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Edited Transcript of BEZQ.TA earnings conference call or presentation 29-Aug-19 12:00pm GMT

Q2 2019 Bezeq Israeli Telecommunication Corp Ltd Earnings Call

Jerusalem Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Bezeq Israeli Telecommunication Corp Ltd earnings conference call or presentation Thursday, August 29, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Mizrahi

Bezeq The Israel Telecommunication Corporation Limited - CEO

* Naftali Sternlicht

Bezeq The Israel Telecommunication Corporation Limited - IR Manager

* Ran Guron

Bezeq The Israel Telecommunication Corporation Limited - CEO of Pelephone, DBS & Bezeq International

* Shlomo Rodav

Bezeq The Israel Telecommunication Corporation Limited - Chairman of the Board

* Yahali Rotenberg

Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO

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Conference Call Participants

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* Ethan Etzioni

Etzioni Portfolio Management Ltd - CEO

* Ondrej Cabejšek

UBS Investment Bank, Research Division - Director

* Roni Biron

Ion Asset Management - Senior Equity Analyst

* Tavy Rosner

Barclays Bank PLC, Research Division - Head of Israel Equities Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to Bezeq's Second Quarter 2019 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded and broadcasted over the web.

At this time, I would like to turn the call over to Mr. Naftali Sternlicht, Investor Relations Manager for Bezeq. Mr. Sternlicht, please go ahead.

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Naftali Sternlicht, Bezeq The Israel Telecommunication Corporation Limited - IR Manager [2]

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Thank you, operator. Welcome, everyone, and thank you for joining us on the call today. With us from Bezeq Group's senior management team, we have Mr. Shlomo Rodav, Bezeq's Chairman; Mr. Dudu Mizrahi, Bezeq's Fixed-line CEO; Mr. Ran Guron, CEO of Pelephone, Bezeq International and yes; and Mr. Yali Rotenberg, Bezeq Group's Chief Financial Officer.

Before we begin today's discussion, I will start with a brief safe harbor statement. Today's conference call and webcast contain general data and information as well as forward-looking statements about the Bezeq Group. Although Bezeq believes its expectations are based on reasonable assumptions, these statements are subject to numerous risks and uncertainties and should not be regarded as a representation that anticipated events will occur or that expected objectives will be achieved.

Today's conference call and webcast contain partial information from the public reports of Bezeq under the Israeli Securities Law for which the Hebrew reports can be accessed at the Israeli Security Authority's website.

The call and webcast are not a substitute for a review of the detailed reports of Bezeq. Today's conference call and webcast also do not constitute an offer or invitation to purchase or subscribe for any securities and nothing contained herein shall form the basis of or be relied upon in connection with any contract or commitment whatsoever.

Before I introduce our speakers, please note that their comments will generally follow the slide presentation, which is available under the Slides tab on the webcast link, and may also be downloaded from Bezeq's IR website. You can go through the presentation by clicking on the arrows on the left or right-hand side.

Let me now turn the call over to our Chairman, Shlomo Rodav, for prepared remarks and our group quarterly results. After which, Dudu will continue the presentation on Bezeq Fixed-line, followed by Ran discussing results of our subsidiaries and Yali will finish with the financial section. At the end of Yali's presentation, management will be available to answer questions.

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Shlomo Rodav, Bezeq The Israel Telecommunication Corporation Limited - Chairman of the Board [3]

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Thanks, Naftali. Today, I'd like to provide an overview of our group results during the second quarter of 2019.

Let's start on Slide 3 with the positioning of Bezeq, especially for the benefit of those of you who may be new to our story. Bezeq is the largest telecom group in Israel. Here you can see a high-level snapshot of our latest quarterly operating and financial results. We'll talk about these in more details as we go along. Let me just preface by saying that our financial results in the second quarter were impacted by 3 extraordinary items related to the write-off of the tax asset, impairment loss in Pelephone and capital gains from the sale of the Sakia complex.

Turning to Slide 4. As you may know, the Bezeq Group is continuing to implement a comprehensive strategic plan that includes significant steps towards streamlining and improving business performance. The result of these steps is not yet fully evident and we should see their effect more and more as time progresses. With the strategic transition, we are conducting a business-oriented examination for all group companies, streamlining and improving profitability and deliberating on core infrastructure issues central to the group's future for the coming years, while maintaining Bezeq as a strong and financially sound company.

Now I'll turn the call to Dudu to talk about Bezeq Fixed-line.

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David Mizrahi, Bezeq The Israel Telecommunication Corporation Limited - CEO [4]

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Thanks, Shlomo. Turning to Slide 6. At Bezeq Fixed-line, we're putting the customer home at the center of our business proposition, and we're working to deepen the customer experience through various services, such as the BE router and the Bspot service. Broadband retail ARPU has shown impressive growth and increased to ILS 97 in the first half of 2019, up from ILS 93 in 2018.

On the next slide, we serve 180,000 SME in Israel and leading business solution. We provide innovative solution to customer, sell diversified telecom solution to businesses and simplified services and sales processes through interface digitization.

Turning to Slide 8. We have previously reported Bezeq Fixed-line entered the terminal equipment market this year and so far, we are showing significant growth in this area.

Moving to Slide 9. Employee streamlining has been a big initiative for Bezeq Fixed-line. The company intends to take advantage of the total potential of the retirement plan for hundreds of additional employees under the terms of the current collective agreement. During the second quarter, employee streamlining already helped offsetting the ongoing wage creep in the quarter.

On Slide 10, let me update you on the efforts to reduce -- in reducing operational real estate sites and sales of redundant assets. We sold the Sakia complex and recorded capital gains of ILS 403 million and net cash flow of ILS 174 million in Q2 this year. The company signed an agreement to transfer Bezeq's headquarter from Tel Aviv to Holon in 2021, likely to result in saving of tens of millions of shekels in operating expenses. We have also begun to convert some of our properties to data centers utilizing the physical layout, communication connection and energy durability in currently owned buildings. In addition, we are reviewing sales of additional properties in the amount of hundreds of millions of shekels in the coming years.

Now I'll turn the call to Ran to talk about Bezeq subsidiaries, Pelephone, Bezeq International and yes.

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Ran Guron, Bezeq The Israel Telecommunication Corporation Limited - CEO of Pelephone, DBS & Bezeq International [5]

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Thanks, Dudu. Let me start with Slide 12. Pelephone subscriber base has grown for 3 consecutive years. We have been investing in our network in Israel with wide retail distribution and we are a leading operator for the business sector. We're also continuing to innovate in key technology areas such as IoT, Big Data, Cyber, Cloud and ESIM.

On Slide 13, the graph details the subscriber growth at Pelephone and the number of the postpaid subscribers. This has reached 1.87 million users during the second quarter of 2019. The growth of the number of subscribers have offset the decrease in prices and resulted in a significant slowdown in the erosion of revenues.

Moving along to the next slide. In terms of competition, the Israeli market is highly competitive with 6 mobile network operators and additional mobile virtual network operator. Competition is mainly focused on pricing. The competitive dynamic and lack of recovery prospects for the short term is the reason that we update Pelephone financial prospect -- forecast.

As shown on Slide 15, Bezeq International is the leading ISP in Israel, with advanced IP services and high-quality infrastructure. We provide a wide range of business solutions from ICT and cyber to data center and project management.

Turning to yes on Slide 16. yes is Israel's favorite content brand. We have highly -- we have high-quality original and international content and provide great viewing experience to our customers. In March this year, yes won 21 awards in the Israeli Academy Awards.

Moving on to Slide 17. yes is implementing a gradual process of migrating from satellite to IP broadcasting as part of the emerging trends in the sector and transfer of operations over to Group's infrastructure. The IP platform enables significant upgrade of the viewing experience and advanced product features such as intuitive personal user experience and advanced viewing capabilities derived from cloud technologies. yes will gradually replace set-top boxes until transition to IP services. The fixed cost for satellite infrastructure would also be replaced by using the group infrastructure. We expect to begin the migration process before the end of 2019.

Turning to Slide 19. Let's first talk about some of the synergies and streamlining efforts that we are undertaking. We are pleased to announce that recently we launched our very first triple play package, including leading Internet services from Bezeq International together with high-quality TV from yes. This package enable us to enhance the view -- the value proposition for both existing and new customers and to offer a full range of telecommunication products under one roof. Triple pay will also result in operating efficiencies in sales and services.

Turning to Slide 20. As a major part of our synergies effort, we've reached synergies and streamlining agreements with the labor unions in both yes and Bezeq International, which will result in retirement of 325 employees in each company as well as nonrecruitment of additional employees. Streamlining procedure for yes was implemented in 2019, while implementing for Bezeq International is in process.

In addition, we are conducting ongoing negotiation with the labor union and implementing processes to reduce number of employees in Pelephone. The decrease in salary expenses for our main subsidiaries, companies is a direct reflection of our streamlining efforts.

As you can see on Slide 21, such expenses decreased 7% year-over-year to ILS 215 million in the second quarter of 2019. Additionally, those synergies and streamlining that we have already implemented include a transition of an almost identical integrated management team for all companies resulting in the lowering of number of senior management by approximately 50%, thereby saving millions of shekels every year. We've also begun to implement joint purchasing for 3 companies and resulted in additional financial savings.

In Slide 23, we lay out some of the plans we have in the pipeline for the future: maximize synergies in subsidiaries. Firstly, we are looking at cross-selling opportunities to improve marketing capabilities for customers who do not currently receive services from all the 3 companies. We plan to establish a centralized point of contact with customers to improve services and reduce churn. In addition, we'd like to sell at One Stop Shop to maximize synergies and various distribution and service channels of the 3 companies.

I would like now to turn over the call to Yali, who will provide you with some financial highlights.

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [6]

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Thanks, Ran. Turning to Slide 25, the financial results in the second quarter of 2019 were impacted by 3 extraordinary items: write-offs of the tax asset of ILS 1.166 billion, impairment loss in Pelephone of ILS 951 million and capital gains from the sale of Sakia complex of ILS 403 million.

Turning to Slide 26. Group-wide revenues in the second quarter totaled ILS 2.2 billion compared to ILS 2.3 billion a year ago, a decrease of 4.7%. The decrease in revenues was due to lower revenues in Bezeq Fixed-line, Pelephone and yes.

On Slide 27, group-wide salaries decreased from ILS 503 million in the second quarter 2018 to ILS 489 million in the second quarter of 2019. The decrease was due to the reduction in salary expenses in Bezeq International and yes.

On Slide 28, group-wide operating expenses decreased from ILS 838 million in the second quarter of 2018 to ILS 814 million in the second quarter of 2019. The decrease in operating expenses was primarily due to lower expenses in Pelephone and Bezeq's Fixed-line.

On Slide 29, group-wide adjusted EBITDA in the second quarter of 2019 totaled ILS 921 million compared to ILS 992 million in the corresponding quarter a year ago.

Turning to Slide 30. Net loss in the second quarter of 2019 amounted to ILS 1.6 billion compared to net profit of ILS 195 million in the same quarter of 2018. Net loss was primarily due to the write-offs of the tax asset as well as the impairment loss in Pelephone. Adjusted quarterly net profit was 900 -- ILS 225 million compared to ILS 260 million a year ago.

The group's free cash flow in the 2019 second quarter was ILS 350 million compared to ILS 122 million a year ago. The increase in the free cash flow was primarily due to the proceeds of ILS 323 million received in connection with the sale of the Sakia complex compared to a payment of ILS 80 million for the betterment tax in the second quarter of 2018.

Moving to Slide 32. CapEx in the second quarter was ILS 525 million, slightly up from the corresponding quarter a year ago. CapEx in the second quarter included payment of a betterment levy of ILS 149 million in connection with the sale of Sakia complex compared to payment of ILS 112 million for permit fees in the second quarter of 2018.

On Slide 33, we have broken down subscribers and ARPU by different business segments. Let me just point out, retail ARPU in the second quarter of 2019 was ILS 97 compared to ILS 93 in the second quarter of 2018.

Moving to Slide 34. Broadband Internet subscribers reached 1.61 million subscribers in the second quarter of 2019, with wholesale subscribers representing 38% of the total.

On Slide 35, we are focused on lowering our debt over time. Group net debt decreased from ILS 9.4 billion in the second quarter of 2018 to ILS 8.4 billion in the second quarter of 2019.

Moving on to Slide 36. Bezeq's prudent management of financial aspects of the company will solidify our financial strength and provide flexibility with existing debt. Going forward, we will seek to maintain prudent debt coverage ratios and remain in the AA credit rating range, continue to adapt the company's debt structure to its needs and operate with high cash balances.

Lastly, let me talk about our 2019 guidance on Slide 37. Due to the 3 extraordinary items in the second quarter as well as the inclusion of the estimated costs for early retirement in the outlook, we are updating the group's outlook for 2019. We now expect a net loss of approximately ILS 1.1 billion, EBITDA of approximately ILS 2.9 billion and CapEx unchanged at ILS 1.7 billion.

Let me remind you that as usual, we will be holding an analyst conference at our corporate headquarters in Tel Aviv after this call. In addition, we will be attending the Barclays Media and Telecom Forum in London on September 3. This concludes our prepared remarks.

Operator, let's begin the Q&A session.

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Questions and Answers

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Operator [1]

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The first question is from Tavy Rosner.

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Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [2]

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First, with regards to write-down of the tax asset at yes. Does that mean that as far as you're concerned, the removal of structural separation isn't happening in the foreseeable future? And does that impact your strategy for Bezeq at all? Or any way your base strategy right now is not articulated around the removal of structural separation happening anytime soon?

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Shlomo Rodav, Bezeq The Israel Telecommunication Corporation Limited - Chairman of the Board [3]

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Our forecast was going to be centered around tax asset. Initially, the removal of the structural separation has no change. We are waiting for the answer of the government to the appeal that we have submitted to the court. The due date to get the response is on September 5 and we hope by that time to get the official response. We do not expect that the response will be, sorry guys, here you have the removal of the structural separation. We also do not expect that they'll say exactly the opposite. We do not understand why we have expected this at all.

We believe that what they will say is they are deliberating, evaluating, et cetera. Just in this respect, we do not expect any, let's say, clearing the facts or the attitude to day 0. However, we went through this process in order to force the government to expedite their answers on this matter because we believe -- we believed -- we believe that we have met all of the requirements set by the government to -- for the removal of the structural separation and that we should get it. In parallel to this, we are working diligently with the tax authorities in order to get the extension of the tax agreement that we have for an additional year. The current approval is until the end of this year and we expect to receive this shortly.

So in this respect, we haven't changed -- there is no major change in our assessment. However, because time is flying and during the last 3 months especially, but a little bit over that there was no major progress and they saw no progress at all. By definition, our assessment for accounting purposes has been decreased and moved below the 50% required for more likely than not. So the write-off means nothing about our intention to fight for what we believe is due to us and we intend to work on it. So our plans have remained the same.

However, we do not expect this process to end soon. Unfortunately, you have seen that the court in Israel have granted them already 3 delays, something like additional 6 months and most probably they will continue to play and ask the court for additional time to set up their mind or to check additional things and so it's a process and we are glad that we are already in the process. Otherwise, we would have been now in exactly the same situation that we have been a year ago.

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Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [4]

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Okay. That's helpful. I had a question on the Fixed-line side. So -- I mean you lost wholesale subscriber this quarter, is that attributable to the fiber nascent competition? And talking about fiber more broadly, do you have anyone to talk to at the MOC right now to kind of make progress on the negotiation with them about the different terms? Or anyway, you have to wait for a new minister in charge to have someone make a decision on that.

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David Mizrahi, Bezeq The Israel Telecommunication Corporation Limited - CEO [5]

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So it's Dudu. First of all, as you know, the broadband market in Israel is changing, and we've seen deployment -- fiber deployment coming from Cellcom, Partner, IBC, et cetera. If you take all the numbers they are publishing altogether, you reach like I think 800,000 or 900,000 households already covered. I think that the official numbers are smaller than that, but anyway there is massive deployment ongoing. And another thing that you can see happening over the last few months is the fact that Hot is starting to offer single broadband service and started to offer wholesale services, which they haven't done earlier. So all of these changes, of course, affect our market share on broadband and we've seen some decline in our broadband customer base, mostly in wholesale customers because it's easier for Cellcom and Partner to move customers from wholesale platform to their own fiber optic services.

Regarding the MOC, you can see that lately the MOC has published 4 or 5 different papers for hearing regarding all kinds of element in the regulation of our fiber or our future fiber services. We think that's a progress in the right direction. It's -- we need to wait and see what will be the result of this hearing and whether that will be significant enough to make the project economical for us. But there is an ongoing work happening currently at the Ministry of Communication.

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Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [6]

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Okay. Maybe last one, that would probably be for Shlomo. But in the past, we had this discussion and investor often ask us about employees at Bezeq and management getting shares as part of compensation there to align kind of management interest to shareholders' interest. Is there any progress on that? Is that still on the table?

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Shlomo Rodav, Bezeq The Israel Telecommunication Corporation Limited - Chairman of the Board [7]

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Not at present. As you know, we've tried to increase our registered capital about 4 months ago, with a view also maybe to have a capital increase. And our shareholders have decided not to go in this direction. We believe that at present, it's the -- the answer that we'll get from our shareholder will be the same. However, because as you know, BComm cannot be reduced below 26% now and to get the approval of the government for this may take some time, it may be possible in the future to do such a move. However, if we do it, I believe that it will not be limited only to top management, but again, it's something that we will not consider seriously this year, but maybe sometime in the future.

But if you may -- may I answer -- just to add one more sentence. The commitment of management to the goals of the company is the result of many other managerial action and the nature of the people here and not so much because of financial incentives. And we have the full commitment of the management in Bezeq Fixed-line, in the subsidiaries, all over and haven't seen any problem in getting their full commitment to achieve the same goals as our shareholders and lenders' view.

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Operator [8]

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Your next question is from Roni Biron of Ion.

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Roni Biron, Ion Asset Management - Senior Equity Analyst [9]

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I have a number of questions. First for Dudu maybe. Regarding the early retirement programs in Fixed-line, it seems to have offset the automatic pilot salary increases, but not more than that. Should we expect a more meaningful impact on salary cost to flow through in the -- maybe in the second half of the year?

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David Mizrahi, Bezeq The Israel Telecommunication Corporation Limited - CEO [10]

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First of all, in terms of P&L, what you just mentioned is correct that the fact that we've seen stable salaries cost, meaning that the early retirement has offset the salary increase. But take in mind that we have made -- we have less CapEx invested in the quarter and in the first half, if you compare it to the first half last year and that caused us to have less capitalized salaries. If you take that into account, the overall cost -- overall salaries cost in Bezeq has reduced significantly.

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Roni Biron, Ion Asset Management - Senior Equity Analyst [11]

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I see. And regarding future programs you mentioned in the presentation, how much further can you continue to reduce headcount before stretching your resources too thin given the potential fiber deployment and other projects?

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David Mizrahi, Bezeq The Israel Telecommunication Corporation Limited - CEO [12]

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First, as long as we can effectively reduce our headcount and as long as it's economical, and as you know -- as you well know, the early retirement plan is economical for us, and you can -- you have the payback within 35 to 40 months. As long as that happening, I think, we will further decrease our labor cost and utilize the current agreement that we have.

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Roni Biron, Ion Asset Management - Senior Equity Analyst [13]

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And you think it can -- that basically means that you can continue to significantly reduce headcount for a good number of years without hurting execution?

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David Mizrahi, Bezeq The Israel Telecommunication Corporation Limited - CEO [14]

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I think that we have the current agreement, and I think that we can try to work within the current agreement and what it allows us to do. I think that that's what we intend to do over the -- at least by the end of the current agreement.

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Roni Biron, Ion Asset Management - Senior Equity Analyst [15]

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Okay. And just following up on Tavy's question on the fiber regulation. I know it's a work in progress and there were some positive signs, but maybe you can add a little bit more color on whether there are any main, major topics that you bridge the gaps? I mean should -- I mean any signs for us -- any reason for us to expect maybe an agreement getting closer?

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David Mizrahi, Bezeq The Israel Telecommunication Corporation Limited - CEO [16]

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Well, as I mentioned earlier, it's still early to say because the -- there is still an ongoing hearing without any resolution yet. So we need to wait and see what will be the result of this hearing and we need to -- once it happens, we need to thoroughly examine our views and to see whether we'll reach a point that the overall project is economic for us.

As I mentioned, we are seeing a progress in the right direction. I don't see it's enough, but we definitely see a progress if you compare it to the views that were in the Ministry of Communication a year ago. So there is definitely a progress. I hope that it will be enough for us to see the overall project as economical. As you know, the requirements from Bezeq is not similar to any other operator in the world. We're still -- even with this new hearing that the ministry established, we are still required to deploy 80% of the country with fiber, which is -- there's no any other precedent for that anywhere in the world. And we are still operating under structural separation, and we don't have a full service. We still have separate service for infrastructure and an ISP and all kinds of other regulations that makes things much more difficult for us than any other player in the market.

Bear in mind that all other players that's operating are operating with no regulation whatsoever, they can choose where to deploy, when, how much money they're charging. And we've just recently seen that the other universal player Hot is getting released in the Universal Service Obligation. In those circumstances, things are much more difficult to us. Hopefully, in the near future, we'll see sufficient progress, and I think we will see that in the next -- in the coming few months.

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Roni Biron, Ion Asset Management - Senior Equity Analyst [17]

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Okay. And final question for me, it's more of a general question. Following the high number of provisions over the past few quarters, are there any outstanding items still under consideration, not including early retirement? Are we finally heading towards maybe a clearer set of numbers going forward?

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Shlomo Rodav, Bezeq The Israel Telecommunication Corporation Limited - Chairman of the Board [18]

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It's Shlomo. We do review every quarter in order to find out whether the -- there is any signs that require us to look again at the value of our subsidiaries. And this is basically the only subject that we'll continue to do. So basically there are 3 -- 2 companies that can be evaluated every quarter. And if there is not going to be any change in the market, then there is no problem here. But the main risk is about what's going on in the market in these 2 subsidiaries, which is Pelephone and Bezeq International. There are no any other assets in our balance sheet that we believe that will need any review. The only other issue, as you know, is lawsuits that you never know how it will happen. But it's not dependent on us, but we work based on a conservative but standard way to evaluate these risks. But besides that, no, there is nothing that we are aware of.

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Operator [19]

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The next question is from Ondrej Cabejšek of UBS.

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Ondrej Cabejšek, UBS Investment Bank, Research Division - Director [20]

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Two questions for me, please. One is on your EBITDA guidance. If I may understand your assumptions for the second half of the year, because if I look at the revised number that you're giving, ILS 2.9 billion, and if I look at your year-to-date performance, then basically what you're saying is that compared to the minus 6% roughly performance of EBITDA year-to-date, you assume that your second half of the year EBITDA is going to be roughly flat year-over-year, so what are your assumptions driving this statement?

And then second question, just coming back to the tax asset, please. So you're saying that first of all, you expect a positive decision from the tax authorities in terms of extending the window for the tax asset usability. You're also saying that you're quite hopeful around the decision from the Supreme Court. Can you just walk us through your decision to write this off? Because it seems like all the conditions that you can expect for you to continue considering this tax asset are sort of expected value with some sort of neutral to positive outcome, so if you could just clarify why you decided to write this off.

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [21]

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Okay. Ondrej, this is Yali, I'll take your first question and Shlomo will take the second question. As for the first question, as we mentioned, our results in this quarter were affected heavily by the write-offs. There are 2 different write-offs. And we basically put into the outlook all these ones-off write-offs. If you exclude all these ones-off, we don't think that this outlook varies substantially from the previous outlook that was in the market. That's one thing. And the other thing we have included in the outlook, which was excluded from the previous outlook is all the early retirements that we expect will happen this year. So -- and we also have given the disclosure to the amount that accounting-wise, we haven't reported yet of ILS 360 million in the outlook. So everything is in this outlook, even things that we're not including were excluded in the outlook previously. And also, this -- and the main difference business-wise is -- and the difference business-wise is very -- is almost nonexistent from the previous outlook. Okay. That answers your question?

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Ondrej Cabejšek, UBS Investment Bank, Research Division - Director [22]

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I'm not sure it does because if I look at the adjusted numbers that you reported that exclude all of these one-offs that you now include, so looking at the net number is, you're basically minus 6% year-to-date in your adjusted EBITDA. So -- I mean, your guidance would imply that you're -- the limit is roughly minus 3% for the full year in order to reach your guidance. So -- because you've been minus 6% year-to-date on the adjusted numbers, how do you achieve a flat second half is my question, really.

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [23]

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So I was referring to the differences between this outlook and the previous one. And the previous outlook and this outlook, the main differences when you take the differences between this outlook and the previous one, if you exclude all the extraordinary write-offs that we had this quarter and you include the early retirement, you basically get a flat, and we'll be happy to talk to you later and go through the numbers as much as we can.

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Ondrej Cabejšek, UBS Investment Bank, Research Division - Director [24]

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Okay.

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [25]

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Okay.

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Shlomo Rodav, Bezeq The Israel Telecommunication Corporation Limited - Chairman of the Board [26]

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Okay. It's Shlomo, I want to explain a little bit the process that we have done. You need to understand and let's talk about the accounting side, the first that we work -- when we place our asset to evaluate them, we work under 2 guidance: one is as you know [S12], and the other one is tax -- sorry, it's the local SEC directive [16-1], which require us to do a few things simultaneously. And in order to continue to have an asset on our book, we need to meet cumulative both requirement, which are a little bit different.

The first one, the S12 is a little bit more easy to evaluate. It's based purely on judgment. But the other one, the 16-1 -- the directive 16-1 requires an entity, as time progress, to have more -- to substantiate more and more and more the same issue.

So if, for example, you have a certain evaluation at a certain point of time, and let's say, 2 years later nothing has happened, it means that you have not applied -- you haven't substantiated more the same. So as -- for quite few years have passed since the time that we have registered this asset in our book and because we are totally dependent on regulatory issues, and also, the local SEC require us when -- not only us, but any public company in Israel that once assets are dependent totally on regulation, on obtaining regulatory approvals, this is something that's questionable whether you can still write it on the books.

So if I'm trying to crystallize the issue to one point is time is passing, no new facts are available or approval and therefore, by definition, the probability is reducing. And once the probability -- if, for example, we've been in the probability of 81% and now it's 79%, no problem, no discussion. But once you are 51% and now it's 49%, it's a major issue, and this is exactly where we are this quarter.

We still have some discussion with the local SEC, they think and we have published it that maybe this issue have already happened at the end of the year, but it's something that we are fully confident in our analysis, but it's something that we are going to continue to discuss with them.

On the pure economics, as I said before, it's something that we will continue to fight and demand in the courts concerning the structural separation. And we believe that will get approval from the tax authorities rather shortly than later. So it's something -- these 2 issues is something that we do.

The third issue is for accounting purposes, you need also to assess the period in which you'll be able to utilize the tax assets. So the longer the period for -- let's assume that we could have -- take advantage of it over 1 year next year, then there is no question that we can do it.

Now let's assume another thing that it will require us 100 years to utilize it. So by the directive of the SEC, if you're talking about such a long period, you need much more proof to substantiate it in a very high level. And because the situation that we have about the uncertainty when we will get it, the requirement from us are more and more, even if nothing has changed. And as I told you unfortunately, we are totally dependent in all 3 aspects on regulation, and we haven't received any progress or facts, new facts from them. And therefore, we have no choice but to write-off this quarter the tax asset.

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Ondrej Cabejšek, UBS Investment Bank, Research Division - Director [27]

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And 2 follow-ups, please, if I may. Can you just clarify what sort of extension you were asking from the tax authority? And then second theoretical question, what happens if, for example, you're expecting it very shortly? So what happens if the tax authority grants you those extensions? And at the same time, for example, you win the court case now -- or you get the court to recommend to the regulator that you should be allowed to get rid of the structural separation, what happens then in theory?

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Shlomo Rodav, Bezeq The Israel Telecommunication Corporation Limited - Chairman of the Board [28]

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Okay. It's a multi-option case, but I'll try to clear it. Once we get the approval for the removal of the structural separation and under the assumption that at this point in time, the tax agreement will be in effect, probably it will take us only a couple of days, and we will do the merger immediately. So I go now to the next question and that's whether unrelated to or until the removal of the structural separation, what we need from the tax authorities.

The agreement that we got from them, and I just want to remind that we have paid a couple of hundreds of millions of shekels in order to reach this agreement, is that we can take advantage of the full ILS 1.166 million losses over a period of 8 years. And the agreement is in effect until the end of this year, December 31, 2019, and it's written in the agreement that the tax authorities will extend it after that each year.

So we've already applied to get the extension for next year. We are discussing it with them. In the discussion, they told us. But again, they told us that they are going to give it to us but we haven't received it yet. And also one of the reasons for the write-off was that in the -- we already have these discussion with them for over 6 months and the fact is that we haven't received it yet. So we hope and believe that we will receive it, but we will still need to wait. And for sure, if we will not obtain this approval shortly, we will do what is necessary in order to get this approval by other means.

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Operator [29]

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The next question is from Ethan Etzioni of Etzioni Portfolio Management.

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [30]

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Yes. I don't understand the ILS 2.9 billion EBITDA that you're now guiding for '19. First of all, what was the change from the ILS 3.9 billion you were guiding earlier? And secondly, if you already made a ILS 1.9 billion EBITDA in the first half, what's going to lower the number to only ILS 1 billion in the second half?

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [31]

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As we mentioned before, the main effects were about ILS 951 million write-off in -- for -- over Pelephone evaluation. And we have also included the early retirement cost in -- inside because it's -- by definition, it's not EBITDA, so that was also -- that also affected the change in the EBITDA. So that was the 2 key numbers that affected the EBITDA, and we also -- have also written, as we mentioned, the early retirement costs for yes already in the first quarter and the sale of Sakia had affected it positively.

So all these changes together amount to the new outlook. And as I mentioned some changes also in the business, but were not major in the criteria that we published under -- in the outlook change. We have published plus/minus 10% outlook change and that was not -- the business changes were not significant enough for the outlook change. The outlook change primarily came from the extraordinary effect.

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Shlomo Rodav, Bezeq The Israel Telecommunication Corporation Limited - Chairman of the Board [32]

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Let me make it very clear. Without these extraordinary effects and the allowance for the early retirement, there would be no change to the guiding -- to the guidance.

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [33]

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How much is the allowance for early retirement?

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [34]

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So as we mentioned, we published about ILS 380 million for the early retirement that we put in, of which ILS 360 million remain to be -- yet to be realized accounting-wise.

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [35]

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So ILS 360 million is going to be charged in the second half?

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [36]

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Yes, that's right according to what we expect as of now.

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [37]

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But the first half was ILS 1.9 billion, right, the EBITDA, that's the number I'm seeing. Is that correct?

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [38]

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First half, it's not the first quarter. You're looking at the adjusted EBITDA or just -- or the EBITDA?

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [39]

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I'm looking in my...

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [40]

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I think it will be a good idea if we call you after this, we will have like a separate call just to go over the numbers with you.

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [41]

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Okay.

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Operator [42]

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(Operator Instructions) There are no further questions at this time. I would like to remind participants that a replay is scheduled to begin in a period of 3 hours on the company's website at www.bezeq.co.il. Mr. Rotenberg, would you like to make your concluding statement?

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Yahali Rotenberg, Bezeq The Israel Telecommunication Corporation Limited - VP of Finance & CFO [43]

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Yes. I would like to thank you all for taking the time to join us today. Should you have any follow-up questions, please feel free to contact our Investor Relations management -- department, sorry. The management looks forward to speaking to you on the third quarter of 2019 earnings call. Thank you.

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Operator [44]

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Thank you. This concludes Bezeq's Second Quarter 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.