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Edited Transcript of CEL.TA earnings conference call or presentation 23-Mar-20 2:00pm GMT

Q4 2019 Cellcom Israel Ltd Earnings Call

Netanya Apr 2, 2020 (Thomson StreetEvents) — Edited Transcript of Cellcom Israel Ltd earnings conference call or presentation Monday, March 23, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Avraham Gabbay

Cellcom Israel Ltd. – CEO

* Shlomi Fruhling

Cellcom Israel Ltd. – CFO

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Conference Call Participants

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* Chris Reimer

Barclays Bank PLC, Research Division – Analyst

* Ehud Helft

CCG Investor Relations Inc. – Managing Partner – Israel

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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 Full Year 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. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

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

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Yes. Thank you. I would like to welcome all of you to Cellcom Israel’s Fourth Quarter and Full Year 2019 Results Conference call, and I would like to thank management for hosting this call. With us here on the line are Mr. Avi Gabbay, CEO; and Mr. Shlomi Fruhling, the CFO. Mr. Gabbay will open by providing a summary of 2019 results, and we’ll then open the call for the questions you may have.

Before I turn the call over to Mr. Gabbay, 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 protections 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, refer you to a more detailed discussion of the risks and uncertainties in the company’s filing with the Securities and Exchange Commission, including under risk factors in the company’s annual report for the year ended December 31, 2019, filed under Form 20-F, which was filed on March 23, 2020, with the SEC. In addition, any projections as to the company’s future performance represents management estimates as of today. Cellcom Israel assumes no obligation to update these projections in the future as market conditions change.

And I would now like to hand over the call to Mr. Avi Gabbay. Avi, go ahead please.

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Avraham Gabbay, Cellcom Israel Ltd. – CEO [3]

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Thank you, Ehud. Good day to all of you, and welcome. This is my first conference call as the new CEO of Cellcom Israel, and I’m very pleased to be here at Cellcom Israel. In my few — in my first few months, I have found the company with much inherent potential and a highly experienced and professional workforce. My goal is to further cement Cellcom Israel as Israel’s leading communication group by broadening and increasing the high quality of service and products we offer our customers. As you all know well, the situation in the cellular market in Israel has been tough for many years now with high level of competition. However, in the fixed-line market, we were able to show growth throughout 2019.

Despite the competition, 2019 was a year in which we demonstrated some financial stability with revenues at similar levels of those of last year at ILS 3.7 billion with stability in our free cash flow and EBITDA; when EBITDA, by eliminating — when we eliminate the onetime items and the impact from the IFRS 16 reporting requirement.

I would like to say a few words about the IBC deal. As you know, one of the key events of 2019 was the completion of the IBC investment deal and the sale of our fiber network in residential areas to IBC. This positions us well for future growth in the fiber optic market. The long-term potential for Cellcom Israel in terms of being an indirect 25% owner of one of the most advanced fixed-line communications network in Israel as well as our potential savings from this over the coming year is significant. Today, IBC’s infrastructure is already close to 300,000 households of connected [business mark]. As IBC network continues to expand across Israel, we will be able to provide more customers with super-fast Internet up to 1 gigabyte per second. Our goal is for IBC to potentially reach over 1 million households across the country within 5 years.

That’s for IBC and now for the restructuring plan. In the fourth quarter, we launched a comprehensive restructuring plan, reducing expenses and CapEx, lowering our debt levels and increasing our equity to further adjust Cellcom Israel to the current market environment. We approached our suppliers and cut costs across the board. We also entered new collective retirement agreement with the employee representatives in early February 2020. This agreement included a voluntary retirement program for 450 employees as well as options in RSU grant under certain profitability conditions. We have also been reducing our landline wholesale access fees by shifting our customers to the optical fiber network of our subsidiary IBC. The steps we have taken are in line with our annual expense target reduction of about ILS 150 million by the end of 2020.

We have also taken additional steps to reduce capital expenditure. Our goal is a reduction to a level of between ILS 450 million and ILS 500 million by year-end 2020. This includes lowering various IT and engineering investments as well as moving Cellcom Israel through this residential fiber optic investment to IBC. This is obviously not including any additional frequencies related to CapEx that we may execute.

Finally, during the quarter, we also raised over ILS 300 million net equity for working capital purposes from Israeli and non-Israeli investors. We also repurchased in the open market some of our bonds at the amount of approximately ILS 10 million. And at year-end, our cash was ILS 1.4 billion, and we reduced our net debt to ILS 1.9 billion. Due to all these activities, our EBITDA to net debt ratio, excluding the impact of the IFRS 16, is now less than 3x.

Few words about the Golan. A few weeks ago, we entered into a binding MOU for the purchase of Golan Telecom for about ILS 590 million subject to certain adjustments. This will be paid in cash in 2 installments: ILS 413 million and certain additional payments upon completion of the transaction; and the later, ILS 177 million and certain additional payments within 3 years of the completion of the deal. The transaction is subject to certain conditions, including regulatory approvals. We hope to complete the deal during 2020. We believe the acquisition of Golan is a significant win-win for both Golan and Cellcom Israel, and we see significant share synergies [available], which means the combined entity will be greater than the sum of its parts.

To not neglect the corona. So I would like to make a comment with regard to the corona pandemic. To date, the impact on Cellcom Israel was mostly to the reduction of roaming revenues, which already started in the first quarter of the year. However, in the last 2 weeks, the Israelian government published their regulatory requirements, including the prohibition of public gathering and closure of malls and other major complexes, a substantial reduction of manpower presence in workplaces. Following [patch on touching] instructions, the company has closed its point of sales and walk-in centers will potentially reduce its personnel who are not essential for the continued proper operation of its network and provision of the company’s services. During this period, the company intends to focus its efforts in providing quality and dependable service to existing customers. In addition, due to the sharp decline in the stock market, the company’s investment portfolio is expected to record a loss in the first quarter.

We have taken steps to reduce our expenses and investments to mitigate the impact of our results. We also reduced our workforce by sending a large quantity of employees on unpaid leave and have allowed all working where possible to meet government requirements. However, if the current situation will continue for a long duration, it will likely have a material adverse effect on the company’s operation and financial results.

We do wish all those who are sick with the virus a quick recovery, and we hope that we will all be able to return to normalize quickly and as management of Cellcom Israel can go back to focusing on our longer-term strategy of growth and profitability.

Just to summarize, with that, I would like to hand over to Shlomi. Shlomi, please?

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

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Thank you, Avi, and good day to all of you. I will provide you a summary of our results. The details can be found on the press release we issued earlier today.

Revenues for 2019 totaled ILS 3.7 billion, up marginally from the ILS 3.7 billion reported last year. Out of those, the service revenues were ILS 2.8 billion, at the same level of those last year. I would like to highlight that the fixed-line segment service revenues grew 4% over those of 2018 to ILS 1.3 billion. This increase resulted mainly from the increase in the revenues from Internet and TV services and revenue from fiber optic infrastructure deployment service to IBC. This increase was partly offset by a decrease in the minute of sale among international calls.

Adjusted EBITDA for 2019 was ILS 925 million or 25% of revenue, a 35% increase compared with ILS 687 million or 19% of revenues in 2018. The increase in the adjusted EBITDA resulted from a decrease in rent expense in total amount of ILS 247 million due to the recognition of right-of-use assets as a result of the additional implementation of the IFRS 16, starting from 1st of January 2019. This was partly offset by expenditures of the voluntary employment retirement plan, which took place in the fourth quarter of 2019.

Adjusted EBITDA from the fixed-line segment was ILS 308 million compared with ILS 269 million last year. And adjusted EBITDA from cellular segment was ILS 670 million compared with ILS 418 million last year.

Net loss for 2019 totaled ILS 118 million compared with a net loss of ILS 64 million in 2019 (sic) [2018]. The free cash flow for 2018 (sic) [2019] was ILS 391 million versus 191 — ILS 181 million in 2019 (sic) 2018 . The free cash flow includes the proceeds from the sales of fiber infrastructure amounting to ILS 191 million.

Our cash capital expenditures from 2018 (sic) 2019 totaled ILS 557 million versus ILS 583 million (sic) [ILS 593 million] in 2019 (sic) 2018 . As of the end of 2019, our net debt stood approximately at ILS 1.9 billion. We have total of approximately ILS 1.4 billion in cash in our balance sheet, while overall debt repayment of interest and capital that are due until the end of 2020 amount to ILS 600 million.

At the end of 2019, the company had approximately 2.744 million cellular subscribers, a decrease of approximately 100,000 — 107,000 subscribers net compared to the cellular subscriber base in the end of 2018. The decrease resulted mainly because of the company deleted 153,000 subscribers from subscriber-based accounts in the end of the first quarter of 2019 due to change in the funding method of the company’s cellular subscriber base. These subscribers generate negligible revenue to the company. During the fourth quarter of 2019, the company cellular subscriber base decreased by approximately 23,000 subscribers net. The churn rate of the cellular subscribers in the fourth quarter of 2019 was 11.3% or 45.8% (sic) [48.8%] for 2019 (inaudible). The monthly cellular ARPU for the fourth quarter of 2019 was at ILS 49.2 million similar to ILS 49 million in the fourth quarter of last year.

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

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Questions and Answers

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Operator [1]

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

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

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This is Chris Reimer on for Tavy. I wanted to ask about the fiber deployment and headway, if you’ve made any with IBC. You mentioned in your opening remarks that you have reached over 300,000 homes passed. I think the last report, it was 300,000. Is there a new number you can provide us now?

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Avraham Gabbay, Cellcom Israel Ltd. – CEO [3]

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No, this is the number for the end of the year. IBC is rolling out (inaudible) fiber optic network. Hopefully, we’re building high numbers during this year. And when we will be able to report the numbers, we will do.

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

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Okay. Also, assuming the acquisition of Golan is approved, can you give any color around integration plans?

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Avraham Gabbay, Cellcom Israel Ltd. – CEO [5]

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As we declared in the past, we see Golan as a good opportunity. Golan is a very good company. We will continue to operate Golan as a separated company, and there’s a lot of synergies in the operations side, like roaming and engineering, et cetera, but it will stay a company that will continue to give the same service — the same good service they’re giving today to their customers.

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Operator [6]

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(Operator Instructions) There are no further questions at this time. Mr. Gabbay, would you like to make your concluding statement? Mr. Gabbay, would you like to make your concluding statement?

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Avraham Gabbay, Cellcom Israel Ltd. – CEO [7]

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Yes, yes, yes. Of course, of course, of course. I would like to thank all of you for joining the conference call and your continued interest in our company. I look further — I look forward to updating you again in the next call. Thank you very much, and have a good day and healthy.

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Operator [8]

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

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