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Partner Communications Company Ltd. (NASDAQ:PTNR)

Q4 2009 Earnings Call Transcript

February 9, 2009 10:00 am ET

Executives

Oded Degany – VP, Corporate Development, Strategy & IR

David Avner – CEO

Emanuel Avner – VP and CFO

Analysts

Daniel Meron – RBC Capital Markets

Tom Erlich – RBC Capital Markets

Maura Shaughnessy – MFS Investment

David Kaplan – Barclays Capital

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications’ fourth quarter 2009 results conference call. All participants are present in a 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 recorder February 9, 2010.

I would now like to turn the call over to Mr. Oded Degany, VP Corporate Development and Strategy. Mr. Degany, please go ahead.

Oded Degany

Thank you, Thessa. Good afternoon to those of you in Europe, the Middle East and Russia, and good morning to our listeners in North America. Thank you for joining us for this conference call of Partner Communications 2009 fourth quarter year end results. With me on the call today are David Avner, our CEO and Emanuel Avner our CFO.

Our CEO David Avner is going to make several statements and then Emanuel Avner our CFO will give a summary of our financial and operational results. We then open the floor for Q&A.

At this time if you don’t have a copy of today’s release please contact our Investor Relations manager in Israel Ms. Tanya Rabinovich on 972-54-4815952 and a copy of the release will be either emailed or faxed to you immediately.

Before we begin I would like to draw your attention to the fact that all the statements in this conference call maybe forward-looking statement within the meaning of the US Private Securities Litigation Reform Act of 1995. Regarding such forward-looking statements you should be aware that Partners’ 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 9, 2009 as well as Partner bio filings with the US Securities and Exchange Commission on form 20-F, F1 and 6-K as well as the F-3 shelf registration statement, all of which are readily available.

Please note that information in this conference call related to projections are either forward-looking statements is subject to the previous Safe Harbor Statement as 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.

At this stage, I’d like to hand the call to our CEO, David Avner. David, please?

David Avner

Thank you, Robert, and hello to our listeners. I’m satisfied of this quarter’s financial and operational results for the fourth quarter in the year 2009. I’m also encouraged by the early signs of improvement releasing the identified in the business environment. Our results demonstrate the ability to simultaneously deliver strong financial results together with investments and platform for future growth. Our strategy decision to continue and invest in our excellent customer service and new company owned distribution channel despite a demanding business environment is reflected in net adds of 144,000 new cellular subscribers.

Once again, this year Orange was named by Globes as the leading telecommunication brand in Israel for the eighth year in a row. TheMarker, Israel’s business daily newspaper named Partner as the mobile operator who has the best customer service, and we also were awarded the marketing strategy as the most innovative company in the Israeli market.

The dominance and the leadership of partnering the Israeli market are two of our key assets. Our decision to expand our product and service portfolio into the fixed line business is supported by the recent event in the Israeli telecom markets. In 2010, following the execution of our fixed services ramp-up period, we’ll start implementing the second phase and join our existing sales channels and force to the fixed services sales efforts. On the product side, we intend to enrich a fixed line portfolio to offer new broad cost effective products and features which address new marketing segments.

Partner is determined to establish new standard in customer service and innovative products which will further strengthen our position in the communication market. In 2010, we work in two major avenues, the implementation of the second stage of our wireline growth strategy for maximization the entire company's synergy and also the execution of our efficiency plan which is aimed to realize the cost saving potential.

Partner has always striven to follow the golden path of maximizing the interest of our customers, shareholders and employees. Our success in combining the best customer service and attractive dividend yield together with our commitment to employee’s welfare are our major achievements.

2009 was landmark year for Partner. In this year, we established the foundation of our future growth engine, strengthened our retail distribution channel and also successfully supported the change in ownership. I am certain that in the coming years we will harvest the fruits of our investments for the benefits of our shareholders.

With that said, I would now like to hand the call over to Emanuel Avner. Emanuel, please?

Emanuel Avner

Thank you, David. As David explained operational and financial performance of the final quarter was encouraging. Service revenues decreased only marginally by 0.8% in the quarter, although the revenues were positively affected by the shifting of some of the Jewish holidays from the fourth quarter in 2008 to the third quarter in 2009. For 2009 as a whole, service revenue has decreased by 2.2% reflecting lower outgoing voice revenues due to both the competitive market conditions and the mandated reduction in the billing interval, as well as the impact of lower roaming activity.

Revenue growth continues to be supported through growing fixed line business revenues of cellular content and data revenues and expanding cellular subscriber base.

Operating profit for 2009 decreased by 6.8% compared to 2008. The decrease primarily reflect the supplementary expenses related to the ISP and fixed telephony services and the impact of the economic downturn. For Q4 2009, operating profit was approximately unchanged from Q4 2008.

EBITDA for 2008 increased by point – EBITDA for 2009 so increased by 0.3% compared with 2008, reaching 2.3 billion shekels, which is equivalent to 42.5% of service revenues and 37.9% of total revenues. Excluding the impact of the capitalization of handset sales goes in 2009; EBITDA would have been 2.1 billion shekels in 2009, a decrease of 8.4% or 192 million shekels compared with 2008. The decrease is mainly attributable to the losses of approximately 119 million shekels in 2009 related to the ISP and fixed telephony initiatives, as well as the impact of the economic downturn.

The management of the company has decided that full year financial statement for 2009 will include a note that presents a selected financial data on the basis of two operating segments. The fixed line business, including fixed line telephony, ISP Telecommunications Services and the Cellular IP system. This additional level of expense will help both management and investors who assess the performance of each operating segments separately.

For 2009, the fixed line business segment contributed an EBITDA loss of NIS 83 billion, representing an increase in loss from NIS 70 million in 2008. As I mentioned already, with the total the new ISP and fixed-line telephony services contributed a loss of NIS 190 million compared with a loss of NIS 26 from this service in 2008.

Regarding dividend, the Board of Directors will decide on the quarterly dividend distribution following the approval of the auditors’ financial statements for year 2009. Turning to our guidance for the year ahead, in the recent months the company has undertaken a wide ranging efficiency in cost review with the help of external consultants, with a aim of reducing operating costs. We are also beginning to see some early signs of an economic recovery. These two factors explain our expectation that profitability will be higher in 2010 than in 2009 providing that we will (inaudible) in competitive environment evolve as currently anticipated.

With that, I will now hand the conference back to Oded. Oded?

Oded Degany

Thank you, Emanuel. You are now invited to ask your questions. Theta, please proceed with the process.

Question-and-Answer Session

Operator

Thank you. Ladies and gentleman, at this time we’ll begin the question-and-answer session. (Operator instructions) The first question is from Daniel Meron of RBC Capital Markets. Please go ahead.

Daniel Meron – RBC Capital Markets

Thank you. Hi, congrats on the ongoing execution. Can you give us a sense on where we are with the cost reduction and efficiency measures on '10? I saw that already did some measures that you can give us a sense and where we should see the full realization of these efforts? Thank you.

David Avner

Okay. Regarding the status of the capital reduction process or measures – About efficiency measures, we said that we already started efficiency work with the external consultant. This was – it has begun in 2009 at the end of the quarter, we already see some signs of this work in the fourth quarter in 2009, and I hope that you will see full implementation of this work along 2010.

Daniel Meron – RBC Capital Markets

Would it be second quarter event that we'll see the full realization, is there a timeframe and also what is the magnitude?

David Avner

I think it will be gradual along the year. You will see I think the full impact along the year. Of course, we implement several of this efficiency measures step by step, and we already see some signs of that in Q4 2009, and I am sure that this will be bigger and bigger along the year.

Daniel Meron – RBC Capital Markets

Okay. And then on the ISP front with – you mentioned that you're going to increase the efficiencies or the synergies of this product line with larger division. Are we talking additional expenses that you put in or are those resources already committed, so we are seeing pretty much, I guess most of the financial drag on the EBITDA performance from here on to (inaudible)?

Emanuel Avner

Okay. So first of all in 2010 we will see some changes in the product side and I think in this side we will see more efficiency from our side brining the better and more efficient, cost efficient product to the market. On the same side the sales now will be committed not only by the ISP division of the company, the ISP group division of the company, but it also will be done by the old sales force of Partner together, and I think this will bring, of course, better and higher force, sales force to the market by that we believe that our sales achievement will be much better in 2010.

David Avner

Regarding the synergy in the fixed line and the cellular, we do see synergies and the more we implement the product we see more synergies, and it goes in two revenues. One, is the operational and sales side; we have seen now in the last quarters that the more we use the current sales force and retail chain that we already have to sell the ISP and whole products, it works better for us, and of course, it also saves money. And on the product side, we have already synergies between the cellular product and the fixed line products. It goes with the products itself and also through the tariff and bundling between the products. So we see synergies and savings and creating value in the product due to the synergies in the product and in the operational and sales side.

Daniel Meron – RBC Capital Markets

Thank you, Oded, minor [ph] that I’ll hear the story now. Thank you.

David Avner

Thank you.

Operator

(Operator instructions) The next question is from Tom Erlich of RBC Capital Markets.

Tom Erlich – RBC Capital Markets

Hey guys, congrats on the execution. Just a follow-up here. Could you outline the process of the capital reduction you guys are planning? Is this something for the next couple of weeks to be resolved?

Oded Degany

Hi, Tom. We submitted yesterday and we announced yesterday that we submitted the settlement agreement with some of the bondholders. Now it’s of course a call to decide about the timeline and about the next – basically we’re optimistic about the process because we are familiar with the fundamentals of the company and the financial of the company and from office where we can send over that a one-time dividend is possible.

And on top of it, of course, we are also optimistic because we have managed to obtain the consent, and to remove some of the objections of the bondholders. Generally speaking, I want to be cautious and not try to predict the timeline, but as I mentioned before we’re very optimistic and we hope to see it soon.

Tom Erlich – RBC Capital Markets

Great, thanks for the color, Oded. Good luck.

Oded Degany

Thank you.

Operator

The next question is from (inaudible). Please go ahead.

Unidentified Analyst

Hello, everyone. And my question is when the fixed line business segment will become profitable?

David Avner

Well, generally speaking, based on the business trend that we have – the internal business that we – we will see throughout the year an improvement in the financial results. We will start to report based on the entire wireline fixed segment, and not just the ISP in 2010, meaning that our reports will include the so called consolidated revenues and profits of the ISP, the PRI transmission and the mobile backhauling [ph] internal revenues. I prefer not to use guidelines, but I believe that the entire wireline activity will be breakeven at the end of this year or the beginning of next year.

Unidentified Analyst

Thanks.

Operator

The next question is from Maura Shaughnessy of MFS Investment Management. Please go ahead.

Maura Shaughnessy – MFS Investment

Good day. Couple of questions. First of all, with regards to the special dividend, assuming that the courts allow that to happen, could you talk about your leverage goals post the special dividend? Second question is with regards to the economy, you mentioned that there were some early signs, can you be more specific, is that with regard to roaming or what have you? And then the third question is just in terms of the competitive environment what the iPhone has meant? And that would be my three. Thanks.

David Avner

Okay. Regarding the first question, I believe that following the one-time dividends our net debt to EBITDA will be in order of magnitude of 1.5, okay. Just to remind you today it's around 0.91, okay, this is the number. So we don’t intend to substantially increase the lever of the company following the one-time dividend.

Regarding the status of the Israeli economy, we have many metrics to measure and to feel the mood and the atmosphere in the Israeli market, but it's too early to provide a market with significant and very clear indications about recovery. What we said is that we see early signs, which are reflected in some of our deep analysis of MOU and then some of customer behaviors and uses, by the way mainly the business segment.

Some of the usage pattern of the roaming customers, but it's still too early to say something, which is very significant and very clear and we want to be again very cautious to trying to predict what will be the impact of the recovery of on Partner. Basically, we think that we will gain from the recovery because generally speaking we are most sensitive compared to the other to the impact of the recession, but we don’t have any expected timeline for recovery, and I would say disclose the analysis of what will be the impact. And that’s by the way, mainly because it's not very easy to distinguish between competition and the situation of the economy.

Okay, regarding the iPhone, the bottom line is that unlike other countries, such as US and some places in Europe our network is well prepared and in a good condition. We are dealing with the right agreement and the right infrastructure to support the increasing data traffic. The value of iPhone subscriber is based on the tariff plans and the packages that we introduce to the market, is relatively high and positively not surprising us. Again, it’s too early to deicide about it because we launched the product only in the beginning of December but we are very, very satisfied on the introduction of iPhone in Israel.

Maura Shaughnessy – MFS Investment

And if you don’t mind if I ask just one more question, could you outline what your average cost of debt is right now and the expected inflation in Israel for 2010?

Emanuel Avner

Okay, it’s about a year. Basically, we have something to like 2.1 below shekels which are linked to the CPI. Out of that we have about 1.7 billion shekels that bears 4.25% linked to the CPI. We have another a full 60 million shekels which bears now 4% linked to the CPI. And we have another loan which – of 300 million shekels which appears on the balance sheet in separate line which is term payable interest rates which is now about, which is now about 2% – 2% non-linked to CPI. On top of that, we have another – we have a credit facility of 1.2 billion shekels again on the basis of payable interest rates, with interest rates which is currently about 2.2% on annual basis, not-linked.

Maura Shaughnessy – MFS Investment

And what is the expectation for CPI in 2010?

Emanuel Avner

Right now if you would like to buy now a futures on the CPI in Israel, this will be about between 2.6% to 3% on annual basis so.

Maura Shaughnessy – MFS Investment

Great, thank you.

Emanuel Avner

Thank you.

Operator

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

David Kaplan – Barclays Capital

Hi everyone. The first question I have is on CapEx. If you look at the CapEx in the Partner model, it looks like the CapEx number was a little bit less than a 100 million shekels for the quarter. That’s a little bit lower than we were expecting. Can you talk a little bit about what wasn’t set down or why that happened or, or if mostly just ended being capitalized and going into the intangible form?

Emanuel Avner

Okay, I think you should look on the CapEx more on an annual level and not so much on a quarterly level because you see that there are many fluctuations along the year. We started with very high CapEx level in Q1, and after that it went down, but on an annual level you can see that it’s more or less similar to what we had in 2008. For next year, I don’t think you should anticipate something which is not in line with that trend that you see right now.

David Kaplan – Barclays Capital

Okay. And also can you just give us a sense or a timetable maybe vis-à-vis. You mentioned in your 3Q press release that the dividend policy was under discussion. If you can tell us or give us some sense of when discussions would be take place, and when we might hear what the result of that is?

Emanuel Avner

The only thing that we will tell you that the new board decided to declare the fourth quarter dividend only following the audited financial statement for 2009, which are expected to be released in the next few weeks. So we don’t have an accurate – specific date but it’s not a long term.

David Kaplan – Barclays Capital

Okay. And then lastly, which is on the fixed line I thought you broke out fixed line revenues and EBITDA numbers for and this really, can you just talk a little bit about is that meeting the expectations that management had set for the Voice-over-Broadband and the fixed line business and what the goals are for 2010?

Oded Degany

We decided not to provide the market with specific – with accurate guidelines about the numbers of this business. But generally speaking, you are dealing with three types of market. The transmission market itself is a market in the order of magnitude of NIS 1 billion. Transmission meaning, PRI which are voice services to large enterprises and those are few transmission services data network. The voice and the ISP market are in the order of magnitude between and NIS 4 billion and NIS 5 billion, okay. And the third segment which is an inter-company segment, the cost saving regarding our mobile bank calling transmission. Let’s not forget that Partner owns 1400 kilometers of fiber optic network, which provide transmission services to large customers on one hand, and on the other hand it also assist us in the cost saving of our mobile backhauling.

So this is also an inter-company revenue. Generally speaking, as I mentioned before, we believe that by the end of the year the entire segment, the entire product segment will be close to breakeven.

David Kaplan – Barclays Capital

Okay. Thanks very much, Oded.

Emanuel Avner

Thank you, David.

Operator

There are no further questions at this time. Before I ask Mr. Degany to go ahead with his closing statement, I would like to remind participants that a replay of this call is schedule to begin in two hours. In the US, please call 1888-326-9310, in Israel please call 03-9255-900, internationally please call 9723-9255-900. Mr. Degany, would you like to make concluding statements.

Oded Degany

Thank you, Thessa. This conclude our 2009 yearly and fourth quarter results, conference call of Partner Communications. We appreciate your interest and please feel free to contact us at Investor Relations if have any further questions. Access to the call and to other valuable information of Partner is available through our website at www.orange.co.il. Thank you very much and have a good day.

Operator

Thank you. This concludes the Partner Communications Company fourth quarter 2009 results conference call. Thank you for your participation, you may go ahead and disconnect.

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