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Edited Transcript of CEL.TA earnings conference call or presentation 15-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Cellcom Israel Ltd Earnings Call

Netanya Mar 15, 2017 (Thomson StreetEvents) -- Edited Transcript of Cellcom Israel Ltd earnings conference call or presentation Wednesday, March 15, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kenny Green

GK Investor & Public Relations - IR

* Nir Sztern

Cellcom Israel Ltd. - CEO

* Shlomi Fruhling

Cellcom Israel Ltd. - CFO

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Conference Call Participants

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* Tavy Rosner

Barclays Capital - Analyst

* Chris Grundberg

UBS - Analyst

* Liran Halbani

Etzioni Portfolio Management Ltd. - Analyst

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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 Cellcom's fourth-quarter and year-end 2016 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. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin, please?

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Kenny Green, GK Investor & Public Relations - IR [2]

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Thank you. I would like to welcome all of you to Cellcom Israel's fourth-quarter and full-year 2016 conference call, and I would like to thank management for hosting this call today. With us here on the line 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 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 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 Israeli 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 risk factors in the Company's annual report for the year ended December 31, 2015, filed under Form 20-F which was filed on March 21, 2016, 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 by 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 hand the call over now to Mr. Nir Sztern. Nir, please go ahead.

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

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Thank you, Kenny. Good day to all of you, and welcome to our fourth-quarter and full-year 2016 earnings conference call.

Our results for 2016 as a whole, and for the fourth quarter, continued to demonstrate that we are not operating in an easy market and competition remains tough. In 2016, we showed growth in our fixed line business despite the tough environment, while the cellular business remained under competitive pressures which led to further erosion of our service revenues but at a lower level of erosion compared with that of 2015.

Throughout the year, we focused on implementing our ongoing strategy and extending our position as a leading communications group. And, indeed, we saw many successes. In particular, we are very pleased with the traction that our TV service, Cellcom tv, has seen. We've reached approximately 122,000 subscribers to date, which is above 7% market share in the local TV market, which is dominated by YES, owned by Bezeq and HOT Cable.

Our subscribers have signed up to Cellcom tv, enjoying our high-quality programming with rich and diverse content. We are also growing by offering additional premium channels, including all the major Israeli sport channels, and Russian content for local Russian speakers. Overall, we are pleased with the ongoing positive market reception of our offering.

Our goal is to continue growing our subscriber base in the TV field, providing a very high-quality alternative to the existing incumbent TV players' offering with, by far, the most attractive pricing in the market. This achievement is another success in our strategy to strengthen and cement our standing as a leading Israeli telecommunications group.

In terms of our costs, we remain committed to efficient operation and maintain ongoing measures to keep expenses low in our business. Our SG&A expenses in 2016 declined by 8% versus last year, and was close to NIS90 million less than that of last year. Over the past two years, we have substantially lowered our overhead expenses, reducing the headcount and streamlining much of our work processes. And this remains an ongoing process at Cellcom Israel.

Much happened throughout 2016 with regards to Golan. In the past few months, Electra Consumer Products, a public company here in Israel, entered into an agreement to purchase Golan for NIS350 million. At the same time, we signed a 10-year 3G and 4G network sharing and 2G hosting service agreement with Electra, which will pay us over NIS200 million on average annually for the next 10 years. In addition, we are providing Golan with NIS130 million loan.

In July 2016, we also signed a network sharing and hosting agreement with Marathon 018 Xfone. Bear in mind that Golan sales and our network sharing agreements are still pending regulatory approval and subject to finalization. Signing the network sharing agreement with Electra Consumer Products and Xfone 018 is a very positive step that will ensure revenues over the coming years. It will also allow us to continue to offer advanced and high-quality cellular services, thanks to the range of frequencies that the shared network will have. We are awaiting the necessary regulatory approvals in order to move forward.

With regard to the wholesale market, our ongoing activities have continued to be successful. And as we exit 2016, we have emerged as the clear market leader in the wholesale segment of the market. As of today, we have more than 180,000 wholesale customers. This translates to over 40% of the wholesale market, which positions us as the market leader in the wholesale market. This strong performance in the wholesale market supports our position as one of the leading telecommunications groups in Israel providing both mobile and landline services to our customers.

We're also looking and seeding our other activities which we believe have potential. In the fixed line market, we are examining the option to become owners of an independent infrastructure to the IBC consortium or independently.

We're also enlarging our suite of services in the cellular space. We have relaunched Cellcom Volume, our popular music application. And recently, together with international IoT company AGT, we announced the launch of Cellcom smart cities solution and we're already starting our trial solution in some cities in Israel. Israel has 50 million devices connected to our network, and this number continues to grow strongly. We intend to further strengthen Cellcom's position at the heart of the communications network supporting the majority of smart sensors and devices in Israel.

In summary, we continue to cement ourselves as a leading telecommunications group in Israel. The new growth engines, that of Cellcom tv as well as our activities in the wholesale market, continued to gain market traction and we expect to see the benefit over the coming years.

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

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

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Thank you, Nir, and good day to all of you. Revenues for 2016 totaled NIS4,027 million compared to NIS4,180 million last year. The decrease in revenue was due to a 3.2% decrease in service revenue and a 5.2% decrease in equipment revenue. Sales revenue for 2016 totaled NIS3,033 million compared with NIS3,133 million last year (sic - see press release, "NIS 3,132 million"). Sales revenue in the cellular segment totaled NIS2,162 million in 2016 compared with NIS2,273 million last year.

This decrease was mainly due to a decrease in cellular services revenue due to the ongoing erosion in the price of these services, and churn of customer as a result of the competition in the cellular market. This was partly offset by increasing revenue of national roaming services.

Service revenues in the fixed line segment totaled NIS1,071 million in 2016 compared with NIS1,063 million last year. This increased result mainly on increasing revenue from Internet and TV fields and was partly offset by decrease in revenue from long distance calling services.

Equipment revenues in 2016 totaled NIS994 million compared with NIS1,048 million last year. This decrease was due to the lower quantity of end-user equipment sold during 2016 in the cellular segment as compared to 2015, and was partly offset by increasing equipment sales in the fixed line segment. Revenue for the fourth quarter of 2016 totaled NIS984 million compared with NIS1,046 million in the fourth quarter last year. A decrease in revenue was due to a 5% decrease in service revenues and 8.3% decrease in equipment revenues.

Service revenues totaled NIS719 million in the fourth quarter compared with NIS757 million in the fourth quarter of last year. Service revenue in the cellular segment totaled NIS502 million in the fourth quarter compared with NIS546 million in the fourth quarter of last year.

Service revenue in the fixed line segment totaled NIS267 million in the fourth quarter compared with NIS263 million in the fourth quarter of last year. Equipment revenue in the fourth quarter totaled NIS265 million compared with NIS289 million in the fourth quarter of last year.

2016 EBITDA from cellular segment was NIS625 million or 20.8% of revenues; and EBITDA from the fixed line segment was NIS233 million or 19% of revenues. Annual EBITDA of 2016 was NIS858 million or 21.3% of revenues compared with EBITDA of NIS872 million or 2.9% (sic - see press release, "20.9%") of revenues in 2015. Fourth-quarter EBITDA from the cellular segment was NIS117 million or 16.5% of revenue, and EBITDA from fixed line segment was NIS56 million or 17.1% of revenue.

Overall EBITDA for the fourth quarter of 2016 was NIS173 million or 17.6% of revenue compared with NIS225 million, 21.5% of revenue, in the fourth quarter of last year.

Net income for 2016 totaled NIS150 million compared with NIS97 million in 2015. Fourth quarter of 2016 net income was NIS14 million compared with NIS19 million in the fourth quarter of last year.

Free cash flow for 2016 was NIS416 million compared to NIS494 million in 2015. The free cash flow during the quarter reached NIS83 million versus NIS121 million in the fourth quarter of last year. The decrease in the free cash flow was mainly due to a decrease in receipts from customer and services and end-user equipment.

As of the end of 2016, our net debt stood at NIS2.5 billion, NIS200 million lower than the net debt at the end of 2015.

Our cash CapEx for 2016 was NIS368 million compared to NIS396 million last year. In the quarter, cash CapEx was NIS96 million compared with NIS89 million in the fourth quarter of last year.

Our cellular subscriber base amount to 2.801 million at the end of 2016 compared with 2.835 million at the end of 2015. The churn rate of cellular subscribers in the fourth quarter in 2016 stood at 10.4% compared with 11.1% in the same quarter of 2015. ARPU for the fourth quarter totaled NIS59.3 compared with NIS63 in the fourth quarter of last year.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions). Tavy Rosner, Barclays.

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Tavy Rosner, Barclays Capital - Analyst [2]

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Thanks for the presentation. You talked about the competitive environment in mobile. And I was wondering if you can share your views on pricing across the industry, especially in the context of the acquisition of Golan by Electra. And overall, when do believe we might see a recovery in ARPU?

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Shlomi Fruhling, Cellcom Israel Ltd. - CFO [3]

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In terms of pricing, over the last year, we continue to see aggressive pricing in the market. We've seen two-year pricing of low prices, three-year pricing. So, over the last year, we've continued to see that aggressive pricing in the market. Even, I'd say, over the last six months it's pretty much been stabilized. Going forward, obviously I can't predict what's going to happen there. And so we'll have to wait and see where prices are going as competition develops.

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Tavy Rosner, Barclays Capital - Analyst [4]

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Thank you. Regarding the dividend, on the press release, there was some mention of the Board deciding not to declare. I was wondering what would need to happen in order for the Board to feel more comfortable about that decision?

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

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I think we need to see some stabilizing free cash flow; stabilizing our net debt to EBITDA. And then maybe this would be the time that we would be able to discuss the dividend policy again.

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Tavy Rosner, Barclays Capital - Analyst [6]

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Okay, thank you. I'll go back to the queue.

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Operator [7]

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Chris Grundberg, UBS.

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Chris Grundberg, UBS - Analyst [8]

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Just a couple of questions from me. Just one on the TV performance, which still is very encouraging. Wondered if you can give an update on your ambitions there, what you think your ultimate market share can get to? And I guess, linked to that, if you can give any updates on what the competitive reaction has been to your market share gains. And then I have a couple of follow-ons. Thanks.

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Shlomi Fruhling, Cellcom Israel Ltd. - CFO [9]

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In terms of TV, like we said, we are very pleased with the results. We are close to more than 7%; maybe even 8% is more accurate, but we haven't seen the results of our competitors so far. We are pushing full steam ahead. We haven't reached a point that we think we've even gotten close to finishing the potential that we see in the market.

The more we do well, the more we are encouraged by the customers. And growth rate is actually going up a little bit, as well, over the last few months.

So the future for us is that we are going to continue to put more content and more innovative services over the platform. So we'll continue to push. It's still, I think, a little bit early to say what the final ambition is. And it's not something that we usually disclose.

In terms of the competition, we are seeing more and more price offers coming from our competitors, and mostly we are seeing them losing a lot of customers. So I think, the next year or two, we'll probably see more coming from that. We are hearing the [partners is] going to into the market. That, as well, is going to influence what we do over the next year.

So we feel -- going into 2017, we feel very, very positive, very optimistic about our chances; and knowing what we know and the process that we have been through over the last two years of refining the way we install the TVs, the way we market them, the content that we deliver, we feel very confident going forward.

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Chris Grundberg, UBS - Analyst [10]

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Thanks. And then maybe a follow-up on that. Given the growth in both the wholesale and the TV subscribers on the fixed side, it feels a little bit like the revenue line there might be lagging the subscriber growth. I might be missing something. But is there any commentary you can throw around that, or is there anything that we should bear in mind on that front?

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

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I think Shlomi said it in his things. In terms of revenue growth in the fixed line business, we've seen growth both in Internet coming from wholesale and TV. But that was offset by a decline in ILD, the international long distance. That's something that we've been seeing over the last two years, year after year, and also in this year.

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Chris Grundberg, UBS - Analyst [12]

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Got it, thanks. I'll jump back in the queue, as well. Thank you.

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Operator [13]

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(Operator Instructions). Chris Grundberg, UBS.

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Chris Grundberg, UBS - Analyst [14]

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The question I have is actually just on the equipment revenue decline that you've seen across both fixed and mobile in Q4; just seeing the year-on-year decline actually accelerate in both. I just wondered if there is any commentary you can give around what the trends we should be thinking about in FY17. Is sort of a Q4 base the right kind of level to think about? Or do you think things continue to decline, in year-on-year terms, from here? Thanks.

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Nir Sztern, Cellcom Israel Ltd. - CEO [15]

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First, it's a very -- also a very competitive market, this segment. But we continue to decline revenues, but total year profitability is being stable, and if you are looking year after year. And part of it that we are selling maybe -- we shift from selling only cellular; or also we are selling today a tablet and smart watch. So there's change in the revenue. But the effect on the contribution is much lower. But, Chris, this is still a very competitive market, and we cannot estimate now going forward.

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Chris Grundberg, UBS - Analyst [16]

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So should we basically assume that if you are seeding some sales, it will be on the basis of profitability? You'd rather not sell at low margins and impact your profitability. Is that the right read?

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Shlomi Fruhling, Cellcom Israel Ltd. - CFO [17]

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We are always well focused on the profitably of this segment and not on the level of revenue.

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Chris Grundberg, UBS - Analyst [18]

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Got it, that's clear, thank you.

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Operator [19]

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Liran Halbani, Etzioni Portfolio Management.

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Liran Halbani, Etzioni Portfolio Management Ltd. - Analyst [20]

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Is the revenue including the Golan Telecom payments? Because I remember that last quarter it wasn't including payments from Golan Telecom.

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Shlomi Fruhling, Cellcom Israel Ltd. - CFO [21]

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Revenue is always including Golan, our national roaming revenues. In the third quarter, we echoed a one-time of NIS40 million. So that reduced the total amount of national revenues in third quarter. But it's always been, and it always will be, part of our total revenues.

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Liran Halbani, Etzioni Portfolio Management Ltd. - Analyst [22]

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So, it's still decreased -- it came back because they need to pay you by (inaudible) agreement around NIS50 million, NIS55 million. So now I can or can't see it inside the revenues?

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Shlomi Fruhling, Cellcom Israel Ltd. - CFO [23]

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Can you repeat the question? I didn't understand the numbers.

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Liran Halbani, Etzioni Portfolio Management Ltd. - Analyst [24]

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By the new agreement that you have with Golan Telecom, they are supposed to pay you certain amount every month. Now you (multiple speakers) for the revenues.

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Shlomi Fruhling, Cellcom Israel Ltd. - CFO [25]

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The new agreement hasn't been finalized yet. Like we said, we are still waiting for the regulatory approval.

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Liran Halbani, Etzioni Portfolio Management Ltd. - Analyst [26]

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Okay, so it's not concluding.

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Shlomi Fruhling, Cellcom Israel Ltd. - CFO [27]

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In the fourth quarter, it's still Golan Telecom that's owned by Michael Golan that's paying us. It's all in the revenues. Regarding the new national roaming agreement, that is not in the results of the fourth quarter. It will be in the second quarter, actually. It will be finalized.

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Liran Halbani, Etzioni Portfolio Management Ltd. - Analyst [28]

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Okay thanks. I'll jump back to the queue.

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Operator [29]

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

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Nir Sztern, Cellcom Israel Ltd. - CEO [30]

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I would like to thank all of you for joining our conference call and your continued interest in our Company. As always, I look forward to --

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Operator [31]

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Sorry to interrupt. Liran Halbani has another question.

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Liran Halbani, Etzioni Portfolio Management Ltd. - Analyst [32]

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The other question that I have is regarding the CapEx. If I'm looking at the CapEx and the depreciation, I see that there is a big gap between them. By my calculation in the fourth quarter, the gap is -- the CapEx is 78. Depreciation is 136. And the property, plant, and equipment went down only 1 from last quarter. So the number -- the numbers are not fitting. What can't I see?

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Shlomi Fruhling, Cellcom Israel Ltd. - CFO [33]

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The numbers are fitting. This is the earnings report of the Company. Of course, we will be happy to answer your question off-line. You can contact me or contact Elad Levy, and we'll give you the full explanations.

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Liran Halbani, Etzioni Portfolio Management Ltd. - Analyst [34]

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Okay. Thanks.

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Operator [35]

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

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Nir Sztern, Cellcom Israel Ltd. - CEO [36]

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Yes, so as I said, thanks again for joining us. And look forward to hosting you again at our next call in the next quarter. Have a good day.

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Operator [37]

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Thank you. This concludes the Cellcom Israel Ltd. fourth-quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.