Cellcom Israel Ltd. (CEL) Q2 2019 Earnings Call Transcript

Cellcom Israel Ltd. (CEL -1.78%)
Q2 2019 Earnings Call
Aug. 15, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Cellcom's Second Quarter 2019 Results Conference Call. All participants are present in a listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. 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 Relations

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 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 Israeli Securities Law of 1968.

I'd 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 over the call to Mr. Nir Sztern. Nir, please go ahead.

Nir Sztern -- Chief Executive Officer

Thank you, Gavriel. Good day to all of you, and welcome to our Second Quarter 2019 Earnings Conference Call. In July, we completed the IBC investment deal and the sale of our cyber network in residential areas to IBC. We see significant long-term potential from these developments, both in terms of growth from being part owner of the fastest and most advanced time 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 forward course 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 engines. We continue to bring new subscribers to Israel's leading OTP television offering in the Israeli TV market. As in 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 quatro packages, is continuing to bring us good subscriber recruitment in each and every quarter.

Fiber to the home is today's solution for providing ultra-fast internet to the home, enabling the provision of speeds of up to one gigabyte per second, 20 times what is typical today in Israel. In the past few weeks, we've made significant progress with closing of our investments in IBC, as well as the sale of our fiber infrastructure in residential areas to IBC. These agreements are significant milestones with Cellcom and are also a major step in advancing the fixed line communication infrastructure in Israel to the next stage.

We've, paid NIS55 million for our indirect 35% stake in IBC, while IIF, our partner in this venture also paid NIS55 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 NIS180 million. This was financed entirely through shareholder loans provided to IBC indirectly by both Cellcom and IIF in the amount of NIS90 million each. As a result of these two transactions, Cellcom net cash increased by NIS35 million. The quarter's result does not include the IBC transaction.

Our agreement with IBC also provides us with a brighter view 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 super-fast Internet of up to one gigabyte per second, which also will significantly improve the quality of our TV offering. And the plan is to make it available to over a 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 investment in improve our cash flow.

We concluded the second quarter with a net loss of NIS35 million. I note that the loss includes NIS52 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 generate a positive cash flow and hold cash balance of approximately NIS1.3 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 the previous quarter, as well as the year ago quarter. And also, on the positive side, our ARPU grew in the quarter compared with previous quarter, even when we neutralize 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 remain tough. However, throughout this time, and despite the competition, Cellcom has taken steps to mitigate some of the negative impact 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 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 regulators 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 would like to turn the call over to our CFO, Mr. Shlomi Fruhling, for a review of our financials. Shlomi, please.

Shlomi Fruhling -- Chief Financial Officer

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 issue earlier today.

Revenue for the second quarter of 2018 totaled NIS920 million, marginally lower than the NIS927 million reported last year. The service revenues were at a similar level to those of last year at NIS695 million. The fixed line segment service grew 4% over those for the second quarter of 2018, to NIS312 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 NIS233 million, or 25% of revenue, a 66% increase compared with NIS140 million, or 50% of revenues of the second quarter of 2018. The increase in the adjusted EBITDA results from a decrease in direct expense in a total amount of NIS68 million due to the recognition of right of use asset as a result of the initial implementation of IFRS 15, starting January this year.

Adjusted EBITDA for fixed line segment was NIS70 million, compared to NIS62 million in the last year, and adjusted EBITDA from the service segment was NIS163 million, compared to NIS78 million in the last year. Net loss for the second quarter of 2019 totaled NIS35 million, compared to a net loss of NIS37 million in the second quarter of 2018. The net loss was affected by increasing the financial expense of our index link debt as a result of the increase of 1.5% in the customer price index during the quarter.

Free cash flow for the quarter totaled NIS55 million versus NIS56 million in the second quarter of last year. Our cash capital expenditures during the second quarter of 2019 totaled NIS130 million versus NIS131 million in the second quarter of last year.

As of the end of the second quarter of this year, our net debt stood at approximately NIS2.2 billion. We have a total of approximately NIS1.3 billion in cash on our balance sheet, while our overall debt to payment of interest and capital that are due until the end of 2020 amount to less than NIS1 billion. Our subscriber base amounts to 2.745 million in June 30, 2019, compared to 2.855 million at the end 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 a 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 output for the second quarter of this year was NIS51.9, similar to NIS51.8 in the second quarter last year. The ARPU was positively impacted for the increase of NIS2.8, 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

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press *1. If you wish to cancel your request, please press *2. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be polled in the order they are received. Please stand by while we poll for your questions.

The first question is from Tavy Rosner of Barclays. Please go ahead.

Chris Reimer -- Barclays -- Analyst

Hi. This is Chris Reimer on for Tavy. Thank you for taking my questions. I wanted to ask, how we should be looking at overall profitability at the company, not just the effective date cellular segment weakness? And just, is there any other options management is looking at to reduce operational costs?

Nir Sztern -- Chief Executive Officer

Hi, Chris, 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 we'll 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 -- Analyst

Mm-hmm. And regarding the rise in finance cost, 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 -- Chief Financial Officer

As you know, we have more than NIS1.3 million cash in our balance. This means that we have, at least in the next two years, we don't have the mask to increase our debt to issue new debt. It means that we have enough time to make a rebound off of our cost of debt. And we will issue new debt when the time would come in the right interest.

Nir Sztern -- Chief Executive Officer

And specifically, the quarter, we had 1.5 of the 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 shouldn't go down seasonally, we can expect to see the relative changes in our financing expenses relative to that.

Chris Reimer -- Barclays -- Analyst

Mm-hmm. Okay. Thank you. That's very helpful. That's it for me.

Operator

If there are any additional questions, please press *1. If you wish to cancel your request, please press *2. Please stand by while we poll for more questions.

The next question is from of Elad Solomon of Excellence. Please go ahead.

Elad Salomon -- Excellence -- Analyst

Hi. Thank you for taking my question. So, my question is, why did you change from the beginning the measurement of the output?

Nir Sztern -- Chief Executive Officer

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

Elad Salomon -- Excellence -- Analyst

Why did you change the -- in the beginning, the measurement of the out? I mean, why did you did that, the play paid in the end-to-end contract?

Nir Sztern -- Chief Executive Officer

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 number 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. That's what we did this quarter.

Elad Salomon -- Excellence -- Analyst

Thank you.

Operator

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

Nir Sztern -- Chief Executive Officer

Yes, thank you. I'd 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

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

Duration: 18 minutes

Call participants:

Gavriel Frohwein -- GK Investor Relations

Nir Sztern -- Chief Executive Officer

Shlomi Fruhling -- Chief Financial Officer

Chris Reimer -- Barclays -- Analyst

Elad Salomon -- Excellence -- Analyst

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