIS389 million, a 6% decrease compared to the third quarter of 2012.

The Company Board of Directors decide to distribute a cash dividend in the aggregate amount of approximately NIS85 million out of the Company existing retained earnings, after five consecutive quarters in which we did not distribute dividend in order to strengthen its balance sheet.

During the last period, we reduced our net debt by overall NIS1.1 billion. This distribution is not an indicator of dividend distribution in future quarters, or any such decision should be examined according to the future market conditions and the Company’s needs.

With that I would 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 Israel

Hi, everyone. My question is really around with two of your competitors recently just said they signed a network sharing agreement. I am curious what your view is of that kind of agreement. Is something that Cellcom would think about doing? And do you think that the anti-trust regulator would approve such type of agreement?

Nir Sztern

Well, I think that all in all we said before that having 5, 4G networks in a country of the size of Israel doesn’t make much sense. So I see that is a pretty good news in terms of the industry and getting into network sharing, and overall lowering the cost of all the networks. So obviously we are also looking into that. And regarding the Antitrust Commissioner into something that need to be done still early days and he will have to give the answer pretty soon.

David Kaplan – Barclays Capital Israel

Okay, do you see a possibility where two of the larger network operators could actually have a network sharing agreement. as you think only in the case with one of the larger ones and one of the smaller ones like the agreement that was recently signed to this what makes sense for this market?

Nir Sztern

I think it’s still early days to answer that question.

David Kaplan – Barclays Capital Israel

Right, and in just on the wholesale side, the Bitstream Access agreement. We've all been waiting for regulator to kind of make a decision on that. Are there still ongoing negotiations between the sides, if they can come to an agreement prior to the regulator having a say, that we might actually something happen in the near term?

Nir Sztern

I’m curious to what will be the questions if once we have the wholesale market, but that’s a continue question every conference call that we have. To answer your question there isn’t any negotiations right now everybody is on hold waiting for the regulator to announce the prices.

David Kaplan – Barclays Capital Israel

Okay, great. Thanks from me for now.

Porat Saar

Thanks David.

Operator

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

Dov Rozenberg – Clal Finance

Hi, thank you. I was wondering, if there is any change in sort of your debt targets for the end of the year. For next year, is there any color you can give us and how will you hope to – you hope to bring it or if at any point, and in the near future you expect to have sort of on going dividend policy rather than one times?

Nir Sztern

We didn’t have any target regarding our debt, we reduced our net debt in more than NIS1 billion in the last year. The Company still generating a free cash flow in high levels and there is no, any change in the dividend policy.

Dov Rozenberg – Clal Finance

Okay, is there a certain range toward the sort of the level of debt that you're hoping to reach? Also if you’re not telling us what the number is? Is there a sort of a number in your remind that you hope to reach?

Nir Sztern

We never announced of a target and we won't be able to do it now.

Dov Rozenberg – Clal Finance

Okay, thanks. Regarding the ARPU, sort of stayed flat, I was wondering, if there is any sort of color, you can give us towards understanding where would go forward, understanding how much of it was seasonality? Are you giving out exact numbers on seasonality or goal line or et cetera but how much – looking forward to we should expect to go down a little bit next quarter then stabilize next year or is it too early to tell in your opinion?

Nir Sztern

Well, like we said, the ARPU in this quarter was influenced a little bit by seasonality mainly roaming and in the summer months and the holiday season, which most of was on the third quarter. So obviously we’ll see that going down a little bit and plus we will – we’re still seeing a price erosion not at the rates that we used to see, but it’s still there. So we’ll see both of these influence the fourth quarter.

Dov Rozenberg – Clal Finance

Okay, thanks. That’s it from me.

Operator

(Operator Instructions) The next question is from Gilad Alper from Excellence. Please go ahead.

Gilad Alper – Excellence Nessuah Brokerage Services Ltd.

Hi, thanks for taking my call. My question is about cost cuts. If you guys reach you goals when it comes to cost cuts, are we kind of finished or should we expect to see a lot more happening in the 2013? Thanks.

Nir Sztern

Well, we definitely haven’t reached the bottom in terms of cost cuttings, obviously we won't, it’s hard to maintain the rate of decline that we saw in cost cutting. This is the limit of what we can do. But we’re examining many more initiatives to cut our costs, some of which and I've mentioned that before things that we've done last year, we’ll see the results of next year, and in terms of rents and downsizing some of the areas that we've rented. So we’ll the upside coming in next year, plus more initiatives that we are working on. So it’s something that we are continuing to focus our attention on and we’ll see some of the results next year.

Gilad Alper – Excellence Nessuah Brokerage Services Ltd.

Okay. Thanks.

Operator

The next question is from [indiscernible]. Please go ahead.

Unidentified Analyst

Thank you. What is your guidance please for CapEx for the rest of the 2013 and the other view for 2014? And the same question please with regard to acquisition of intangibles.

Shlomi Fruhling

I’d just say during the last year we dramatically reduced our level of CapEx. The level of CapEx that you saw in the last forward quarter, this is something that hopefully would stay on, don’t see any reason for significant change in the CapEx level and not in terms of intensive...

Unidentified Analyst

Last four quarters I see NIS310 million. So that’s the representative level for CapEx going forward?

Shlomi Fruhling

This is what we have done in the last four quarters and we don’t see any reason to see any significant change.

Nir Sztern

I’d just add to what Shlomi is saying. The only possible or major change, I mean that we talk about is the entrance to LTE. Obviously we still don’t know at and when, but that’s something also to be considered.

Unidentified Analyst

Okay. And acquisition of intangibles, over the last four quarters I see NIS70 million. Is that going to be the same more or less?

Shlomi Fruhling

Yes, when we’re talking about CapEx, look at those together. We don’t separate it between these two.

Unidentified Analyst

Again what is the intangible representative?

Shlomi Fruhling

I’ll repeat. When we’re talking about CapEx in our terms it’s including intangible asset and the fixed asset.

Unidentified Analyst

What do the intangible assets represent?

Shlomi Fruhling

What do you mean by represent?

Unidentified Analyst

I mean what assets are they? I mean this acquisition of Netvision or…?

Shlomi Fruhling

Basically investments in information technology.

Unidentified Analyst

Okay. Thank you.

Operator

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

David Kaplan – Barclays Capital Israel

Hi, Nir. You actually just touched on something I was asked about, the LTE auction. You guys also mentioned in your press release and you obviously can it in the financial statement. You guys have over NIS1 billion on the balance sheet. Why are you not willing to give any guidance or set any policy as far as dividends are concerned? Can you talk a little bit about why you are maintaining $1 billion treasure chest there and what investments are you thinking about, what do you think those costs will be?

Nir Sztern

I’ll answer the latter part of your question first. In terms of our investment plans we need obviously to invest in the network and maintain the network. That’s something that we always need to do. The big investment that will come in, I don’t know maybe in 2014 or maybe a little bit later, is going to be LTE.

I’m not very definitive in my answer because I don’t know at this point when the auction of the frequencies will be held and what parties are going to be there. But it’s definitely something that we are planning towards and hopefully we’ll come in sometimes in the near future.

In terms of the balance sheet, we still have repayments of debts coming in the beginning of January and most overview the cash balance that we have is towards the repayment of our debt.

David Kaplan – Barclays Capital Israel

Okay, if you can just maybe expand a little bit on the LTE well I understand, no yes exactly which frequencies if at all or how many band of that frequency are going to be available to Cellcom for LLE, and I imagine you do have in mind a plan for what would need to be spend because it’s not an LTE ready network as far as I understand. So can you give us a range of what you think the CapEx would have to be for your guys to become an LTE network?

Shlomi Fruhling

No, I’m sorry. Not at this point. We are looking into it and we are talking to all the vendors and trying to figure right now what’s the best way to rollout the network and it’s depending on how fast we want to rollout, where we want to rollout and that is also dependent on the demand by region. So it’s something that we’re working on the internal band right now within the company. So we still don’t have the numbers to be above.

Unidentified Analyst

Okay, great. Looking forward to getting some more information on that.

Shlomi Fruhling

Okay.

Operator

There are no further questions 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 third quarter 2013 earnings conference call. And as usual I look forward to hosting you again at our next call. Have a good day.

Operator

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

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Cellcom Israel (CEL): Q3 EPS of NIS0.53. Revenue of NIS1.22B (-15.5% Y/Y) misses by NIS0.01B. (PR)