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Cellcom Israel Ltd (NYSE:CEL)
Q4 2019 Earnings Call
Mar 23, 2020, 10:00 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 Fourth Quarter and Full Year 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 issued by now the company's press release. If you have not received it, please contact Cellcom's Investor Relations team at G Caster 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 would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Ehud Helft -- GK Investor Relations

Yeah. 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, the 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 that you may have.

Before I turn over the call 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 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 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 represent management's 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.

Avi Gabbay -- Chief Executive Officer

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 being here at Cellcom Israel. 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 commence Cellcom Israel as Israel's leading communications group by broadening and increasing the high quality of services and products we offer our customers.

As we all know well, the situation in -- the situation in the cellular market in Israel has been tough for many years now with a high level of competition. However, in the fixed line markets, we were able to show growth during 2019. Despite the competition, 2019 was a year in which we demonstrated some financial stability in revenue than similar levels of those of last year at ILS3.7 billion, with stability in our free cash flow and EBITDA, when EBITDA by eliminating -- when we eliminate the one-time items and the impact from the IFRS16 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 in resented areas for IBC. This position us well for future growth for their fiber optic market. The long-term potential for Cellcom Israel in terms of being an indirect split 35% [Phonetic] owner of one of the most advanced fixed line communications network in Israel, as well as our potential savings from this over the coming years is significant.

Today, IBC's infrastructure has already crossed the 300,000 households of collective business mark [Phonetic]. As IBC's 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 five years. That's for IBC and now for the restructuring plan.

In the fourth quarter, we launched comprehensive restructuring plan reducing expenses in capex, lowering our debt levels and increasing our equity to further adjust Cellcom Israel to the current market environment. We approach our suppliers cut costs across the board. We also entered the new collective employment agreement with the employees respresentative in early February 2020. The agreement included a voluntary retirement program for 450 employees as well as options in RSU grants 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 by ILS150 million by the end of 2020. We have also taken additional steps to reduce customer expenditure. Our goal is a reduction to a level of ILS450 million and ILS500 million [Indecipherable] by year-end 2020. This includes lowering various IT and engineering investments as well as moving Cellcom Israel's previous residential fiber optic investment to IBC. This is obviously, not including any additional frequencies related to capex that we have made to execute [Phonetic].

Finally, during the quarter, we also raised ILS300 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 ILS10 million. As at year end, our cash was ILS1.4 billion and we reduced our net debt to ILS1.9 billion. Due to all these activities, our EBITDA to net debt ratio excluding the impact from the IFRS16 is now less than 3 times.

Few words about the Golan. A few weeks ago, we entered into a binding MOU for the purchase of Golan Telecom for about ILS590 million, subject to certain adjustments. This will be paid in cash in two installments; ILS413 million on certain additional payments upon completion of the transaction. And the later ILS177 million on certain additional payments within three years from 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 shared synergies and stable, [Phonetic] which means the combined entity will be greater than the sum of it's parts.

To not neglect the corona. So I would like to a make a comment with regard to the corona pandemic. To-date, the impact on Cellcom Israel was mostly to the reduction of roaming revenue, which already started in the first quarter of the year. However, in the last two weeks, the Israeli government published their regulatory requirements including the prohibition of oral public gatherings, the closure of malls and other leisure complexes, a substantial reduction of manpower presence in workplaces.

Following such instructions, the company has closed its point of sales and work-in centers or potentially reduced its personnel who are not essential for this 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 services 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 home working where possible to meet the government's 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. While 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 normal life quickly and the 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 Fruhling.

Shlomi Fruhling -- Chief Financial Officer

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 ILS3.7 billion, up marginally from ILS3.7 billion reported last year. Out of those, the service revenues were ILS2.8 billion at the same level of those of last year.

I would like to highlight that the fixed-line segment service revenues grew 4% over those of 2018 to ILS1.3 billion. This increase resulted mainly from the increase in the 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 calls.

Adjusted EBITDA for 2019 was ILS925 million or 25% of revenue, a 35% increase compared with ILS687 million or 19% of revenues in 2018. The increase in adjusted EBITDA resulted from a decrease in rent expense in total amount of ILS247 million due to the recognition of right-of-use assets as a result of the initial implementation of IFRS16 starting from January 1, 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 ILS308 million compared with ILS269 million last year, and adjusted EBITDA from the cellular segment was ILS670 million compared with ILS418 million last year. Net loss for 2019 totaled ILS118 million compared with a net loss of ILS64 million in 2019. The free cash flow for 2018 [Phonetic] was ILS391 million versus ILS191 -- ILS181 million -- ILS191 million sorry in 2019. The free cash flow includes the proceeds from the sales of fiber infrastructure amounting to ILS191 million.

Our cash capital expenditures for 2018 [Phonetic] totaled ILS557 million versus ILS583 million in 2019. As of the end of 2019, our net debt stood at approximately ILS1.9 billion. We have a total of approximately ILS1.4 billion in cash in our balance sheet, while overall debt repayment of interest in capital that are due until the end of 2020 amount to ILS600 million.

At the end of 2019, the company had approximately 2.744 million cellular subscribers, a decrease of approximately 107,000 subscribers net, compared to the cellular subscriber base at the end of 2018. The decrease resulted mainly because the company deleted 153,000 subscribers from its subscriber base count at the end of the first quarter of 2019 due to a change in the counting method of the company's cellular subscriber base. These subscribers generate negligible revenues to the company.

During the fourth quarter of 2019, the company's 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% for 2019 was a whole. The monthly cellular ARPU for the fourth quarter of 2019 was ILS49.2 which is similar to ILS49 in the fourth quarter of last year.

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

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.

Chris Reimer -- Barclays Bank -- Analyst

Hi. This is Chris Reimer on for Tavy. Thank you for taking my questions. 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 had 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?

Avi Gabbay -- Chief Executive Officer

No, this is the number for the end of the year. IBC is rolling out fiber optic network. Hopefully, they will do it in high numbers during this year. And when we would be able to report new numbers, we will do it.

Chris Reimer -- Barclays Bank -- Analyst

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

Avi Gabbay -- Chief Executive Officer

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 their operation side, like roaming and engineering, etc., but it will stay a company that will continue to give the same service -- the same good service they are giving to their customers.

Chris Reimer -- Barclays Bank -- Analyst

Okay. Thank you. That's it for me.

Operator

[Operator Instructions] There are no further questions at this time. Mr. Gabbay, would you like to make your concluding statements.-- Mr. Gabbay, would you like to make your concluding statements.

Avi Gabbay -- Chief Executive Officer

I would like to thank all of you for joining the conference call and your continued interest in our company. I look forward to hosting you again at the next call. Thank you very much and have a good day and a healthy.

Operator

[Operator Closing Remarks]

Duration: 18 minutes

Call participants:

Ehud Helft -- GK Investor Relations

Avi Gabbay -- Chief Executive Officer

Shlomi Fruhling -- Chief Financial Officer

Chris Reimer -- Barclays Bank -- Analyst

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