Cellcom Israel's (CEL) CEO Nir Sztern On Q2 2016 Results - Earnings Call Transcript

| About: Cellcom Israel, (CEL)

Cellcom Israel, Ltd. (NYSE:CEL)

Q2 2016 Earnings Conference Call

August 10, 2016 09:00 AM ET

Executives

Ehud Helft - GK IR

Nir Sztern - CEO

Shlomi Fruhling - CFO

Analysts

Tavy Rosner - Barclays

David Kaplan - DBK Advisors

Operator

Ladies and gentlemen, thank you for standing-by. Welcome to Cellcom's Second Quarter 2016 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. 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 in the news section of the company's website www.cellcom.co.ir.

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

Ehud Helft

Yeah, thank you. I would like to welcome all of you to Cellcom Israel's second quarter 2016 conference call and I would like to thank management for hosting this call today.

With us today on the line are Mr. Nir Sztern, the CEO and Mr. Shlomi Fruhling, the CFO. Nir will open by providing a summary of the main highlights of the results, followed Shlomi who will give review of 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 risk 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 statement that is contained in the Private Securities Litigation Reform Act of 1995 and Israeli Securities Law of 1968. I'd note that actual results may differ from those discussed today and therefore, we refer you to the more detailed discussion of the risk and uncertainties within the company's filing with the Securities and Exchange Commission including under risk factors in the company's annual report for the year ended December 31, 2016 filed under Form 20-F, which was filed on March 23, 2016 with the SEC.

In addition, any projections as to with the company's future performance to present management's estimate as of today. Hence, the company assumes no obligation to update these projections in the future as market conditions change.

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

Nir Sztern

Thank you, Ehud. Good day to all of you and welcome to our second quarter 2016 earnings conference call.

The second quarter of our financial results reflect some improvement over the second quarter of last year. Our net profit grew by 267% and the EBITDA grew 10% year-over-year. While the competitive environment does remain tough. In 2016 so far, we are seeing some moderation in the erosion of the revenues from cellular services as compared with what we saw during 2015. This is evidenced by our ARPU that has remained around the same level for the past two quarters.

In terms of our operating expenses, we are committed to continuing our efficiency measures as part of this; we completed another voluntary retirement program this quarter. As a result, while this quarter, we recorded ILS13 million expense. The positive impact on our costs will be felt gradually starting already by the third quarter.

Over the past few years, we have substantially lowered our overhead expenses, reducing the headcount and streamlining much of our work processes. And this remains an ongoing process at Cellcom Israel.

I note that our SG&A during the first half of 2016 was 8.7% below those of the comparable period last year. We generated free cash flow over ILS103 million during the quarter. This allowed us to further reduce our net debt to ILS2.6 billion at the end of the second quarter of 2016 versus ILS2.9 billion at the end of second quarter 2015.

Cellcom TV continues to be in solid traction, having reached approximately 87,000 households as of the end of Q2. We recruited 12,000 subscribers during the quarter, even though the second quarter of 2016 had fewer working days, due to the Passover holidays.

We are very pleased with ongoing positive market reception of our offering, and we will continue to invest in Cellcom TV, so it remains a technologically advanced and high-quality alternative to the existing incumbent TV players offering, with a most attractive pricing in the market.

Much has happened over the past three months with regard to our relationship with Golan. First as you know, Golan signed a hosting agreement with HOT mobile for replacing Cellcom's network with the network used by HOT mobile. We view this agreement as a breaching Golan's obligation towards Cellcom, and as such, we commenced legal actions to prevent the execution of the Golan HOT agreement.

The court granted our request for an interim injunction against the consummation of the Golan HOT agreement. As a result, Golan is not allowed to further advance its agreement with HOT mobile. Golan has recently filed a request to appeal against such interim injection.

We noted currently there are uncertainties in relation to our agreement with Golan as we described in the press release issued earlier today. In addition to the legal action that we took in order to prevent this agreement from being executed, during the quarter, we also signed an agreement for network sharing and hosting with Xfone, which was awarded 4G frequencies in 2015 and hasn't yet entered the cellular market. The agreement is subject to regulatory approvals. This agreement proves that a competitive market can be maintained, while complying with the regulation guidelines to ensure a level playing field.

In summary, we continue to work to lower cost and improving efficiencies, while bringing additional value-added services to our customers. The new growth engines ceded last year that of Cellcom TV as well as our entry into the wholesale market are gaining market attraction, and we hope to see the benefit over the coming years.

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.

Revenues for the second quarter of 2016 totaled ILS1.03 billion compared with ILS1.04 billion in the second quarter of 2015. I note that we report our results in two operating segments: Cellular and Fixed Line segment. The cellular segment includes service revenue as well as handset service, and this amounted of ILS784 million in the second quarter of 2016. Revenue from Fixed Line segment were ILS284 million and this include service and equipment from Fixed Line segment. Our service revenue overall was ILS782 million versus ILS786 million in the second quarter of last year.

Revenues from Cellular services were ILS567 million in second quarter of 2016 versus ILS573 million in the second quarter of last year. The decline was mainly due to the competitive environment in the Cellular market.

Fixed Line services revenues were ILS264 million as in the cost per rating [ph] period last year. Overall revenues from equipment were ILS247 million in the quarter compared with ILS254 million in the second quarter of last year.

EBITDA from the Cellular segment was ILS181 million or 23.1% of revenues and EBITDA from Fixed Line segment was ILS57 million or 19.4%of revenues. Overall EBITDA for the second quarter of 2016 was ILS238 million includes a ILS13 million expense due to retirement program with a 10% higher than the ILS260 million EBITDA reported in the second quarter of 2015, which also include ILS25 million expense due to our provisional retirement program.

We reported a second quarter of 2016 net income of ILS44 million compared with ILS12 million in the second quarter of last year. The free cash flow during the quarter reach ILS103 million versus ILS119 million in the second quarter of last year. This decrease in free cash flow was mainly due to decline in receipt from customer from service and end user equipment partly offset by increasing receipt from national roaming services.

As of the end of the quarter, our net debt stood at ILS2.6 billion, 13.4% lower than the net debt of ILS2.8 billion in the end of the second quarter of 2016. Our CapEx in the quarter was ILS102 million compared with ILS125 million last year. Cellular subscriber base amounted to 2.812 million at the end of the quarter compared with 2.848 million in the end of Q2 of 2016.

During the quarter, our subscriber base decrease by 8000 subscribers net. The churn rate of cellular subscribers in second quarter of 2016 stood at 10.6% was compared with 10.2% in the same quarter of 2016. Our portfolio for the second quarter totaled ILS66 compared with ILS65.5 in the second quarter of last year. And the end of the second quarter of 2016, the company had approximately 136,000 households in the wholesale internet infrastructure field and approximately 87,000 household in the TV field.

In order to diversified our financial results in the second quarter of 2016, we were provided with the first loan amount in ILS200 million under the loan agreement, we entered with two financial institutions in May 2015.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question is from Tavy Rosner of Barclays. Please go ahead.

Tavy Rosner

Hi, thanks for taking my questions. First on the TV side you talked about the new subscribers that you gain during the quarter. Can you give some color on the subs, are they people that you are displacing from Yes [ph] and HOT or you believe it's more people that have the Eden [ph] offering and also all these people signups for your triple offering or is this just the TV offer?

Nir Sztern

We don't have the actual figures of how many of the customers are coming directly from Yes [ph] or HOT or [indiscernible]. But we do know from surveys that we are taking that a vast majority of the customers that are joined Cellcom TV are coming from the existing operator. So, I can say with great confidence that most of the customers that we are recording have been former customers of our competitors.

In terms of triple play versus the TV standalone, again it’s a mixture of both with the majority of customers joining the triple play offer.

Tavy Rosner

Okay. That’s helpful. And with regards to Golan, can you run this through what’s the timeline with regard to the legal process. I recall that down the road, there loan is due in November, the debts that they own to you, can you run us through what’s going to happen until then and if eventually they were to exit the market, how can you get back that debt that they have to you?

Nir Sztern

Well, for the first part of the question, Golan is under the agreement, current agreement is the sale purchase agreement. The agreement states that we will do our outmost to approve and try our best to approve the purchase of Cellcom and Golan.

That means that until November, he is not allowed to do any substantial changes in the company and that’s why we took him to court and won the interim injunction, and stating that he cannot make any significant changes in the company i.e. he can’t sign a new agreement, sharing agreement of any kind with HOT. So basically, he’s not allowed to pursue that agreement or make any changes in the company until November. November meaning the first point that which either of the parties can terminate the sale purchase agreement, not necessarily that the parties will do that, but it’s an option that the two parties have.

Again at November, Cellcom can issue - can try to send a - can demand the 600 million shackles, so until then nothing is really supposed to happen. We are still working together to try and see if we can appeal the decision and coming November, we’ll have to see what will happen then and how - what are the next steps that we are going to take.

Tavy Rosner

That’s theoretically would you say that the option to buy Golan is still realistic given the pushback we saw coming from some of the regulatory authorities?

Nir Sztern

Well, it’s - I mean it’s a tough, it’s an uphill battle, but we - I mean as long as there is a fighting chance, we’re willing to give it a try.

Tavy Rosner

Okay. Thank you very much.

Operator

The next question from David Kaplan of DBK Advisors. Please go ahead.

David Kaplan

Hi, everyone. A question really about the balance sheet and the dividend, I don't think you get too many of these many anymore, but looking your cash generation, looking at the amount of money you guys are investing in CapEx, are there any specific plans to increase CapEx and if not, there is cash generation, your reduction in debt, below interest rate environment seems to leave room for you guys, especially come back and start paying the dividend even if it’s minimal at this stage?

Nir Sztern

Well, I think that the point that we would be able to consider paying dividend will be when we will be sure that we are standing on the stabilized market, there is still issue with Golan and other players. The environment is still very competitive and there is still more to do in order to deliver a channel balance sheet, our net debt to EBITDA is now 2.79. We believe that there is still room to grow and lower than the 2.5 level so it’s too early to discuss dividend, but not similar change in the long-term. As for the current growth, we probably won’t be in that situation.

David Kaplan

Okay. And then in terms of the competition you’re seeing in the market, I mean finally after very many years of some significant cut cost and price reductions. It seems since continue to be stabilizing. So is it more when you talk about - they're not being a stable market. Are you talking about the threat of a new offer coming in that you're concerned about or is it something that you're actually feeling in the market on a day-to-day?

Nir Sztern

I think the biggest issue is what's going to happen with Golan, whether or not he is going to remain in the market, leave the market. We sold a marriage or whatever I think this is - this will have a tremendous impact on the next few years in the market. So, I think until we have more assurances or more knowledge of what's going on there. Right now, we are kind of in between days, okay. The market as like you said, and you can see from the results and then we stated is, it hasn't been as or the decline hasn't been as rapid as it used to be. But still we need to see where things end up with Golan to have better visibility towards the future.

David Kaplan

Great, thanks Nir. And that's - it's interesting comment about Golan only in that what it seems to me and again looking from the outside. But what it seems to me is that the risk with Golan is actually to the upside. Because obviously given his financial situation today, he can't afford to go back and cut prices, because of the low cost, clearly was a business model that wasn't working for him. If he stays in the market, do you think there is a high probability, he comes back and cuts as another subscriber grab. And if he doesn't and he leaves the market, will then - will any of the upside potential is really what we're all looking at. So from that perspective, it seems we're - I would guess that Cellcom is in a pretty good place right now.

Nir Sztern

Well, I can't - I mean it's - I can't really comment on your analysis, it's pretty intelligent. But I mean I can't comment it. But I think overall Cellcom had pretty good sale overall regardless of what you said. So that's - I can agree with you on that.

David Kaplan

Great. Thanks a lot.

Operator

[Operator Instructions]. There are no further questions at this time. Mr. Sztern would you like to make a closing statement?

Nir Sztern

Yes, thank you. I would like to thank all of you for joining our conference call and your continued interest in our company. And as always look forward to hosting you again at our next calls in three months’ time. Have a good day.

Operator

Thank you. This concludes the Cellcom Israel Limited second quarter 2016 results conference call. Thank you for participation and you may go ahead and disconnect.

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