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Cellcom Israel Ltd (NYSE:CEL)
Q3 2019 Earnings Call
Nov 27, 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 Third Quarter 2019 Results Conference Call. [Operator Instructions] Following management's formal presentation, instructions will be given for the question-and-answer session. [Operator Instructions] 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 will now hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Ehud Helft -- Investor Relations

Yes. Thank you, operator. 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, 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 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 the Israeli 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 risk 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 31st, 2018 filed under the Form 20-F, which was filed on March 18th, 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 indicator table included in the earnings 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 in the ISA website at www.magna.isa.gov.il and 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 -- Chief Executive Officer

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 alternative and more stable streams of income. Again, while our overall profitability is still being 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 three main goals. The first is to prepare the Company to better cope with market conditions, the intense competition, and future investment.

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 are taking three 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 have taken the past 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 we 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 subsidiary's IBC's optical fiber network. We have targeted overall lowering our operating expenses by approximately ILS150 million by year-end 2022.

The second is reducing capex. We're making further savings by reducing capital expenditure. Our aim here is also a reduction to a level of between ILS450 million and ILS500 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 ILS400 million equity capital raise in Israel before year-end and we are working full steam ahead to meet this target. This move together with factoring the payables of customers' end-user's equipment should we accomplish that, which would amount to an additional ILS100 million to ILS150 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 ILS938 million and our service revenues were similar to those of last year, up by 1% to ILS719 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 ILS8 million to the EBITDA from the sale of our fiber network to IBC. However, when excluding these one-time -- one-off items, EBITDA was stable at ILS191 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 ILS181 million to our free cash flow, which was strong in this quarter and amounted to a total of ILS230 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 began 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 super-fast Internet of up to 1 gigabyte per second. Our goal is potentially to reach over 1 million households across the country within five 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 offerings, 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 are 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 -- Chief Financial Officer

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 ILS938 million, up 3% over the ILS910 million reported last year. Out of those, the service revenues were 1% higher than the level of those of last year reaching ILS719 million while equipment revenues were ILS219 million, 11% higher.

I would like to highlight that the fixed line segment service revenues grew 4% over those of the third quarter of 2018 to ILS321 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 ILS271 million or 29% of revenue is a 42% increase compared with ILS191 million or 21% of revenue in third quarter of 2018.

The increase in the adjusted EBITDA results from a decrease in rent expense in total amount of ILS72 million due to recognition of right-of-use asset as a result of the initial implementation of IFRS 16 starting from 1st of January 2019. In addition, there were an ILS8 million contribution from the sale of fiber optic infrastructure to IBC. Excluding these two positive effects, EBITDA was ILS191 million at the same level of -- as the third quarter of last year.

Adjusted EBITDA from the fixed line segment was ILS86 million compared with ILS73 million last year and adjusted EBITDA from the cellular segment was ILS185 million compared with ILS118 million last year. Net loss for the third quarter of 2019 totaled ILS2 million compared to a net income of ILS1 million in the third quarter of last year. Free cash flow for the quarter totaled ILS234 million versus ILS34 million in the third quarter of last year.

As Nir explained it earlier, the free cash flow included the proceeds from the sale of the fiber infrastructure amounting to ILS181 million. The cash capital expenditures during the third quarter of 2019 totaled ILS149 million versus ILS160 million in the third quarter last year. As of the end of the third quarter of 2019, our net debt stood at approximately ILS2.2 billion. We have a total of approximately ILS1.3 billion in cash in our balance sheet while our overall debt repayment of interest and capital that are due until the end of 2020 is amounting to ILS900 million.

Our cellular subscriber base amounted to 2.767 million as at September 30, 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 2019, Cellcom has deleted 133,000 M2M and prepaid subscribers due to a change in the counting method that was used for our cellular subscriber base.

The churn of the cellular subscribers in the third quarter of 2019 was 11.4%. The monthly cellular ARPU of the third quarter of 2019 was ILS53.2, similar to ILS53.5 in the third quarter of last year. The ARPU was positively an effect from an increase of ILS2.8 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 sale.

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. [Operator Instructions] The first question is from Tavy Rosner of Barclays. Please go ahead.

Tavy Rosner -- Barclays Bank -- Analyst

Hey. Good afternoon. Thanks for taking my questions. I was wondering if you could share your comments about the regulatory framework that was published by 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 -- Chief Executive Officer

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 will be offering our opinions in the hearing that will be coming in the next few weeks. We are concerned that the offer that has been put on the 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 it 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 if -- to see whether and when it will be implemented.

Tavy Rosner -- Barclays Bank -- Analyst

Yes. That's very helpful. Maybe just big picture questions. I mean you're the last company to report so we can observe the other companies' numbers and one of your competitor is talking about 450,000 home passed, you have 300,000 and both of you have very big ambitions. So I mean looking down the road, you passing I mean in home, 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 -- Chief Executive Officer

I think the risk of price wars is always there. But I think the upside of rolling out a fiber network with potential new product 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 [Technical Issues] IBC 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's 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 -- Analyst

Thank you. And maybe a 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 -- Chief Executive Officer

Well, in terms of the MoC's opinion on consolidation, obviously they are keeping their cards close to their chest and not saying a lot. And 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 have as well, that there is 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 -- 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 two other partners, Cellcom is in a pretty good position because the cost is going to be divided between three operators. In terms of the cost of the frequency, there is still some uncertainty there and some answers we're waiting to hear from the Ministry of Communications and then we'll be -- we'll know a little bit more.

Tavy Rosner -- Barclays Bank -- Analyst

Thank you. Just a technical one, you said the numbers of IBC connected homes is 300,000?

Nir Sztern -- Chief Executive Officer

Yes. And thank you for saying that. Just to make sure and be clear, OK. 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, OK. Street pass is when you have fiber going down the street and not connected to the building. Home pass is where you go, you have the fiber industry 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 number of connected homes to the fiber network, these are actual home passes. Every single one of the 300,000 potential customers who calls Cellcom can be connected within 48 hours. That's the true meaning of having home pass. I don't know what some of -- 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 -- Analyst

I have a feeling that some of the others have a more wider definition so that's probably why it was a good idea to start that.

Nir Sztern -- Chief Executive Officer

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

Tavy Rosner -- Barclays Bank -- Analyst

I understand. That's very helpful. I was worried when I saw the numbers when -- I guess it makes more sense now. I appreciate it. Thank you, guys.

Nir Sztern -- Chief Executive Officer

Thanks, Tavy.

Shlomi Fruhling -- Chief Financial Officer

Thanks, Tavy.

Operator

[Operator Instructions] 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 our Company. And as always, I look forward to hosting you again at our next call. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 24 minutes

Call participants:

Ehud Helft -- Investor Relations

Nir Sztern -- Chief Executive Officer

Shlomi Fruhling -- Chief Financial Officer

Tavy Rosner -- Barclays Bank -- Analyst

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