Partner Communications' CEO Discusses Q4 2011 Results - Earnings Call Transcript

| About: Partner Communications (PTNR)

Partner Communications Company Ltd. (NASDAQ:PTNR)

Q4 2011 Earnings Call

March 22, 2012 12:00 pm ET


Gideon Koch - Manager, Revenues-Finance Department

Ziv Leitman - CFO

Haim Romano - CEO


Simon Morris - Citibank


Ladies and gentlemen, thank you for standing by. Welcome to the Partner Communications Company fourth quarter and yearend 2011 results conference call. All participants are at present in listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded March 22nd, 2012. I would now like to turn over the call to Mr. Gideon Koch. Mr. Koch, please begin.

Gideon Koch

Thank you and thank you to all of our listeners for joining us on this conference call to discuss Partner Communications final and complete results for the fourth quarter from the year 2011. With me on the call today is Haim Romano Partners’ CEO; and Ziv Leitman, our CFO. We have chosen to hold this conference call today to discuss with you the impairments that was recorded in the results for the fourth quarter of 2011. So Ziv is going to open the discussion with a detailed explanation of the background for the impairments and the process. And then as usual we will move on to the Q&A together with Haim.

Before we begin, I would like to draw your attention to the fact that all statements in this conference call may be forward-looking statements within the meaning of Section 27A of the US Securities Act of 1933, as amended; Section 21E of the US Securities and Exchange Act of 1934, as amended; and the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Regarding such oral forward-looking statements, you should be aware that Partner’s 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 March 22nd, 2012; as well as Partner’s prior filings with the US Securities and Exchange Commission on Forms 20-F which for 2011 was filed earlier today; F-1, 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 Statement 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 I will now turn the call over to Partner’s CFO, Ziv Leitman. Ziv?

Ziv Leitman

Thank you Gideon. On February 22, 2012 we released the estimated results for 2011, while noting that these results were not final due to the fact that the company was in a process of evaluating the necessity of an impairment of intangible assets of the fixed line segment. Having completed all assessments, the company recognizes impairment charge in a total amount of NIS 322 million in the fourth quarter of 2011. Following the recognition of the impairment charge, the company reported a net loss of NIS 188 million for the fourth quarter of 2011, a net profit of NIS 443 million for the year 2011. The main difference compared with the estimated results we published in February 2012 is the impact of the resulting impairment charge related to the acquisition of 012 Smile.

Let me start by explaining the background to these assessments. In October 2010, the company entered into an agreement for the acquisition of 012 Smile for NIS 1.4 billion. The closing of the share purchase agreement was in March 2011 and its assets and liabilities were initially recognized at the fair value as of that date. This was part of the PPA process. Goodwill in the amount of NIS 494 million was also recognized. This amount was fascinated as the excess of the consideration transferred over the net fair value of the asset and liabilities acquired.

The goodwill was allocated to the fixed line segment. Accounting rule (inaudible) 36 require the company management to undertake goodwill impairment reviews at least once a year or more frequently if events or changes in circumstances indicate that the carrying amount may not be revocable. It is also necessary to review for impairment of any non-financial assets with finance [slides] whenever eventual changes in the circumstances indicate that the carrying amount may not be recoverable.

In the fourth quarter of 2011, changes in the fixed line market occurred and were considered by the management as regular events. We felt that the events were sufficiently significant to require the undertaking of an impairment test for the assets of the fixed line segment. Until December 2011, international connectivity of internet traffic from Israel was provided by the sole monopoly provider Med-1. Med (inaudible). During December 2011, Bezeq International Ltd completed the installation of an underwater cable between Israel and Italy and began commercial use soon after. In addition the company Tamares Telecom Limited was in the final stages of laying another underwater cable, which was then completed in January 2012. This U cable offers yet another communication channels between Israel and Western Europe.

The additional capacity from this cable significantly increased the level of competition in the market for international connectivity services. And as expected, this led to a sharp decline in prices for international connectivity services during the fourth quarter of 2011.

Furthermore, it was expected at the time with increased competition in retail ISD market would lead to a decrease in prices and market share indicating the need to perform an impairment test for certain assets of the fixed line segment.

At the same time the company was required to conduct an annual impairment review of its goodwill as I have already mentioned. These impairment tests were performed by management with the assistance of an external independent expert, Giza Singer Even. Ltd.. The impairment tests required us to assist the recoverability of the relevant assets based on value in use calculation using discounted cash flow forecast.

While the current value of the asset is higher than the expected recoverable amount, we are required to recognize an impairment loss in the amount of the difference. The recoverable amount is that of its sales value, net cost to sale and value renewals. Value renewal determine the discounted expected future cash flow that are expected to derive from the continuing use of the assets together with realization of the assets at the end of useful life, in light of the result of the testing the company recognizing impairment charges for strategic efforts and goodwill.

Regarding the impairment of assets with finite lives an impairment charge was recognized in the fixed line business segment in a total amount of NIS235 million. First an impairment charge for trade names in the amount of NIS14 million, which was recorded in selling and marketing expenses.

Second, an impairment chart for customer relationship in the amount of NIS73 million, which is also recorded in selling and marketing expenses and finally a impairment charge for right of use for international fiber optics line in the amt of NIS148 million, which was recorded in the cost of revenues.

Regarding the impairment charge of goodwill, the company recorded an impairment charge to goodwill with respect to the fixed-line business unit in the amount of NIS87 million. The total impact of these two impairment charge on the operating profit in 2011 was a reduction of NIS322 million. The total impact on the net profit including the resulting deferred tax assets of NIS11 million was a reduction of NIS311 million.

The cash flow forecast was based on an analysis of future revenue, which was derived from the trend in the market competition, prices in our forecast market share, CapEx requirement and unknown technological development. Both the valuation of the fixed-line assets and the goodwill perform according to management assessment of the financial performance and future strategy in light of current and expected market and economic conditions.

It is important to note the valuation did not take into account potential impact of future regulatory events, such as opening the wholesale communication infrastructure market and the fiber optics infrastructure projects of the Israeli Nation] Electric Company or further structural changes in the book. However, the valuation did take into account expected cost savings and synergies of the company and 012 Smile, that mostly already begun.

In addition, the valuation were based on certain accounting guidelines, which are not fairly identical to the economic tasks which better reflect the economic potential of fixed-line segments. Please note that the impairment charges of NIS235 million will reduce the future depreciation expenses over the next few years.

We still believe in the growth potential of the fixed-line segment, especially when we take into account the imminent possibility of a re-launch in markets and the new market trend of [Wi-Fi service]. I would like to emphasize that this impairment had no impact on the cash flow of the company and the underlying fundamentals of the company remains strong.

Now, I would like to say a few words about dividend. The Board of Directors decided not to distribute additional dividends for the year 2011 in light of the loss recorded for the fourth quarter of 2011 and considering that the total amount of dividend already distributed for 2011, its equivalent approximately to 80% of the annual net profit of 2011. For 2012, the Board of Directors reaffirmed the existing dividend policy which continue to target a minimum of 80% payout ratio of the company annual net profit.

Now Haim and I will be happy to answer any questions you may have. So can I ask the moderator to please begin the Q&A?

Question-and-Answer Session

(Operator Instructions) The first question is from Simon Morris of Citibank. Please go ahead.

Simon Morris - Citibank

Just a couple of questions if you don't mind; in your statement you said that 1,100 employees have left by the end of February, how many more left in March and how many employees do you target for year-end 2012 based on your current estimates of revenue?

Haim Romano

In the 2nd of October, we were -- number of positions was 7,500 employees.

Simon Morris - Citibank

What was that again, sorry?

Haim Romano

In the 2nd of September, the number of the employees was 7,400. In the end of March it will be 5,950, number of positions.

Simon Morris - Citibank

Again, any more for the rest of 2012, any more target of employees?

Haim Romano

I can’t expose the numbers, but it’s not the end of the road.

Simon Morris - Citibank

Okay, thanks.

Haim Romano

We are just only part now, we have another plan for ’12; but as I said before, in our last meeting, we have a very aggressive plan for reduction our OpEx and we feel that the short story of the last five months shows that we say and we do.

Simon Morris - Citibank

Okay, thanks a lot. And just another question on ARPU, when you first report ARPU, be a lot in fourth quarter in absolute terms also and just seasonal factors would that be low as well?

Haim Romano

You asked about the ARPU in the first quarter of...

Simon Morris - Citibank

Yes, 2012, particularly in the current quarter?

Haim Romano

Sorry, we can’t comment on that.

Simon Morris - Citibank

Any indicator, okay fine. And also, how compliant earlier were one of the three operators, not to try in national roaming with [Mace or Golan]. How come you didn’t do that; was the price too low, what was the reason for that?

Haim Romano

It was before my time so I can’t answer for that. I’ll check with my previous CEO. I think that they have their reasons, but I was not then be at and I don’t know what was the road?

Simon Morris - Citibank

And just a final question, just any kind of thoughts into ISP. So how much of that impact had on the first quarter in terms of share and ARPU?

Haim Romano

No, the impact was not that significant. It stopped comparing last two weeks and we managed to react nicely to the initiative with Bezeq and we fought back and it’s not a significant damage. It was more than just a PR, but the damage is not significant and we cover quite good from that. It was not further damage, because we stopped it.


(Operator Instructions) There are no further questions at this time. Before I ask Mr. Romano to go ahead with closing statement, I would like to remind participants that a replay of this call is scheduled to begin in two hours. In the US please call, 1888-326-9310. And elsewhere please call 039255942 and internationally please call 97239255942. Mr. Romano, would you like to make your concluding statement?

Haim Romano

Thank you all. As we declared in our last conference call, we stick with our strategic plan for 2012 with the main three items. First, is to improve and to operate our network and investments are there. We tend to invest NIS 600 million in network and IT.

The second one is to improve the brand perception and we see now monitors that the perception of our brands getting better and we are getting back the position of the leading brand in the telecommunication market. And the Clear campaign that we launched, now we have more than 150,000 subscribers under the Clear campaign and we’ve got a lot of compliments about the Clear and its really changed in the way that the market is, our plans and our offers.

And the third is the customer service. Although, we reduced significantly the number of employees, the customer service is a good one; the best in Israel today in the cellular industry and the service level is very, very high, but we have still a way to go and we work on it. It’s interesting.

So thank you very much and thank you (inaudible). Thank you.


Thank you. This concludes the Partner Communications Company Fourth Quarter and Year-End 2011 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.

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