U.S. Markets closed

Edited Transcript of CEL.TA earnings conference call or presentation 27-Nov-19 2:00pm GMT

Q3 2019 Cellcom Israel Ltd Earnings Call

Netanya Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Cellcom Israel Ltd earnings conference call or presentation Wednesday, November 27, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* Nir Sztern

Cellcom Israel Ltd. - President & CEO

* Shlomi Fruhling

Cellcom Israel Ltd. - CFO

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

Conference Call Participants

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

* Tavy Rosner

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

* Ehud Helft

CCG Investor Relations Inc. - Managing Partner - Israel

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

Presentation

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

Operator [1]

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

Ladies and gentlemen, thank you for standing by. Welcome to Cellcom's Third 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 and Public Relations at 1 (646) 688-3559 or view it in the News section of the company's website, www.cellcom.co.il.

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

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

Ehud Helft, CCG Investor Relations Inc. - Managing Partner - Israel [2]

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

I would like to welcome all of you to Cellcom Israel's Third Quarter 2019 Results Conference Call, and I would like to thank management for hosting this call today. With us on the call today are Mr. Nir Sztern, the CEO; and Mr. Shlomi Fruhling, CFO. Nir will open by providing a summary of the third quarter results, and Shlomi will go over the financials in more detail. We will then open the call for the question-and-answer session.

Before I turn over the call to Nir, I would like to then remind you, our listeners, that in 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 protection of the safe harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995 and Israel Securities Law of 1968. I note that actual results may differ from those discussed today, and therefore, we refer you to the more detailed discussion of the risks and uncertainties in the company's filings with the Securities and Exchange Commission, including under 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 estimates as of today. Cellcom Israel assumes no obligation to update these projections in the future as market conditions may change.

I note a mistake in the key financial and operating indicators table, including in the earning release, published by the company earlier today. The correct table was included in the Form 6-K filed thereafter by the company on the SEC website at www.sec.gov and the ISA's website at www.magna.isa.gov.il. It is also available on the company's website at www.cellcom.co.il.

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

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

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

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

Thank you, Ehud. Good day to all of you, and welcome. As you all know well, the situation in the cellular market in Israel has been very tough for all players for many years now with unrelenting competition, and the situation was no different in the third quarter. Given the situation over the years, we have taken steps to mitigate the impact. We have diversified our operations and made us an end-to-end supplier of all the consumers' needs for connectivity. We were the first in the market to launch over-the-top television. We also entered into the fixed-line arena, which includes recently optical fiber to the home. These activities have provided us with alternatives and more stable streams of income. Again, while our overall profitability has still been impacted by the competition, these new revenue streams have been less impacted.

Beyond this, over the years, we carefully controlled and cut our costs, focusing on improving efficiencies. We also signed network sharing agreements with other operators, which lowered our expenses and CapEx. In general, we have taken steps and adjustments to mitigate some of the impact of the competition. Over the past year, it became clear that we would have to take more drastic measures. And a few weeks ago, we announced a comprehensive restructuring plan to lower our debt levels, reduce expense and CapEx and further adjust Cellcom Israel to the low-pricing environment, enabling us to better cope in the current market reality. This was the culmination of extensive work and internal analysis, which we undertook with certain aspects of it in consultation with highly experienced external consultants from a leading global consulting firm.

As we discussed a few weeks ago, I want to reiterate that our plan has 3 main goals. The first is to prepare the company to better cope with market conditions, the intense competition and future investments. The second is to lower our net debt-to-EBITDA ratio to less than 3. And the third is to bring the business to positive net income by the end of 2020. In order to achieve these goals, we're taking 3 main steps. First, cutting expenses. Our expense cutting is ongoing, and our plan is implementing additional steps to reduce our expense footprint even further. One of the steps we've taken in the first month is that we approach our suppliers to cut costs across the board. We have entered into discussions with the employees' representatives to reach a new collective agreement that will lower our overall employee-related expenses, and we hope to conclude this discussion successfully. For the past few months, we have also been reducing our landline wholesale access fees by shifting our customers to our subsidiaries, IBC's optical fiber network. We have targeted overall lowering of operating expenses by approximately ILS 150 million by year-end 2020.

The second is reducing CapEx. We are making further savings by reducing capital expenditure. Our aim here is also a reduction to a level of between ILS 450 million and ILS 500 million per year by year-end 2020. This includes lowering various IT and engineering investments as well as moving Cellcom Israel's previous residential fiber optic investment into IBC. This is obviously not including any new frequencies-related CapEx that may require added investment.

And the third thing we're going to do to implement in the restructuring plan is raise equity. As we announced, we are looking to execute an approximate ILS 400 million equity capital raise in Israel before year-end, and we're working full steam ahead to meet this target. This move, together with factoring the payables of customers, end users equipment, should we accomplish that, which would amount to an additional ILS 100 million to ILS 150 million, will allow us to reduce our total debt and interest expenses and will help us in achieving our net debt-to-EBITDA ratio and net income goals.

In terms of the results of the third quarter, our financial performance was better than that of previous quarters. While Shlomi will go through the financial results in detail in a few moments, I want to highlight a few aspects. Our overall revenues were up slightly at 3% year-over-year to ILS 938 million, and our service revenues were similar to those of last year, up by 1% to ILS 719 million. This was made up by a slight increase in the fixed line and slight decrease in cellular.

On the bottom line, our adjusted EBITDA increase was mainly due to the new IFRS 16 reporting. In addition, we also had a contribution of ILS 8 million to the EBITDA from the sale of our fiber network to IBC. However, when excluding these onetime -- one-off items, EBITDA was stable at ILS 191 million, similar to last year. We completed the IBC investment deal and the sale of our fiber network in residential areas to IBC. This contributed ILS 181 million to our free cash flow, which was strong in this quarter and amounted to a total of ILS 230 million. The long-term potential for Cellcom Israel in terms of being a 35% indirect owner of the most advanced fixed-line communications network in Israel as well as our potential savings over the coming years is significant.

Even in the third quarter, we have already begun to see a leveling off of our wholesale payment to Bezeq as we have started the process of shifting new and existing customers to IBC's fiber optic network. Today, IBC's infrastructure already reaches over 300,000 home passed. These are buildings which are physically connected to our fiber network. As IBC's network expands across Israel, we'll be able to provide more customers with superfast Internet of up to 1 gigabyte per second. Our goal is potentially to reach over 1 million households across the country within 5 years.

In terms of our TV offering, we continue to bring new subscribers to what we see as Israel leading over-the-top television offering. As of the end of the third quarter, we had 247,000 households subscribed, having grown by 20% year-over-year. In terms of fixed-line Internet infrastructure, we had 276,000 households subscribed, up 7% over last year. The broad market acceptance of our offering, including as part of our triple and quadruple packages, continues to bring us subscriber recruitment and the associated steady growth in revenue streams.

In summary, as we move into 2020, the steps we're currently taking are important and meant to put Cellcom Israel in a much better position to navigate the current market environment and invest for the future.

With that, I'd like to hand over to Shlomi. Shlomi?

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

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. Details can be found in the press release we issued earlier today.

Revenue for the third quarter of 2019 totaled ILS 938 million, up 3% over the ILS 910 million reported last year. Out of those, the service revenues were 1% higher than the level of those of last year, reaching ILS 719 million, while equipment revenues were ILS 219 million, 11% higher. I would like to highlight that the fixed-line segment service revenues grew 4% over the third quarter of 2018 to ILS 321 million. This increase resulted mainly from an increase in revenues from Internet and TV services and revenues from fiber optic infrastructure deployment service to IBC. This increase was partly offset by a decrease in the minute sales among international operators.

Adjusted EBITDA was ILS 271 million or 29% of revenue, a 42% increase compared with ILS 191 million or 21% of revenue in the third quarter of 2018. The increase in the adjustment EBITDA result from a decrease in rent expense in total amount of ILS 72 million due to recognition of right-of-use assets as a result of the initial implementation of IFRS 16, starting from 1st of January 2018. In addition, there were an ILS 8 million contribution from the sale of fiber optic infrastructure to IBC. Excluding these 2 positive effects, EBITDA was ILS 191 million at the same level of -- as the third quarter of last year.

Adjusted EBITDA from the fixed-line segment was ILS 86 million compared with ILS 73 million last year, and adjusted EBITDA from the cellular segment was ILS 185 million compared with ILS 118 million last year. Net loss for the third quarter of 2018 totaled ILS 2 million compared to a net income of ILS 1 million in the third quarter of last year.

Free cash flow for the quarter totaled ILS 234 million versus ILS 34 million in the third quarter of last year. As Nir expanded earlier, the free cash flow included the proceeds from the sale of the fiber infrastructure amounting to ILS 181 million.

The cash capital expenditures during the third quarter of 2019 totaled ILS 149 million versus ILS 160 million in the third quarter last year. As of the end of the third quarter of 2019, our net debt stood at approximately ILS 2.2 billion. We have a total of approximately ILS 1.3 billion in cash in our balance sheet, while our overall debt repayment of interest in capital that are due until the end of 2020 is amounting to ILS 900 million.

Our cellular subscriber base amounted to 2.767 million as at September 30, 2018 (sic) [2019], compared with 2.825 million at the end of September 30, 2018. The subscriber base increased by 22,000 during the third quarter. At the end of the first quarter of 2018, Cellcom has deleted 133,000 M2M and prepaid subscribers due to a change in the counting method that will use our cellular subscriber base. The change of the cellular subscribers in the third quarter of 2019 was 11.4%. The monthly cellular ARPU for the third quarter of 2019 was ILS 53.2, similar to ILS 53.5 (sic) [52.5] in the third quarter of last year. The ARPU was positively affect 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 services.

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.

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

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

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

I was wondering if you could you share your comments about the regulatory framework that was published by the MOC couple of weeks ago. Do you think it's a good thing for the industry in general and for Cellcom and IBC specifically?

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

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

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

We're looking very thoroughly to the recommendation by the ministry and the other ministries that were in that committee. I think there are some good things. I think there are some things that we're not happy with in terms of the cost of rolling out the network in areas that are less profitable. We think that there's some major changes that need to be made in that. So we'll be offering our opinions in the hearings that will be coming in the next few weeks.

We are concerned that the offer that has been put on table won't allow all the people of Israel to enjoy the fiber network, and we feel that some things need to be changed there in order to improve it. And like I said, we'll give all our opinions when the time comes.

And I think the other thing I want to say about this is, I think we can also assume that it's going to take a little time to see things happening, especially if we'll see new elections in Israel, then it's going to take a little time to see whether and when it will be implemented.

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

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

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

Yes. That's very helpful. Maybe just big picture questions. I mean, you're the last company to report. So we cannot quote the other company's numbers. And one of your competitor is talking about 450,000 homes passed. You have 300,000. And both of you have very big ambitions. So I mean, looking down the road, you're passing 1 million homes partner probably something similar, Bezeq increasing penetration down the road, is there a risk that fiber from the new broadband and then competition on prices which would therefore reduce your return on investment in fiber. Is there something we should be concerned about?

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

Nir Sztern, Cellcom Israel Ltd. - President & CEO [5]

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

I think the risk of price was -- is always there. But I think the upside of rolling out of fiber network with the potential new products and services that will be coming in the future, and some of them are already here, is an upside that we can also look at. Everybody is rolling and talking. We've made a decision to do our network rollout with IBC because we believe the right model for the market is a wholesale company. And that's the best way to consolidate the effort of rollout and at least cut some of the costs down. And then the ability or the margin that will be there even for price wars is better than rolling out it on its own. So IBC is, I think, is a great vehicle for that. And I'm sure we'll all be waiting to see exactly what the decisions in terms of Bezeq are going to be. So right now, we're rolling the fiber, our competitors are as well. But it's still -- some of it is still early days in terms of trying to see where things are going to end up at the end of the day.

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

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

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

And maybe last one. Looking at mobile, so I mean, price war ongoing. That's nothing new. How should we think about consolidation? Do you think that the MOC's tone is changing potentially allowing consolidation down the road? And then as a follow-up, looking at 5G, how do you see potential investments there, especially in this challenging environment?

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

Nir Sztern, Cellcom Israel Ltd. - President & CEO [7]

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

Well, in terms of the MOC's opinion on consolidation, obviously, they're keeping their cards close to their chest and not saying a lot. You have to remember that it's not only the MOC, it's also the antitrust commission and also the Ministry of Finance. So it's hard to say. I think everybody in the regulatory environment is a little bit concerned of where -- and I'm quoting or not really quoting but saying what I've heard and I'm sure you heard as well that there's some concern that current level of competition is going to impact future investment. So whether or not consolidation will be approved, I don't know. But I think it will be looked at with more carefully and looking at not only impact on customers, but also future impact in terms of investment.

Going forward to 5G, there's going to be some investment. Being on a network with 2 other partners, Cellcom is in a pretty good position because the cost is going to be divided between 3 operators. In terms of the cost of the frequency, there's still some uncertainty there and some answers we're waiting to hear from the Ministry of Communications, and then we'll know a little bit more.

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

Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [8]

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

And just a technical one. You said the number of IBC connected homes is 300,000?

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

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

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

Yes, and thank you for saying that. Just to make sure and be clear, okay, we have -- or IBC has 300,000 households that are connected to the network. These are what we call home pass and not street pass. The difference is, maybe you understand, but I want to make sure that everybody understands, okay, street pass when you have fiber going down the street and not connected to the building. Home pass is where you go, you have the fiber in the street and you connect each and every building to the fiber. The difference is very big, both in numbers and both in -- and also in terms of the cost that is associated with it. When we consistently talk about the number of connected homes to the fiber network, these are actual home passes. Every single one of the 300,000 potential customers who call Cellcom can be connected within 48 hours. That's the true meaning of having home pass. I don't know what -- how it's defined by others. But just to make sure that we understand what we say when we mean home pass.

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

Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [10]

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

I have a feeling that some of the others have a more wider definition of -- that's probably wide was a good idea to...

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

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

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

I wasn't referring to them, obviously. I was just making sure that you understand what we are saying.

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

Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [12]

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

I understand. That's very helpful. I was worried when I pulled the numbers. You get -- I guess it makes more sense now.

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

Operator [13]

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

(Operator Instructions) 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 [14]

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

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

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

Operator [15]

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

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