Cellcom Israel Ltd. (CEL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to Cellcom's Second Quarter 2020 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?

Thank you, operator. I would 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 by 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 risks 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 note that actual results may differ from those discussed today and therefore, we refer you to the 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 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 represents management 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.

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 a 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. And 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-sale in the malls and the outside in the outlets, et cetera. 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 a 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 a 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 maintain the business continuity throughout the shutdown, and we continued to service our customers throughout the country with all their communication needs, and we're 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 as in this issue of the new way of managing people. 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 sixth -- fifth-generation issue, fifth-generation technology standard for the cellular networks is set to dramatically upgrade the telecommunication capabilities in Israel. And in August, just a week ago, we attended and successfully completed participating in the frequency tender in Israel, which includes 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 to -- 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 1-gigabyte Internet, which is 25x the speed of today's average of 14 megabytes that you can use over DSL. Furthermore, it allows us to reduce our landline also access fees by shifting our customer currently using the basic infrastructure or old 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 1 million households to infrastructure within the next 4 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 continued to gain momentum, especially in current times, when many people would prefer to stay at home for their entertainment Cellcom TV currently has 245,000 subscribers. And I know that we recently changed our accounting method for a 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 are not -- we don't have any specific limitations that will prevent us from extracting the synergies between the 2 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 position as the leading communications 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.

Thank you, Avi, and a 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 ILS 855 million compared with ILS 920 million reported in the second quarter of last year. Out of those, the service revenues were at ILS 683 million, slightly below the ILS 695 million reported in the second quarter of last year. I would like to highlight that the fixed-line segment service revenues grew 9% over the second quarter of last year to ILS 339 million. This increase resulted mainly from a net increase in revenues from Internet and TV services. Adjusted EBITDA in the second quarter of 2020 was ILS 222 million, or 26% of revenues, a 5% decrease compared with ILS 233 million, or 25.3% of revenues, in the second quarter of last year. Adjusted EBITDA from the fixed-line segment was ILS 97 million compared with ILS 70 million last year, an increase of 39%. And adjusted EBITDA from the cellular segment was ILS 125 million compared with ILS 163 million last year. Net loss in the second quarter of 2020 totaled ILS 46 million compared to a net loss of ILS 35 million in the second quarter of last year. Free cash flow in the second quarter of 2020 was ILS 24 million versus ILS 55 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 ILS 40 million. Our cash capital expenditures for the second quarter of 2020 totaled ILS 114 million versus ILS 113 million in the second quarter of last year. As of the end of the second quarter of 2020, our net debt stood at approximately ILS 1.8 billion. We have a total of approximately ILS 1.4 billion in cash on our balance sheet while our overall debt repayments of interest and capital that are due until the end of 2021 amounts to ILS 1 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 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 ILS 46.9 compared with ILS 51.9 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.

[Operator Instructions] The first question is from [ Mickey Sala ] of [ Epsilon ].