Cellcom Israel's (CEL) CEO Nir Sztern on Q2 2014 Results - Earnings Call Transcript

Aug.11.14 | About: Cellcom Israel, (CEL)

Cellcom Israel Ltd. (NYSE:CEL)

Q2 2014 Earnings Conference Call

August 11, 2014 9:00 AM ET

Executives

Ehud Helft – GK-Investor & Public Relations

Nir Sztern – Chief Executive Officer

Shlomi Fruhling – Chief Financial Officer

Analysts

Gilad Alper – Nessuah Brokerage Services Ltd.

Katish Ninman – Citibank

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Cellcom’s Second Quarter 2014 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’s investor relations team at GK Investor Relations or view it in the news section of the Company’s website www.cellcom.co.il.

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

Ehud Helft

Thank you, operator. I would like to welcome all of you to Cellcom’s Israel conference call and I would like to thank management for hosting this call today. With us on the line are Mr. Nir Sztern, the CEO; and Mr. Shlomi Fruhling, CFO. Mr. Sztern will open by providing a summary of the main highlights of the second quarter 2014 results, followed by Mr. Fruhling, who will review the 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 take additional forward-looking statements in respect to your questions. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statement that is contained in the Private Securities Litigation Reform Act of 1995 and in the Israeli Securities Laws of 1968.

I note that 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 filing with Securities and Exchange Commission, including under Risk Factors in the Company's Annual Report for the year ended December 31, 2013 filed under the Form 20-F on March 6, 2014.

In addition, any projection as for the Company's future performance will represent management estimate as of today. Cellcom Israel assumes no obligation to update these projections in the future if market conditions change.

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

Nir Sztern

Thank you, Ehud. Good day to all of you and welcome to our second quarter 2014 earnings conference call. We are happy with our performance in the second quarter, but particularly with the continued strong cash generation we have shown so far in the first half of 2014. We grew our net income by 17.9% over the second quarter of last year to NIS79 million. EBITDA was NIS314 million in the quarter, which was 7.4% below the EBITDA of the second quarter of last year. Excluding the one time effects on our results during the quarter, EBITDA was NIS331 million, a 2.4% below that over the second quarter of last year.

Our free cash flow amounted to NIS361 million, up 4.6% over the second quarter of last year. Over the past year, we reduced our free cash flow to lower our debt level significantly reducing it by almost NIS600 million since the beginning of this year. Our net debt now stands at approximately NIS3.3 billion. This represents a net debt to EBITDA excluding one time effect ratio of 2.42%. These achievements were despite the continued backdrop of tough competition in the communications market and the price erosion in the cellular market, which we expect to continue in the coming quarters, adversely affecting our service revenues.

These ongoing pressures led to lower revenues, which were 6.3% below those of the same quarter last year. Service revenues were down, but we did experienced growth in asset. We saw a net decrease in our subscriber base of 20,000 subscribers in the quarter all of which were prepaid subscribers. In regards to lowering cost during the quarter, we launched for the first time ever a program of voluntary retirement for employees. Approximately 380 employees chose to retire.

Given that most of these employees are based at Cellcom’s head office and our non-customer facing allows us to avoid impact on the quality of service to our customer base. This program had a one time cost of NIS39 million in the second quarter and will provide us with further savings in ongoing operating expenses starting in the third quarter.

This continues our effort of substantially reducing our headcount over the past two years, as we are successfully lowering overhead expenses and streamlining much of our work processes. As we move through 2014, we are much leaner and more efficient company. These costs saving measures have helped us and will continue to help us mitigating some of the negative impact of the increased competition.

We continue to focus on increasing our customer and brand loyalty by expanding our back care of products and services, as well as maintaining of our commitment to the provision of high quality service. I am proud that Cellcom Israel was chosen as the leading cellular brand in Israel, but the Israeli business newspaper growth for a fourth year in a row. This again testify to our brand strength especially in challenging market conditions and drives us to continue the successful marketing activity which we have carried out over the past years.

In June of this year, we made the decision to enter the field of television over the internet services known as Over the Top TV, or OTT TV. In preparation for the launch we have entered agreements for the procurement of equipment and content as well as related services. We believe that our solution will be an attractive alternative to the traditional cable and satellite television services currently operated in Israel by the two incumbents.

We see our OTT TV services is being highly synergetic and complementary to our core business and will assist us in our efforts to increase the retention of our customers and further strengthen our position as one of Israel’s leading communications market. I note that entering a new and penetrated market will require substantial investment and additional operating expenses.

In July, we launched our LTE network after having received the Ministry of Communications approval under certain conditions to use a narrow frequencies band already in our position for our 4G network. We are already moving fast in building out one of the most advanced 4G network infrastructures in the world and we will achieve a wide and high quality deployment by the end of the year.

Subject to receiving additional frequencies and regulatory approvals, our customers will be able to enjoy its advanced capabilities to the fullest. With regard to the network sharing the Ministry of Communications in Israel has issued a draft license amendment which sets certain specific requirements for the approval of network sharing. We are in the process of making changes to our network sharing agreements with Golan Telecom in light of these requirements. As for the passive elements we are continuing our efforts to achieve sharing cell sites for existing networks which we expect will generate future savings both in operating expenses and capital expenditures if and when this process will be executed.

In summary, while the competitive environment still remains tough for the all players in our market, we demonstrate high levels of profitability margin and strong free cash flow for the second quarter of 2014.

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

Shlomi Fruhling

Thank you, Nir and good day to all of you. As Nir mentioned, we are pleased with our results for the second quarter, especially, the strong free cash flow generation and the good level of profitability, despite the cellular market, which remains very competitive for all.

We continued with our strategy to implementing efficiency measures whatever possible, in order to adjust our expense structure to the revenue level. As Nir mentioned earlier, we recorded a one-time expense of NIS 39 million for a voluntary retirement program for employees, the reduction of our workforce by approximately 380 employees, which will lead to a cost saving in the future.

This one-time expense was partly balanced by a one-time income of NIS 22 million, due to cancellation of provision from several years ago for communication cable expenses. We improved our net income margin to 6.8%, compared with 5.4% in the second quarter of the last year. EBITDA margin was 27.1%, versus 27.4% in the second quarter of last year, excluding the one-time effect, our EBITDA margin stood at 28.6% in this quarter.

Our profitability and efficient CapEx enable us to end the quarter with the free cash flow of NIS 361 million, bringing our six months free cash flow to approximately NIS 730 million. Our strong free cash flows allow us to strengthen our balance sheet in the quarter, which I will get you in a few minutes.

Turning to our consolidation results, revenue for the second quarter of 2014 totaled NIS 1.15 billion, decreasing by 6.3%, compared with the second quarter of the last year. And this was due to a continued tough competition environment. We expect service revenue to continue to decrease through 2014, within our service revenue was down 8.6% totaling NIS 933 million, and an equipment revenue increased by 4% totaling NIS 335 million.

Operating income for the quarter decreased 7.7% totaling NIS 156 million, excluding one-time effect operating income was NIS 173 million, an increase of 2.4%, versus the second quarter of the last year. In the second quarter, EBITDA decreased 7.4% totaling NIS 340 million, excluding the one-time effect, EBITDA was NIS 331 million, a decrease of 2.4% versus the second quarter of last year.

Net income for the quarter increased by 17.9%, totaling NIS 79 million, also for the second quarter of 2014, totaled NIS 75.4 million, a decrease compared with the NIS 79.7 million in the second quarter of the 2014.

I would like to mention here, that’s we expect in temporary, but substantial decrease in revenue from national roaming service in the coming quarter. This will process until the network sharing agreements with Golan Telecom are approve, if approved by the regulators.

As mentioned, I will conclude the second quarter of 2014 with the free cash flow of NIS 361 million, a 4.6% increase compared with the second quarter of 2013. We expect the revenue erosion, increase in the free cash flow primarily due to the efficiency measures implemented during the year, reducing our operating expense in CapEx level, which was partly offset by a decrease in proceed from customers, due to the decrease in revenues.

In terms of the balance sheet, our net debt for the end of the second quarter of 2014 amounted approximately NIS 3.3 billion, almost a NIS 600 million decreased since the beginning of the year. This debt level represents an EBITDA, excluding one-time effect to net debt ratio of 2.42 down from 2.88 level that was at the beginning of the year.

After the end of the reporting period, we’ve completed a successful issuance of two new series of debentures in Israel in an aggregate amount of approximately NIS 330 million shekel with an average duration of approximately 6.7 years. One series is linked to the Israeli CPI with an annual interest rate of 1.98%, and the second series is not linked with a fixed annual rate of 4.14%. This successful issuance represents a vote of confidence in the company by the Israeli institutional investors and the debt holders among the public.

The company’s Board of Directors decided not to distribute a dividend for the second quarter of 2014, given the continued intensified competition of the market and its adverse effect on the company's revenues and in order to strengthen the company balance sheet. The board will continue to re-evaluate the decision of the coming quarter, as market condition will develop, while taken into consideration, the company needs.

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

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. (Operator Instructions) The first question is from Gilad Alper of Excellence. Please go ahead.

Gilad Alper – Nessuah Brokerage Services Ltd.

Hey, I was wondering if you could give some more information regarding the network sharing, when should we see an agreement with Golan, and when should, or will there be any cost saving from passive – from the passive agreement with the Pelephone.

Nir Sztern

We are working both with Golan and Pelephone in to order – in order to make the amendments required to satisfy the Ministry of Communications demand. and so it’s really hard for me to say, when we’ll see those approved, because they have to go through the approval of the ministry, and it’s out of our hands, how soon or how fast they’ll do it, but it’s something that obviously once we have those ready, we’ll let you guys know.

Gilad Alper – Nessuah Brokerage Services Ltd.

Okay. and in your view, is there – what could happen in the market that will decrease, or stop this intense competition in the cellular market.

Nir Sztern

Well, it seems that the competition in market is still a very strong. as we are taking now, what will happen in the future, it’s hard for me to say, I mean you can look at what goes on around the world and get maybe some indication on that, but obviously, in each country, in each market, it’s dependent on the players and the regulators.

So, I think it’s really hard to say right now how things are going to play out. I think for us, the base scenario is that the things are going to be a competitive in the future, and we have to make our plans in that kind of environment, if market dynamics change, that will be obviously great, but if not, we have to be preferred for the agreeing days.

Gilad Alper – Nessuah Brokerage Services Ltd.

Okay. Thank you very much.

Operator

The next question is from Katish Ninman of Citibank. Please go ahead.

Katish Ninman – Citibank

Hi, I have two questions please. First of all, I wanted to ask what can you do better to reduce your sub-loss, I mean is it only above the pricing, or is there something else?

Nir Sztern

Well, I mean, not discussing some stress that may have been out there. But if you look at the results and the actual results of this quarter, you see that we are in a net loss of 20,000 subscribers, all of which are prepaid subscribers. So actually, in the postpaid subscribers, we are doing pretty well, despite the huge competition in market. And so I think overall, we are managing pretty well to maintain our market share strength, especially in the high yielding customers.

And if you take out the fast traffic of non-ARPU generated customers, we are doing pretty well there, and especially comparing to our top competitors, or comparing to the incumbents, obviously, we have new competitor gain in some market share, some of them will come from us, but we are at a pretty good position compared to the incumbents.

Katish Ninman – Citibank

Okay, thank you. My second question is, please can you give us an update on the – on your IPTV launch. are you still going to do this before this year-end, or are you waiting for wholesale, is it dependent on the wholesale?

Nir Sztern

Well, we said that our board of directors decided to enter the OTT TV market. We are actually in the middle of working very hard to sign the contract agreements, and procure the set-top boxes and everything related with the launch. for practical marketing reasons, I don’t want to disclose the actual launch date, because we want that to be a surprise to our competitors, but we are working very hard on it as we speak.

Katish Ninman – Citibank

Okay. thank you.

Operator

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

Nir Sztern

Well, I actually do answer the question, nobody wants to ask anymore. But still I’d like to thank all of you for joining our conference call and your continued interest in our company. And as always, I look forward to hosting you again, in our next call. Have a good day.

Operator

Thank you. This concludes the Cellcom Israel Ltd. second quarter 2014 results conference call. Thank you for your participation. You may go ahead and disconnect.

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