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Cellcom Israel Ltd (NYSE:CEL)
Q2 2020 Earnings Call
Aug 17, 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 Second Quarter 2020 Results Conference Call. [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 and Public Relations at 1646-688-3559 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 & Public Relations

Thank you, operator. I'd like to welcome all of you to Cellcom Israel's second quarter 2020 results conference call. And I would like to thank management for hosting this call. With us on the line are Mr. Avi Gabbay, the CEO; Mr. Areli Beker, Acting CFO. Mr. Gabbay will open by providing a summary of the quarter results, followed Areli Beker who will summarize the financials, and then we will open the call for the question-and-answer session.

Before I turn the call over to Mr. Gabbay, I'd like to remind our listeners that in this call, management's prepared remarks may contain forward-looking statements, which are subject to risk and uncertainties and management may make any 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'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 the 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 may change.

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. As you all know, we are in the COVID-19 era, and I wish you all health and wish you with your family. During the second quarter, Israel faced temporary full economic shutdown because of the coronavirus. This crisis caused a decrease in our revenues from roaming for the company's customer abroad and from -- it's not late, but actually there were no tourists in Israel in this month. In addition, there was a decrease in the equipment revenues as a result of the temporary closure of the service centers and the point-of-sales in the malls and outside in the outlets, etc. And we expect that the impact of the crisis on the results will be -- will continue for the -- at least for the remainder of this year.

Thanks to the quick response by the management, and we have a very good cooperation with the union and the employees' representatives, we actually were able to quickly reduce operating expenses and offset the significant part of the impact of this crisis. Even though we placed employees on unpaid leave in February, closed most of the frontal selling points, we maintained the business continuity throughout the shutdown and we continued to service our customers throughout the country with all their communication needs, and they were quite happy with that.

We did it for whatever, I mean telephony, Internet, TV, it all worked well. We continue to do this despite the limitation of the social distance working requirements and the capsules [Phonetic] and this issue of the new way of managing people. And over the few past months, we took and continue to take comprehensive actions to streamline our expenses. We continue to streamline our workforce based on the early retirement plan. And our efforts actually enabled us to maintain a positive EBITDA and free cash flow in the second quarter.

However, I note that some of the expense cuts, such as certain salary reductions as well as lower rent and maintenance were short-term, and therefore, are expected to return back to normal during Q3, and this means our profitability may decline somewhat in Q3. Overall, we believe that the steps taken have enabled us to successfully deal with the corona crisis combined with our efforts to improve the balance sheet earlier this year. We believe that our business is well structured to weather the current economic environment, and we expect to emerge from the crisis a more efficient and mainly a more focused company.

I just would like to spend a few moments updating you on our strategic steps which support our long-term growth. The fifth generation issue -- fifth generation technology standard for the cellular networks is the step to dramatically operate the telecommunication capabilities in Israel. And in August, just a week ago, we attended -- successfully completed participating in the frequency tender in Israel, which included the fifth generation frequencies. We are very pleased with the results which will allow us to launch both a new advanced and fast 5G network for our customers as well as enlarge our existing 4G network infrastructure under a broad and further high quality deployment.

About the fiber and IBC, as you remember, at the end of the last year, we completed the investment deal in IBC and the sale of our fiber network in the residential areas to IBC. This allows Cellcom to be very well positioned to benefit from the growth of the fiber-optic market in Israel with the one gigabyte Internet, which is 25 times the speed of today's average of 14 megabyte that you can use over DSO.

Furthermore, it allows us to reduce our landline wholesale access fees by shifting our customer currently using the Bezeq infrastructure or Hot infrastructure to the optical fiber network of IBC. And this continues to proceed, and we are very happy with the process. IBC goal is to connect one million households to the infrastructure within the next four years. And today, IBC's infrastructure reached over 400,000 households in connected buildings throughout the country and grows every quarter. The long-term growth potential for IBC and ultimately Cellcom Israel as well as our potential savings from payments for infrastructure over the coming years is very significant.

About our TV services, our OTT TV service continues to gain momentum, especially in current times when many people prefer to stay at home for their entertainment. Cellcom TV currently has 245,000 subscribers. And I'd note that we recently changed our accounting method for subscriber, which resulted in writing off 5,000 subscribers in this quarter.

About the Golan deal, we are very happy that we received all the regulatory approval for the acquisition of Golan. And we're not -- we don't have any specific limitations that will prevent us from extracting the synergies between the two companies. We believe that the acquisition of Golan is a significant win-win for Golan and Cellcom Israel, and we see significant shared synergies and joint savings, which means that the combined entity will be greater than the sum of its parts. The deal will improve Cellcom Israel's position as the leading communication company and is expected to make a significant addition to our adjusted EBITDA and free cash flow.

Just to summarize, the second quarter was a difficult period, not just for Cellcom Israel, but everyone around the world. We continue to support and serve our customers throughout Israel with all their communication needs with TV, telephony and cellular.

And that ends my summary, and I would like to hand over to Areli Beker, our Acting CFO. Areli, please.

Areli Beker -- Acting Chief Financial Officer

Thank you, Avi, and good day to all of you. I will provide you now a summary of our results, the details can be found in the press release we issued earlier today. The quarterly revenues, for the second quarter of 2020 totaled ILS865 million compared with ILS920 million reported in the second quarter of last year. Out of those, the service revenues were at ILS683, slightly below the ILS695 million reported in the second quarter of last year.

I would like to highlight that the fixed line segment service revenue grew 9% over the second quarter of last year to ILS339. This increase resulted mainly from a net increase in revenues from Internet and TV services. Adjusted EBITDA in the second quarter of 2020 was ILS222 million or 26% of revenues, a 5% decrease compared with ILS233 million or 25.3% of revenues in the second quarter of last year. The adjusted EBITDA from the fixed line segment was ILS97 million compared with ILS70 million second last year, an increase of 39%. And adjusted EBITDA from the cellular segment was ILS125 million compared with ILS163 million last year.

Net loss in the second quarter of 2020 totaled ILS46 million compared to a net loss of ILS35 million in the second quarter of last year. Free cash flow in the second quarter of 2020 was ILS24 million versus ILS55 million in the second quarter of last year. The decrease in free cash flow resulted mainly from grant payments in respect of a voluntary retirement plan recorded in 2019 amounted of ILS40 million. Our cash capital expenditures for the second quarter of 2020 totaled ILS114 million versus ILS113 million. In the second quarter of last year.

As of the end of the second quarter of 2020, our net debt stood at approximately ILS1.8 billion. We have a total of approximately ILS1.4 billion in cash on our balance sheet, while our overall debt repayment of interest and capital that are due until the end of 2021 amount to ILS1 billion. The subscriber base at the end of the second quarter of 2020, the company had approximately 2.7 million cellular subscribers. The churn rate of cellular subscribers in the second quarter of 2020 was 8.7% compared with 11.3% in the second quarter of 2019. That is mainly because as of the first quarter of 2020, the churn rate includes only the negative net churn of end-to-end subscribers in order to eliminate changes that do not change the amount of lines held by the customers.

Finally, the monthly cellular ARPU for the second quarter of 2020 was IL46.9 compared with ILS61.9 in the second quarter last year. The primary reason for the lower ARPU is because of the lack of roaming revenues during the second quarter.

With that, I would like to open the call to questions. Back to operator.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question is from Mickey Sala [Phonetic] of Epsilon. Please go ahead.

Mickey Sala -- Epsilon -- Analyst

Thank you for your introduction. The question is for Mr. Gabbay. I wanted to -- if you can share with us a little bit of your priorities and focus areas for the upcoming -- of the upcoming half? And in general, what are your main priorities and objectives to achieving the strength in the second half?

Avi Gabbay -- Chief Executive Officer

Well, a very good question, and nice to meeting you. Well, our priorities are first of all completing the Golan acquisition and to actually to enjoy the benefit of the synergies from this acquisition, and it's going to happen very soon. Second is the rollout of the 5G and 4G generation. I mean, we have to rollout this and improve our network. And we believe that deploying these networks will improve dramatically the network. And according to that, we'll improve the service for our customers and we'll reduce the numbers of the customers that are contacting our contact centers, etc. The third one is the fiber. We want to improve the costs of rolling out the fiber and mainly the cost of acquisition customers and the installations and what's around any new fiber customer. And we are always, always, always very focused on improving our cost structure and improving our customer service because we believe that you cannot improve your cost service -- your cost if you don't improve your service. By improving our service, we're just causing the -- preventing the customers from the reasons that they call us. And if they don't call us and if we provide service in the first time and not the second time, so it costs us less. So we are very focused on cost and improving our service.

Operator

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

Avi Gabbay -- Chief Executive Officer

Yes. I would like to thank you all of you for joining our conference call and your continued interest in our company. And I look forward to hosting you again at our next call. Have a good day and keep health.

Operator

[Operator Closing Remarks]

Duration: 18 minutes

Call participants:

Ehud Helft -- GK Investor & Public Relations

Avi Gabbay -- Chief Executive Officer

Areli Beker -- Acting Chief Financial Officer

Mickey Sala -- Epsilon -- Analyst

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