U.S. Markets close in 4 hrs 34 mins

Edited Transcript of CEL.TA earnings conference call or presentation 15-Aug-19 1:00pm GMT

Q2 2019 Cellcom Israel Ltd Earnings Call

Netanya Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Cellcom Israel Ltd earnings conference call or presentation Thursday, August 15, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Nir Sztern

Cellcom Israel Ltd. - President & CEO

* Shlomi Fruhling

Cellcom Israel Ltd. - CFO

================================================================================

Conference Call Participants

================================================================================

* Chris Reimer

Barclays Bank PLC, Research Division - Analyst

* Gavriel Frohwein;GK Investor & Public Relations

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by. Welcome to Cellcom's Second Quarter 2019 Results Conference Call. (Operator Instructions) 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 & Public Relations at 1 (646) 688-3559 or view it in the News section of the company's website, www.cellcom.co.il.

I would now like to hand over the call to Mr. Gavriel Frohwein of GK Investor Relations. Mr. Frohwein, would you like to begin?

--------------------------------------------------------------------------------

Gavriel Frohwein;GK Investor & Public Relations, [2]

--------------------------------------------------------------------------------

Thank you, operator. I would like to welcome all of you to Cellcom Israel's Second Quarter 2019 Conference Call. I would like to thank management for hosting this call today. With us here are Mr. Nir Sztern, CEO; and Mr. Shlomi Fruhling, CFO. Mr. Sztern will open by providing a summary of the main highlights of the results followed by Mr. Fruhling, who will review 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 this call -- on this call, management's prepared remarks may contain forward-looking statements, which are subject to risks 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 statements that is contained in the Private Securities Litigation Reform Act of 1995 and in the Israel Securities Law of 1968. I note that actual results may differ from those discussed today, and therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company's filings with the Securities and Exchange Commission, including under the risk factors in the company's Annual Report for the year ended December 31, 2018, filed under the Form 20-F, which was filed on March 18, 2019, with the SEC. In addition, any projections as to the company's future performance represent management's estimates as of today. Cellcom Israel assumes no obligation to update these projections in the future as market conditions change. You should have now received a copy of the company's press release. If you have not received it, please contact us at GK Investor & Public Relations.

I would like to now hand the call over to Mr. Nir Sztern. Nir, please go ahead.

--------------------------------------------------------------------------------

Nir Sztern, Cellcom Israel Ltd. - President & CEO [3]

--------------------------------------------------------------------------------

Thank you, Gavriel. Good day to all of you, and welcome to our second quarter 2019 earnings conference call. In July, we continued the IBC investment deal and the sale of our fiber network in residential areas to IBC. We see significant long-term potential from these developments, both in terms of growth from being part of -- part owner of the fastest and most advanced fixed-line communications network in Israel and also from the potential savings over the coming years to Cellcom. I will go into more details in a few moments.

We are seeing ongoing growth in our fixed-line business. Fixed-line segment service revenues were 4% ahead of those over last year. Together with our progress with IBC, it is clear that we are successfully executing on our long-term strategy to provide the full and most advanced and comprehensive range of end-to-end communication services to all our customers, and the IBC deal fits well within the strategy.

On the cellular side, the market continues to see intense competition with high customer mobility between operators and strong downward pricing pressure.

I'd like to go into more details on our growth engine. We continued to bring new subscribers to Israel's leading OTT television offering in the Israeli TV market. As of the second quarter of 2019, we had 239,000 households subscribed having grown by 23% year-over-year. Broad market acceptance of our TV offering, including as part of our triple and quadruple packages is continuing to bring us good subscriber recruitment in each and every quarter.

Fiber-to-the-home is today's solution for providing ultrafast internet to the home, enabling the provision of speeds of up to 1 gigabytes per second, 20x what is typical today in Israel. In the past few weeks, we made significant progress with the closing of our investment in IBC as well as the sale of our fiber infrastructure in residential areas to IBC. These agreements are significant milestones for Cellcom and are also a major step in advancing the fixed-line communication infrastructure in Israel to the next stage. We've paid ILS 55 million for our indirect 35% stake in IBC, while IIF, our partner in this venture, also paid ILS 55 million for its indirect 35% stake. The Israel Electric Corporation will hold 30%. We also sold to IBC our existing independent fiber infrastructure in residential areas for ILS 180 million. This was financed entirely to shareholder loans provided to IBC indirectly by both Cellcom and IIF in the amount of ILS 90 million each. As a result of these 2 transactions, Cellcom net cash increased by ILS 35 million. The quarter's results do not include the IBC transaction.

Our agreements with IBC also provide us with a right of use of IBC's infrastructure, which now includes the infrastructure we sold. As IBC grows, we will be able to provide more and more customers with superfast internet of up to 1 gigabyte per second, which also will significantly improve the quality of our TV offering, and the plan is to make it available to over 1 million Israeli households in the next years. This will also decrease our dependence on Bezeq and HOT's existing fixed-line infrastructure, which over time will significantly reduce our payment for the use of their infrastructure over the coming years.

In addition, it enables us to stop investing in developing our own independent fiber network. And therefore, we'll be able to significantly lower our investments and improve our cash flow.

We concluded the second quarter with a net loss of ILS 35 million. I note that the loss included ILS 52 million of financing expenses, which was primarily due to the high consumer price index in the quarter at 1.5%.

I would also like to highlight that Cellcom's financial situation remains stable and strong. While our debt rating was recently lowered to A, this remains a high rating. We generated a positive cash flow and hold cash balance of approximately ILS 1.3 billion. We continue to have very high liquidity on our cash holdings as well as good access to the Israeli capital and debt market.

Furthermore, as Shlomi will highlight in a few moments, our financial results continue to remain stable, similar to those of both previous quarter and the -- as well as the year ago quarter. And also on the positive side, our ARPU grew in the quarter compared with the previous quarter, even when we neutralized the effect of the subscriber deletion.

So in summary, as has been the case for a number of years, the cellular market environment in Israel still remains tough. However, throughout this time and despite the competition, Cellcom has taken steps to mitigate some of the negative impacts and has been able to successfully maintain and build on its leading position in the cellular market. This competitive environment has taken its toll on the sector's ability to invest in upgrading its infrastructure and keeping Israel's telecommunication infrastructure at the forefront of today's technology. We continue to believe that the regulator should take note of this situation and should work to change it. However, Cellcom has been diversifying its activities very successfully into the fixed-line arena, where we are increasingly gaining momentum.

Our agreement and investment into IBC is a game-changer, enabling further growth while lowering our expense structure. We're increasingly excited about our long-term future.

And with that, I'd like turn the call over to our CFO, Mr. Shlomi Fruhling, for a review of our financials. Shlomi, please?

--------------------------------------------------------------------------------

Shlomi Fruhling, Cellcom Israel Ltd. - CFO [4]

--------------------------------------------------------------------------------

Thank you, Nir, and good day to all of you. I will provide you a summary of our results. The details can be found in the press release we issued earlier today. Revenue for the second quarter of 2018 totaled ILS 920 million, marginally lower than the ILS 927 million reported last year. The service revenues were at a similar level to those of last year at ILS 695 million.

In fixed-line segment, service revenue grew 4% over those of the second quarter of 2018 to ILS 312 million. The growth in fixed-line segment service revenue was due to the growth in our subscriber base for TV and internet infrastructure services.

Adjusted EBITDA was ILS 233 million or 25% of revenue, a 66% increase compared with ILS 140 million or 15% of revenues of the second quarter of 2018. The increase in the adjustment EBITDA result from a decrease in rent expense in total amount of ILS 68 million (sic) [ILS 61 million] result from the decrease in the rent expense -- sorry, ILS 61 million, due to the recognition of right-of-use assets as a result of the initial implementation of IFRS 16 starting January this year.

Adjusted EBITDA from fixed-line segment was ILS 70 million compared to ILS 62 million in the last year. And adjusted EBITDA from the cellular segment was ILS 163 million compared to ILS 78 million in the last year.

Net loss for the second quarter of 2019 totaled ILS 35 million compared to a net loss of ILS 37 million in the second quarter of 2018. The net loss was affect by increase in financial expense of our index-linked debt as a result of the increase of 1.5% in the consumer price index during the quarter.

Free cash flow for the quarter totaled ILS 55 million versus ILS 56 million in the second quarter of last year. Our cash capital expenditures during the second quarter of 2019 totaled ILS 130 million versus ILS 131 million in the second quarter last year.

As of the end of the second quarter of this year, our net debt stood at approximately ILS 2.2 billion. We have a total of approximately ILS 1.3 billion in cash on our balance sheet, while our overall debt repayment of interest and capital that are due until the end of 2020 amount to less than ILS 1 billion.

Our cellular subscriber base amounted to 2.745 million at June 30, 2019, compared to 2.851 million at the end of the last -- of 2018. The subscriber base increased by 45,000 subscribers during the second quarter.

At the end of the first quarter, Cellcom deleted 153,000 M2M and prepaid subscribers due to change in the accounting method that was used for cellular subscriber base. The churn rate of cellular subscribers in the second quarter of 2018 was 11.3%. The monthly cellular ARPU for the second quarter of this year was ILS 51.9, similar to ILS 51.8 in the second quarter last year. The ARPU was positively impacted from the increase of ILS 2.8 due to the deletion of prepaid and M2M subscribers from the company's cellular subscriber base. This was offset by an ongoing erosion in the price of the cellular service.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is from Tavy Rosner of Barclays.

--------------------------------------------------------------------------------

Chris Reimer, Barclays Bank PLC, Research Division - Analyst [2]

--------------------------------------------------------------------------------

This is Chris Reimer on for Tavy. I wanted to ask how we should be looking at overall profitability at the company, not just the effect of the cellular segment weakness. And just if there are any other options management is looking at to reduce operational costs?

--------------------------------------------------------------------------------

Nir Sztern, Cellcom Israel Ltd. - President & CEO [3]

--------------------------------------------------------------------------------

Thanks for the question. Obviously, we're looking all the time at any and all possibilities to reduce the cost. It's something that we have been doing and proven to do so in the last few years and will continue to do so in the coming quarters and years. I can assure you that we're focused on that, and we'll try and do as much as possible.

--------------------------------------------------------------------------------

Chris Reimer, Barclays Bank PLC, Research Division - Analyst [4]

--------------------------------------------------------------------------------

And regarding the rise in finance costs, could you elaborate on what that's made up of? And how we should be looking at that line item going forward over the near term?

--------------------------------------------------------------------------------

Shlomi Fruhling, Cellcom Israel Ltd. - CFO [5]

--------------------------------------------------------------------------------

As you know, we have more than ILS 1.3 billion cash in our balance. This means that we have, at least in the next 2 years, we don't have demand to increase our debt or to issue new debt. It means that we have enough time to make a rebound of our cost of debt, and we will issue new debt when the time will come in the right interest.

--------------------------------------------------------------------------------

Nir Sztern, Cellcom Israel Ltd. - President & CEO [6]

--------------------------------------------------------------------------------

And specifically, the quarter, we had 1.5% of CPI index. The expected inflation rate in Israel yearly is even less than that. So looking forward in terms of financing expenses, obviously, as the CPI will go down or it should go down seasonally, we can expect to see the relative changes in our financing expenses relative to that.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is from [Alad Salomon] of Excellence.

--------------------------------------------------------------------------------

Unidentified Analyst, [8]

--------------------------------------------------------------------------------

So my question is, why did you change from the beginning the measurement of the ARPU?

--------------------------------------------------------------------------------

Nir Sztern, Cellcom Israel Ltd. - President & CEO [9]

--------------------------------------------------------------------------------

Can you elaborate on the question? I'm not sure I understood it.

--------------------------------------------------------------------------------

Unidentified Analyst, [10]

--------------------------------------------------------------------------------

Why did you change the -- in the beginning the measurement of the ARPU? I mean why did you deduct the prepaid and the M2M contract?

--------------------------------------------------------------------------------

Nir Sztern, Cellcom Israel Ltd. - President & CEO [11]

--------------------------------------------------------------------------------

Well, as you know, the mobile arena is seeing all the time technological changes. And I think it's our responsibility to reexamine whether or not the numbers that we give the market are as close as possible to the numbers that we're seeing in terms of actual subscribers and their payments. So mostly -- most of the difference that you see in the numbers is in terms of M2M, machine-to-machine IoT devices. So what we do constantly is examine whether or not these numbers truly reflect the actual subscriber base, and as appropriate, we adjust them. And that's what we did this quarter.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Nir Sztern, Cellcom Israel Ltd. - President & CEO [13]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

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