Cellcom Israel's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 6.14 | About: Cellcom Israel, (CEL)

Cellcom Israel Ltd. (NASDAQ:CELL)

Q4 2013 Earnings Conference Call

March 6, 2014 10:00 am ET

Executives

Ehud Helft - Managing Partner, GK Investor & Public Relations

Nir Sztern - CEO

Shlomi Fruhling - CFO

Analysts

Gilad Alper - Excellence

David Kaplan - Barclays Capital

Alex Balakhnin - Goldman Sachs

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Cellcom's Fourth Quarter and Full Year 2013 Results Conference Call. All participants are at present in listen-only mode. Following management’s formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded.

You should have all received by now the company's press release. If you have not received it please contact Cellcom investor relations team at GK Investor Relation or in the News section of the company's website www.cellcom.co.il.

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

Ehud Helft

Thank you, operator. Good day. I would like to welcome all of you to Cellcom Israel conference call and I would like to thank management for hosting this call today.

With us here are Mr. Nir Sztern, the CEO, and Mr. Shlomi Fruhling, the CFO. Mr. Sztern will open by providing a summary of the main highlights of the fourth quarter and the full year 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 would like to remind our listeners that in this call, management prepared remarks may 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 Safe Harbor for forward-looking statement that is that is contained in the Private Securities Litigation Reform Act of 1995 and the Israeli Securities Law of 1968.

I note that actual results may differ from those discussed today and, therefore, we refer you to more detailed discussion of the risks and uncertainties in company's filing with Securities and Exchange Commission, including under Risk Factors in the company's annual report for the year end of December 31, 2013 filed under from 20-F which was filed today in the SEC.

In addition, any projection to company's future performance represent management estimate as of today March 6, 2014. Cellcom Israel assumes no obligation to update these projections in the future if market conditions change. You should have by now received a copy of the company’s press release. If you’ve not yet received it, please contact us at GK Investor & Public Relations.

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

Nir Sztern

Thank you, Ehud. Good day to all and welcome to our fourth quarter and full year 2013 earnings conference call. Looking back over 2013, we saw another year of aggressive competition in our industry. However, despite this back drop we continued to present good financial results as reflected by our strong free cash flow of approximately NIS1.2 billion for the year.

We view this strong cash generation to adjust overall debt levels approximately NIS1 billion during 2013. Our net debt now stands at approximately NIS3.8 billion. Over the past two years since the merger with Netvision, we have undergone multiple turnarounds in our cost structure. We have reduced headcount by 2,850 positions, a reduction of 40%. We have also reduced overhead expenses and streamline work processes.

These measures have enabled us to reach cost saving and an annual run rate of approximately NIS640 million when comparing the fourth quarter of '13, expenses with the fourth quarter of 2011. In 2013 alone we saved NIS200 million in SG&A expenses compared to last year.

This year we also continued with the expansion of our product offerings to landline services. This, together with our focus on profitability, had positive results as reflected in the moderation of the ARPU decline and revenue erosion in the last quarters.

Looking ahead, I expect that competition and consequently the price erosions in the cellular market will continue into 2014. However, we will continue our focus on efficiency measures. We expect that in the long run a shared passive infrastructure for our network will allow significant savings in operating expenses and assured 4G LTE network will enable us to reduce investment in that area.

We are preparing for quick launch for our 4G network. This is spending the allocation of 4G frequencies and the regulatory decisions with regard to network sharing.

In terms of the future, we see two main upcoming opportunities. The first is further developing our wire line services based on the landline wholesale market once it is established. The fixed line market in Israel is controlled by two companies, Bezeq and HOT, whom together own about 88% of this approximate NIS4 billion market. It is also characterized by low competition. The turn rate is lower than what we see in the cellular market. We also see EBIDTA in this market in the high 50s versus around the 30s in the cellular markets based on the company's reports.

The Israeli ministry of communication is expected to soon announce its decisions as to the development of wholesale market, expected to enable us to purchase the infrastructure all the way to the home from Bezeq at least in the first instance. The establishment of an efficient wholesale market will allow us to strengthen our foothold in the fixed line market. We will do this by leveraging our existing fiber infrastructure, our customer base to over 3 million cellular subscribers and Netvision's household subscribers, as well as our sales and customer support teams.

We are also considering the entry into the television market in Israel to over the top technology, once the wholesale market has been established. The local television market also has only two players with annual revenue of NIS3.8 billion with EBIDTA margins at higher level to those of the cellular market.

The (inaudible) levels are currently at a relatively high level allowing room for new players to come with an attractive offering. We believe that over the top TV services are our potential growth opportunity for us. By leveraging our customer base as well as our existing sales and marketing infrastructure we can establish foothold in the TV market. The combination of a wholesale market with our strength in the cellular market will allow us to become a supplier of full bundle suite of telecommunication services for the consumer.

In summary, while the competitive environment remains tough for all players in our market, we remain the largest cellular operator in terms of subscribers. We aim to continue to strengthen our position as the leading communication group providing comprehensive communication solutions while using our strong footprint to provide additional complimentary and synergistic services to our customers.

In closing, I want to thank our employees and management for their efforts in what has not been an easy year. I am confident in their determination in maintaining our leading position and bringing success. As always, we remain committed to continuing our efforts for the benefit of our customers, shareholders and dedicated employees.

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

Shlomi Fruhling

Thank you, Nir, and good day to all of you. As Nir mentioned, 2013 was a challenging year for the cellular market as a whole, as well as for us. While we intent to continue implementing efficiency measures in order to adjust our expense structure to our revenue level, we continue to expect further competition and price erosion in 2014. Despite the intensified competition, our effort enable us to conclude the year with a free cash flow of their investment of approximately NIS1.2 billion, an increase to approximately 7%, compared with 2012.

Our strong free cash flow allowed us to strength our balance sheet and we made repayment of principal to our debentures in the amount of over NIS1 billion from internal resource, decreasing our net debt by over NIS700 million.

Turning to our consolidate results, revenue for 2013 totaled NIS4.9 billion, decreased by 70% compared to the last year. Within this our service revenue decreased by 12%, totaling NIS4 billion. And revenue for equipment decreased by approximately 31%, totaling NIS942 million.

Operating income for year decreased by 34%, totaling NIS651 million. For the fourth quarter of 2013, operating income decreased by approximately 10%, totaling NIS170 million.

We have placed significant effort in reducting expenses. And in 2013, we successfully reduced operating expenses by 14%, compared with those of last year's. We intend to continue to improve our efficiencies and reduce cost, however, the next big step in cost cutting will come from network sharing agreement if approved by the regulators and implementers.

In 2015, EBITDA declined 24%, totaling approximately NIS1.34 billion. And net income for 2013 decreased by 46%, totaling NIS288 million. EBITDA for fourth quarter 2013 decreased by 10%, totaling NIS335 million while net income decreasing by 10%, totaling NIS102 million.

ARPU for 2013 totaled NIS78.5 compared to NIS87.5 in 2012. ARPU for the first quarter 2013 totaled NIS78.7, compared with NIS82.4 in the fourth quarter of last year. The decline is due to the continued price erosion.

We conclude 2013 with a fee cash total of NIS1.2 billion, a 7% increase compared with 2012. Despite revenue erosion, increasing free cash flow in 2013 is primarily the result of decrease in repayment to vendors for purchase of cellular handset due to lower level of handset sales and the efficiency measures implemented during the year deducting our operating expense and CapEx level.

In terms of balance sheet, our net debt for 2013 year-end amounted to approximately NIS3.8 billion, a decrease of approximately NIS700 million compared to 2012 year-end.

The company board of directors decide not to distribute a dividend for the first quarter of 2013 in order to continue strengthening the company balance sheet. The board of directors will continue to reevaluate its decision in the coming quarter as market conditions develop and taking into consideration the company's needs.

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

Ehud Helft

Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from Gilad Alper from Excellence. Please go ahead.

Gilad Alper - Excellence

Hello.

Nir Sztern

Hi. Yeah.

Gilad Alper - Excellence

Oh, okay. Hi, everyone. I have a general question on the market. I think that HOT mobile and Golan Telecom got their payment back, the license deposit payment back, there was an expectation on that maybe competition level in the market will come down at least a little bit, but it does not seem to be happening, right? I mean, competition level continues to be very intense even after they have received the money back. So what is happening? Is it that we have too many operators for the market, are there any other reasons that are keeping the competition level so high? Thanks.

Nir Sztern

Well, it is true that the level of competition are still very fierce despite the fact that they haven't received the money yet but I think Golan has been approved to receive their guarantee, but they have not received it yet. And yes, it is true, we are still seeing the competition level is very high. I think there is many different reasons why we see that. Some of it -- again, five operators, there is always somebody who wants to be a little more aggressive at a certain point in time. So like we said in the PR, the assumption for us in 2014 the competition levels are still going to be a very high.

Gilad Alper - Excellence

Okay. Thanks.

Operator

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

David Kaplan - Barclays Capital

Hi, yes, if you guys could talk a little bit about the network sharing agreements. I know you should be waiting for the approvals on those and then a whole bunch of them allowed and then there has been some back and forth for the government about their being enough spectrum for there to the three networks up and running. Where are we on all of that? How far are we from getting a decision from the antitrust commissioner, and then once we have a decision on their part, how long will be before the ministry of communications gives us an answer?

Nir Sztern

Well, actually I mean it's something that I would also love to get an answer on. We are still waiting for both the ministry of communications and the antitrust commissioner to give their decision. We have been talking with the MOC over the last two weeks explaining our position and we are waiting for their take on things. The things to remember are this. I mean, there are few network sharing agreements; the first is a passive network sharing agreement, the other is the 4G network sharing. Both have different implications in terms of CapEx and on OpEx. And right now what everybody is talking about is the 4G network sharing, a little bit less on the passive despite, and you have to remember, a lot of the upside at least in the future will come from the passive agreement and not the active one.

David Kaplan - Barclays Capital

Okay. And then just a quick question on the cost cutting side. You guys seem to be able to cut cost in ways that nobody else can. So and every time you guys do it seem the first reaction there isn't much less. So where are you in terms of that? Where are you able to take cost out of your business? How is that you are successful in doing that, and do you still see wall hanging fruit there for you guys to cut of the business in the near term?

Nir Sztern

Well, I think we pretty much run out of wall hanging fruits that's for sure, but we still see that there is more to be done, I mean and sometimes as revenues go down you have to rethink the way you do business and that's what we are doing on a daily basis. And things that we thought that we couldn't do a year ago, we're thinking of them again and reexamine them and doing them differently. And so that's why we feel pretty positive that we will continue to see a cost cutting in 2014.

David Kaplan - Barclays Capital

Are you seeing more of that on the operating side or on the purchasing from your perspective? And that's it from me.

Nir Sztern

I think in everything we do; it's on the operating, it's in the CapEx, it's in everything that we do.

David Kaplan - Barclays Capital

Okay. Great thanks.

Nir Sztern

Sure.

Operator

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

Alex Balakhnin - Goldman Sachs

Yes, good afternoon. A question from me on the wholesale broadband market. Do you expect you will be able to come up with the competitive offering given the new regulation? Do you glad to use that like infrastructure more than you do now? Do you -- like what sort of pricing force do you expect to maybe selling broadband potentially at losses to drive loyalty to your mobile customers for example, like what you're thinking on that? And lastly, when do you think you will be able to launch touch, touch offerings based on the new wholesales market architecture? Thank you.

Nir Sztern

Sure. Actually, we at a very -- it's at a point that it's a little bit tough for me to answer your question, because the hearing has been published by the MOC and we are supposed to give our answer to it next week. Some of the things that are not too bad, the other things are a little more concerning for us. We feel that there is a lot of opportunity in the wholesale market and that's what I said earlier, we feel that there is growth opportunity there, we feel that the market isn't very competitive, we feel that we have a very strong starting position to be a very strong player in the wholesale market.

And regarding your question, we do feel that if prices are better than they are right now and if wholesale market is affected then we plan to be a very strong player there.

Right now, we will be discussing some of our problems that we have with the model that was published by the MOC in the next few weeks, we feel that some of the assumption that aren't very, aren’t right, and we feel that if data usage will go as we have seen in the last year we will increase over the next two years and prices aren’t as attractive as they should be. And so we will be pushing for prices to be lower.

Alex Balakhnin - Goldman Sachs

And do you have any clarity on whether you will be heard or not?

Nir Sztern

Well, we definitely be heard whether or not they will do what we ask them, that's a completely different question. We will send our written decisions or our written comments to the hearing next week and probably a week after that we will present our position to the ministry in person and we will -- we have a good work that we have done with a number of consultant groups that we feel are pretty strong points and we feel that we have a good case to turn around some of their decisions or some of their recommendation.

Alex Balakhnin - Goldman Sachs

And in case -- sorry for keep asking. And in case of they coming up with, I don’t know median expected proposal when do you expect realistically you will be able to come to the market with a commercial upfront?

Nir Sztern

I mean to be honest with you in this, I think we will probably take another month at least, if not two, for the final decision of the MOC. Then there is little bit of set up time between us and Bezeq that can take another a couple or three months. So I think fourth quarter is a reasonable time to assume that we will start seeing that the first customers on the wholesale.

Alex Balakhnin - Goldman Sachs

Yes, thank you so much. That is very clear.

Nir Sztern

Sure.

Operator

The next question Kathy Scheinman[ph] of Citibank. Please go ahead.

Unidentified Analyst

Hi. I have two question please. The first is, what was the EBITDA gain for fixed line in the fourth quarter, and is it -- was it a one-time thing or it is permanent?

Nir Sztern

It is permanent. There was no one time in the EBITDA in the rest quarters.

Unidentified Analyst

In fixed line. Okay. And the second question please. It is now you have a new management, so what is the current management's view on sharing the profit between the debt coverage and dividend distribution in 2014?

Nir Sztern

Well, we do not have a new management, we have new owners.

Unidentified Analyst

The new owners, yeah. Sorry.

Nir Sztern

For the time being, thank you very much, as we still are the same management. I think that is something that you should bring up with them. They're just entering the company and learning, and so there is nothing to say about that yet.

Unidentified Analyst

Okay. Thank you very much.

Operator

(Operator Instructions).

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

Unidentified Analyst

Hi. You talked about the expected price erosions and I wanted to know if you could give us a quote of where you think the ARPU should be in this year?

Nir Sztern

Unfortunately, I can't. There is a lot of things that can go up or down in terms of ARPU. Right now, it seems that the market is aggressive. But I mean also the beginning of last year was aggressive and moderated throughout the year. So I think it is still early to say.

Unidentified Analyst

Understand. And another question. Assuming the network agreement, the shared network agreement is approved, I read in the report that Golan would not need to pay for the use of the second and third generation networks. How material would that be on your results?

Nir Sztern

No, I think you read wrong.

Unidentified Analyst

Right.

Nir Sztern

He will pay.

Unknown Analyst

I understand. Okay. Thank you.

Nir Sztern

Sure.

Operator

There are no further questions at this time. Mr. Sztern, would you like to make your concluding statement?

Nir Sztern

Yes. Thanks. Again, I would like to thank everybody for joining our conference call and your continued interest in the company. With a word of our sponsor, we'll be attending the Citigroup Telecom's Conference in London, in March and we hope to see some of you there. For the rest of you, I look forward to watching you again at our next call. Thanks.

Operator

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

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