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Partner Communications Company Ltd. (NASDAQ:PTNR)

Q4 2010 Earnings Conference Call

February 23, 2011, 10:00 am ET

Executives

Emanuel Avner – CFO

Yacov Gelbard – CEO

Analysts

David Kaplan – Barclays Capital

Michael Claw – Citibank

Abraham Aylon [ph]

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Partner Communications Company fourth quarter 2010 results conference call. (Operator instructions) Following management’s formal presentation instructions will be given for the question- and-answer session. As a reminder this conference is being recorded, February 23, 2011. I would now like to turn over the call to Mr. Emanuel Avner, Partner’s CFO. Mr. Avner, please begin.

Emanuel Avner

Thank you. Hello to all our listeners. Thank you for joining us for this conference call to discuss Partner Communications annual results for 2010 and for the fourth quarter. With me on the call today, is Yacov Gelbard our CEO. Our CEO Yacov Gelbard is going to make several statements and then I will give the summary of our financial and operational results and outlook. We will then open the floor to Q&A.

Before we begin, I would like to draw your attention to the fact that all statements in this conference may be – call may be forward-looking statements within the meaning of US Private Securities Litigation Reform Act of 1995. Regarding such all 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 23, 2011 as well as Partner prior filings with the US Securities and Exchange Commission on forms 20-F, F1 and 6-K, as well as the S-3 shelf registration statement, all of which are readily available.

Please note that the information in this conference call related to projections or other forward-looking statements is subject to the previous Safe Harbor Statements as of 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 would like to hand the call over to our CEO, Yacov Gelbard, Yacov please?

Yacov Gelbard

Thank you, Emanuel and hello to all our listeners. The results for the year ‘010 demonstrates once again the financial and operational strength of Partner. The achievements of considerable growth and profitability and continued growth in subscriber base and revenues demonstrate the strength of our brand and the quality of our leadership and we achieved that in a highly competitive environment and with a challenging regulatory backdrop.

Our commitment to all shareholders of the company demanded with continue to demand to strengthen our assets through building platform for long term growth. In October ‘010, we signed an agreement with Ericsson for the upgrade of our networks and for deployment of a fourth generation LTE network in Israel. A network that will guarantee our technological progress also in the future years. The new network will meet the growing needs of consumers of communications in Israel for data services at the high speeds and will also raise performance levels of both the cellular and the fixed line networks.

We anticipate these upgrades and the deployment of the new network will help us create the differentiation from our competitors and provide considerable added value to the experience of our consumers. Partner’s focused approach to service quality and emphasize our customer needs, both key requirements for consumer satisfaction, retention will enable the company to add impressive number of 108,000 subscribers net to a subscriber base in ‘010.

Over the last few months, the company has taken several steps to strengthen the company’s commitments to its customers and to focus on their needs across all our operational areas. Since the start of this year, the company has offered a variety of attractive rate plans without any exit fees on any commitments and we continue to market our consumers – customers a proposition that is based first and foremost on fairness and loyalty.

Regarding the expected acquisition of Smile 012, which would be completed within approximately a couple of weeks, this acquisition is an important step in Partner’s strategic transformation into a comprehensive communication group. The acquisition will increase competition for the benefit of the consumer and for the wider public benefit, enabling Partner to continue to focus on its core cellular business while 012 Smile will continue to focus on its current core businesses of international and local fixed line telecommunication services and broadband services.

The year ahead poses a particular challenge to revenue and profit margins due to the steep reduction in the interconnect tariffs as of January ‘011. As a response, we have taken a series of efficiency measures and have imposed an even tighter control over cost. These measures together with continued growth in revenues and the subscriber will work to moderate the impact of the interconnect tariff reductions while it’s allowing us to continue to build our business for the future. Partner recognizes that the human capital is the best in Israel marketplace and the company regards its employees as the integral ingredient of its success.

The future offers us many opportunities that will enable us to maximize our particular assets and strengthening order to continue to build our business and provide value for all our stakeholders. With that said, I would like to hand the call over to Emanuel Avner, our CFO.

Emanuel Avner

Thank you, Yacov. In 2010 as a whole, Partner proved its resilience by returning to trend of growth following the impact of the tough business environment in 2009. Once again, the company achieved excellent results with solid growth in its key operational and financial parameters including impressive free cash flow of 1.47 billion shekels. Despite the severely competitive environment and regulatory challenges that we faced.

For the fourth quarter, service revenues increased by 3.8% from 1.38 billion shekels in the fourth quarter of 2009 to 1.43 billion shekels in 2010. The increase mainly reflected growth in cellular segment service revenues from the continued expansion of the cellular subscriber base as well as continued growth in revenues from the use of data and content services. In addition, the increase reflected the shipping of part of the Jewish holiday season from the fourth quarter in 2009, to the first quarter in 2010. The increases were partially offset by a reduction in cellular subscriber ARPU of 1.3% which mainly reflects the downward pressure on tariffs as a result of the increasingly competitive market conditions in the cellular market as well as the impact of mobile broadband subscribers we have lower ARPU on average in cellular subscriber with regular handsets.

Gross profit for the fourth quarter increased by 10.3%. This included an increase in gross profit for the cellular segment of 7.3% reflecting the increase in gross profit from equipment sales. Operating profit reached 459 million shekels in the fourth quarter 2010 increasing by 6.3% from 432 million shekels in the fourth quarter of 2009.

EBITDA totaled 664 million shekels in Q4 2010, the equivalent of 37.7 of total revenues. These represents year-on-year increase of 9.2%. Approximately 60% of the growth in EBITDA in the quarter was contributed by the fixed line segment and 40% by the cellular segment.

Turning to dividends. The Board has approved a dividend distribution for this quarter of 1 shekel and 92 agorot per share, a total of approximately 300 million shekels or $85 million, the equivalent of 99% of net income. The total dividend amount distributed for 2010 was approximately 1.2 billion shekels, equivalent to 7 shekels 85 agorot per share representing approximately 89% of the annual net income. For 2011, the Board of Directors has reaffirmed the existing dividend policy targeting a minimum of 80% payout ratio of the company’s annual net income.

In the year ahead, the reduction in the interconnect tariff will have a significant impact on the outlook of the company as we have explained in the past. We are fully confident however that we will be able to moderate the impact through means of operational efficiency savings, product restructuring and continued growth in the fixed line segment and in data and content services resulting from the continued increase in the penetration of smartphones, tablets and laptops.

Two further regulatory changes will impact on our business in the coming year. First the churn rate of postpaid subscriber is expected to increase following an amendment to the telecommunications law which would fix subscriber exit fines. Second, an amendment to the condition of our license which is expected to come into effect on March 13, will have a one-off adverse impact on our operating cash flow in the first half of 2011.

I would be happy to expand on these if necessary in the Q&A. With this, I will now hand the conference back to the moderator to begin the Q&A.

Question-and-Answer Session

Operator

(Operator instructions) The first question is from David Kaplan of Barclays Capital. Please go ahead.

David Kaplan – Barclays Capital

Hi, good afternoon. I have a question (Audio Gap) extremely high rate especially for a company that talked in the past about being in a cost cutting mode, can you talk a little bit about that?

Emanuel Avner

Yes David, in the fourth quarter we had some one-off effects in our results. First of all we had an increase in our depreciation and amortization, 16 million shekels because of the impact of the new agreement with Ericsson. We had to speed up the depreciation in an amount of 16 million shekels in the first quarter 2011. On top of that, we had another effect, it’s a one-off amortization of subscriber acquisition cost. This is a result of the new amendment for the exit fees. You know that we capitalized the subscriber acquisition cost and since the average fees were lowered materially. There is no need to capitalize any more subscriber acquisition cost in the private segment. And therefore we had an increase in depreciation and amortization.

David Kaplan – Barclays Capital

(Audio Gap) explained I mean, the one that still sticks at in my mind is the sales and marketing line which increased quarter-over-quarter from 1.12 to 1.32 when this grow much higher than the 95 million shekels in the fourth quarter of ’09. So, which of these effects were in the sales and marketing lines I can better understand.

Yacov Gelbard

Sales and marketing expenses increased because of two issues, one is salary and sales commission. Since we don’t capitalize any more subscriber acquisition cost from the fourth quarter, the commission expenses were not capitalized for the private segment and therefore increased the sales expenses. We have also increased salary because of additional staff and that fits us.

David Kaplan – Barclays Capital

Okay then, going back to the initial part of the question, where is Partner in its cost cutting phases and its cost cutting program? When will that be implemented and when will we get a little bit more color on that?

Yacov Gelbard

Okay, about this claim of the cost cutting, you should know we have a consulting firm that worked in Partner for a few months going over all our contracts with our suppliers going over the level of the SLA the Service Level Agreement with all our suppliers and we check which of this contracts what is the needed SLA. We go also over the prices we renegotiate prices.

We bring in also new suppliers we go over each expenses each day and we try to minimize the cost. Many of these issues relate to procurement from suppliers also in the area of the – in the human resources, we have not cut anything materially besides few employees in this quarter, but we expect that we will have additional sales force and additional service employees going forward also we start the recruitment in the first quarter and I believe also in 2011 we will increase the staff of sales and services.

David Kaplan – Barclays Capital

Okay and then just last thing if you can give us a little bit of guidance on CapEx for 2011 with the new rollout of the network?

Yacov Gelbard

Okay, we have said in the press release that the level o the CapEx will be more or less the same level as it was in 2008 and 2009. This means that CapEx alone without any capitalization of subscriber acquisition or retention cost will be at the level of more or less 500 million shekels.

David Kaplan – Barclays Capital

Great, thanks very much.

Operator

(Operator instructions) The next question is from Michael Claw of Citibank. Please go ahead.

Michael Claw – Citibank

Hi, good afternoon everyone, couple of questions. Firstly, in the past you have spoken about net income in 2011 being at similar levels to 2010 even with the NPR cuts and I just wanted to understand is that with – if you still stand by that statement and secondly is that with or without 012 Smile?

Emanuel Avner

Okay I will start with the net income of 2011, what we see in 2011 is first of all there will be a severe impact of the decrease in the interconnect tariff and we believe that the profit level in the service cellular operation might go down. Besides that, we can expect that the fixed line segment can be improved. You have seen that there was a very material improvement in the profit level of the fixed line segment from a net loss in 2009 in the fourth quarter we started to see profit and I believe that the trend will continue also in 2011 without speaking about 012. So we can expect that the profit level of the fixed line in 2011 will be better than in 2010. We have seen also a material increase in the profitability of the handset segment and I believe that the trend will continue in - also in 2011 subject of course to the same market condition that we are in right now. More or less, our target, the internal target of the company of course is to keep the same level of profit in 2011 like it was in 2010. This is not the guidance, this is not a forecast, but this is the internal, let’s say work plan and as we work according to in the company.

Michael Claw – Citibank

Okay, that’s very helpful, thank you. And then secondly and essentially related to that, the latest handset subsidies were a bit higher in the quarter not just the previous three quarters and also some other things like average price per minute came down quite sharply. I’m just wondering how much of this is kind of one-time ahead of NPR cuts and how much subsidy and excess should we continue to see through 2011?

Yacov Gelbard

Okay, regarding new subsidy, we I think we are into a new kind of marketing process. Previously, in the past we subsidized the handsets and we had very nice profit over the services. Right now there is a little bit different trend where we had a profit on the sale of the handsets. We will try not to subsidize any more the handsets. So we have the profit on the handset, but beside that we had an erosion in the profitability of the services. But if you look on the package, altogether of the handset together with services we try to keep the profitability of these two components together the same.

Michael Claw – Citibank

So, can I just ask, if I look at Q4 on churn, I have got some gross profit around 20% from the handset side, was this much higher levels in the first three quarters. So I am asking this, when I look into handset subsidies or handset gross profit into 2011, should I look at the year as a whole, or should I look through this kind of a lower level in the fourth quarter as indicative of what’s going to be in the next year?

Yacov Gelbard

I believe that if the market condition will not be changed, you will see the same trends like you see in the fourth quarter.

Michael Claw – Citibank

Fourth quarter levels rather than 2010 levels which were higher where profits were higher and subsidies were lower.

Yacov Gelbard

I am talking about the first quarter.

Michael Claw – Citibank

Okay, all right. That’s it for me. That’s very helpful, thank you.

Operator

The next question is from Abraham Aylon [ph]. Please go ahead.

Abraham Aylon

Hello, my name is Abraham Aylon and I am calling from Israel. I am a client within your business segment as well as a private investor. I find it interesting that on the one hand you present positive financial results while from my point of view as an end-user customer, I keep on experiencing a constant deteriorating level of service over the past year. I would appreciate your explanation.

Yacov Gelbard

Maybe I can add to it, its Yacov speaking. I joined the company in somewhere in February last year and I took a target to improve customer service and to bring it to the highest level possible as we have taken to installation that we were facing changes in regulatory terms which we believe and we amounted it now will increase the number of customers that are calling our call centers and coming into our service. So we decided somewhere in November while we planned ‘011 to recruit about 850 more employees that are going to be part of the increased request of service provider.

Taking into consideration the current attitude of customers recording us and asking for more services, we decided to increase that number. It takes time on the point that’s we decide to recruit an employee till that they become effective. So we believe that maybe end of March this year and in quarter one this year we will be able to get back to the high level of service that used to have a major asset of our company in the past.

Abraham Aylon

Thank you for your reply.

Operator

There are no further questions at this time. Before I ask Mr. Avner to go ahead with his closing statements, I would like to remind participants that a replay of this call is scheduled to begin in two hours. In the US, please call, 1888-295-2634, in Israel please call 03-925-5925 and internationally please call 9723-925-5925. Mr. Avner, would you like to make your completing statement?

Emanuel Avner

Thank you. This concludes the conference call of Partner Communications 2010 annual and fourth quarter results. We appreciate your interest and please feel free to contact us at investor relations if you have any additional questions. Access with this call and to the other valuable information of Partner is available through our web site at www.orange.co.il . Thanks, and have a very good day, thank you.

Operator

Thank you. This concludes the Partner Communications Company fourth quarter 2010 results conference call. Thank you for your participation you may go ahead and disconnect.

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