CEL Cellcom Israel Ltd

NETANYA, Israel, Nov. 27, 2019 /PRNewswire/ --

Third Quarter 2019 Highlights (compared to third quarter of 2018):

• Total Revenues totaled NIS 938 million ($269 million) compared to NIS 910 million ($261 million) in the third quarter last year, an increase of 3.1%
• Service revenues totaled NIS 719 million ($206 million) compared to NIS 712 million ($204 million) in the third quarter last year, an increase of 1.0%
• Operating income totaled NIS 32 million ($9 million) compared to NIS 40 million ($11 million) in the third quarter last year, a decrease of 20.0%
• Loss totaled NIS 2^[2] million ($1 million) compared to net income of NIS 1 million ($0.3 million) in the third quarter last year.
• Adjusted EBITDA^[1] totaled NIS 271^[2] million ($78 million) compared to NIS 191 million ($55 million) in the third quarter last year, an increase of 41.9%
• Net cash from operating activities totaled NIS 273^[2] million ($78 million) compared to NIS 194 million ($56 million) in the third quarter last year, an increase of 40.7%
• Free cash flow^[1] totaled NIS 234 million ($67 million) compared to NIS 34 million ($10 million) in the third quarter last year.

Nir Sztern, the Company's Chief Executive Officer, referred to the results of the third quarter of 2019: "In light of the continued fierce competition and low price levels in the Israeli telecommunications market, this quarter we announced the adoption of a restructuring plan in order to strengthen the Company and better address the market conditions.

"We are currently in the midst of comprehensive steps to implement the plan and to improve the Company's financial and operational metrics.

"Amongst the steps we have taken, we have called on the Company's suppliers to reduce their cost of services, we have made changes to the Company's investment plan, we have cut expenses and we are negotiating with the employee representatives.

"The effect of the reduction in some expenses has already had a clear positive impact by the end of this quarter, and is expected to increase in the coming quarters.

"While market conditions remain challenging, we are determined to implement the restructuring plan.

"In this quarter we recorded an increase in revenues and Adjusted EBITDA compared to the corresponding quarter last year, the Adjusted EBITDA in this quarter includes a positive effect of NIS 72 million as a result of initial implementation of IFRS 16 and a NIS 8 million gain from the sale of fiber optic infrastructure in residential areas to IBC. Excluding this positive effects, the Adjusted EBITDA in this quarter amounted NIS 191 million, similar to the corresponding quarter last year.

"Currently, over 300,000 households are connected to IBC's fiber infrastructure. IBC is continuing to deploy fiber optics and is preparing to significantly accelerate its deployment rate in 2020, incorporating IEC's rapid deployment capabilities.

We continue to focus on moving our Internet and TV customers onto the fiber infrastructure, while improving the segment's profitability and reducing the payments to Bezeq."

Shlomi Fruhling, Chief Financial Officer, said:

"The Company's service revenues in the third quarter of 2019 totaled NIS 719 million. This revenue level reflects a 3.5% increase over that of the previous quarter and 1.1% over the same quarter last year.

"Service revenues from the cellular segment in the third quarter of 2019 totaled NIS 439 million, an increase of 4.5% from the previous quarter. The increase is due to a positive seasonality in international roaming income and increased activities to enhance revenue.

"Service revenues from the fixed line segment in the third quarter of 2019 totaled NIS 321 million, an increase of 2.8% compared to the previous quarter. The increase was due to Cellcom's revenues for fiber-optic deployment to IBC, and an increase in Internet revenues that compensated for the decline in minute sales among international operators. The Company continues to transfer Internet customers to the fiber-optic infrastructure while improving the profitability of the segment and increasing its penetration in connected buildings.

"Adjusted EBITDA in the third quarter amounted to NIS 271 million, compared with NIS 233 million in the previous quarter, a 16% improvement. This is due to an increase in service revenues and a profit of NIS 8 million for the sale of the Company's fiber-optic infrastructure in residential areas to IBC.

"During the quarter, the Company completed the investment in IBC and the sale of the Company's fiber-optic infrastructure in residential areas to IBC. As part of the two transactions, the Company invested in the equity of IBC and gave shareholder loans to IBC at a total cumulative sum of 154 million, and received from IBC NIS 181 million for the fiber-optic sale. The net cash effect of the two transactions was a positive cash flow of NIS 27 million. Free cash flow for the third quarter of 2019 totaled NIS 234 million and included the sale of the fiber infrastructure for NIS 181 million.

"The Company is working to implement the recovery plan it recently announced. As part of the expense reduction plan, the Company contacted its suppliers to lower service costs, and began negotiations with employee representatives for the implementation of a manpower efficiency plan. At the same time, the Company is preparing to raise equity as soon as possible."

Cellcom Israel Ltd. (NYSE: CEL) (TASE: CEL) ("Cellcom Israel" or the "Company" or the "Group") announced today its financial results for the third quarter of 2019.

The Company reported that revenues for the third quarter of 2019 totaled NIS 938 million ($269 million); Adjusted EBITDA for the third quarter of 2019 totaled NIS 271 million ($78 million), or 28.9% of total revenues; loss for the third quarter of 2019 totaled NIS 2 million ($1 million). Basic loss per share for the third quarter of 2019 totaled NIS 0.01 ($0.003).

Main Consolidated Financial Results:

Main Financial Data by Operating Segments:

(*)      The segment includes the cellular communications services, end user cellular equipment and supplemental services.
(**)     The segment includes landline telephony services, internet services, television services, transmission services, end user fixed-line equipment and supplemental services.
(***)      Include cancellation of inter-segment revenues between "Cellular" and "Fixed-line" segments.

Financial Review (third quarter of 2019 compared to third quarter of 2018):

Revenues for the third quarter of 2019 increased 3.1% totaling NIS 938 million ($269 million), compared to NIS 910 million ($261 million) in the third quarter last year. The increase in revenues is attributed to a 10.6% increase in equipment revenues and a 1.0% increase in service revenues.

Service revenues totaled NIS 719 million ($206 million) in the third quarter of 2019, a 1.0% increase from NIS 712 million ($204 million) in the third quarter last year.

Service revenues in the cellular segment totaled NIS 439 million ($126 million) in the third quarter of 2019, a 0.9% decrease from NIS 443 million ($127 million) in the third quarter last year. This decrease resulted mainly from the ongoing erosion in the prices of these services as a result of the competition in the cellular market.

Service revenues in the fixed-line segment totaled NIS 321 million ($92 million) in the third quarter of 2019, a 3.5% increase from NIS 310 million ($89 million) in the third quarter last year. This increase resulted mainly from an increase in revenues from internet and TV services and revenues from fiber optic infrastructure deployment services to IBC. This increase was partially offset by a decrease in minute sales among international operators (hubbing).

Equipment revenues totaled NIS 219 million ($63 million) in the third quarter of 2019, a 10.6% increase compared to NIS 198 million ($57 million) in the third quarter last year. This increase resulted mainly from an increase in the amount of end user equipment sold in the cellular segment, which was partially offset by a decrease in equipment sales in the fixed-line segment.

Cost of revenues for the third quarter of 2019 totaled NIS 667 million ($192 million), compared to NIS 645 million ($185 million) in the third quarter of 2018, a 3.4% increase. This increase resulted mainly from an increase in the amount of end user equipment sold in the cellular segment, an increase in costs of TV services content and costs of fiber optic infrastructure deployment. This increase was partially offset by a decrease in the amount of end user equipment sold in the fixed line segment and decrease from minute sales among international operators (hubbing).

Gross profit for the third quarter of 2019 increased by 2.3% to NIS 271 million ($78 million), compared to NIS 265 million ($76 million) in the third quarter of 2018. Gross profit margin for the third quarter of 2019 amounted to 28.9%, down from 29.1% in the third quarter of 2018.

Selling, Marketing, General and Administrative Expenses ("SG&A Expenses") for the third quarter of 2019 increased by 4.7% to NIS 243 million ($70 million), compared to NIS 232 million ($67 million) in the third quarter of 2018. This increase is primarily a result of an increase in amortization expenses of salaries and commissions expenses which were capitalized as part of customer acquisition costs, as a result of early adoption of an International Financial Reporting Standard (IFRS 15) as of the first quarter of 2017 (the "Adoption of IFRS15").

Operating income for the third quarter of 2019 decreased by 20.0% to NIS 32 million ($9 million) from NIS 40 million ($11 million) in the third quarter of 2018.

Adjusted EBITDA for the third quarter of 2019 increased by 41.9% totaling NIS 271 million ($78 million) compared to NIS 191 million ($55 million) in the third quarter of 2018. Adjusted EBITDA as a percent of revenues for the third quarter of 2019 totaled 28.9%, up from 21.0% in the third quarter of 2018.

Cellular segment Adjusted EBITDA for the third quarter of 2019 totaled NIS 185 million ($53 million), compared to NIS 118 million ($34 million) in the third quarter last year, an increase of 56.8%, which resulted mainly from a decrease in rent expenses in a total amount of NIS 65 million which were recognized as a right-of-use asset as a result of the initial implementation of IFRS 16 as of 1 January, 2019.

Fixed-line segment Adjusted EBITDA for the third quarter of 2019 totaled NIS 86 million ($25 million), compared to NIS 73 million ($21 million) in the third quarter last year, an 17.8% increase, which result mainly from capital gain from the sale of fiber optic infrastructure in residential areas of the Company, a decrease in rent expenses in a total amount of NIS 7 million which were recognized as a right-of-use asset as a result of the initial implementation of IFRS 16 as of 1 January, 2019 and an increase in revenues from TV and internet services. This increase was partially offset by a decrease in the amount of end user equipment sold in the fixed line segment.

Financing expenses, net for the third quarter of 2019 decreased by 16.2% and totaled NIS 31 million ($9 million), compared to NIS 37 million ($11 million) in the third quarter of 2018. The decrease resulted mainly from deflation of the Israeli Consumer Price Index in the third quarter of 2019 compared to inflation in the third quarter of 2018. This decrease was partially offset by an increase of financing expenses as a result of the initial implementation of IFRS 16 as of 1 January 2019.

Loss for the third quarter of 2019 totaled NIS 2 million ($1 million), compared to net income of NIS 1 million ($0.3 million) in the third quarter of 2018.

Basic loss per share for the third quarter of 2019 totaled NIS 0.01 ($0.003), compared to basic earnings per share of NIS 0.01 ($0.003) in the third quarter last year.

Operating Review

Main Performance Indicators - Cellular segment:

Cellular subscriber base - at the end of the third quarter of 2019 the Company had approximately 2.767 million cellular subscribers. During the third quarter of 2019 the Company's cellular subscriber base increased by approximately 22,000 net cellular subscribers.

Cellular Churn Rate for the third quarter of 2019 totaled 11.4%, compared to 10.0% in the third quarter last year.

The monthly cellular Average Revenue per User ("ARPU") for the third quarter of 2019 totaled NIS 53.2 ($15.3), compared to NIS 52.5 ($15.1) in the third quarter last year. The increase in ARPU resulted mainly due to prepaid and M2M subscribers' deletion from the Company's cellular subscriber base in the previous quarter.

Main Performance Indicators - Fixed-line segment:

In the third quarter of 2019, the Company's subscriber base in the TV field increased by 8,000 net households, and the Company's subscriber base in the internet infrastructure field decreased by approximately 2,000 net households compared to the last quarter. This decrease results from focusing on moving our Internet customers from wholesale market to the fiber infrastructure.

Financing and Investment Review

Cash Flow

Free cash flow for the third quarter of 2019 totaled NIS 234 million ($67 million), compared to NIS 34 million ($10 million) in the third quarter of 2018. The increase in free cash flow resulted mainly from the sale of independent fiber optic infrastructure of the company in residential areas to IBC in the amount of approx. NIS 181 million.

Total Equity

Total Equity as of September 30, 2019 amounted to NIS 1,629 million ($468 million) primarily consisting of undistributed accumulated retained earnings of the Company.

Cash Capital Expenditures in Fixed Assets and Intangible Assets and others

During the third quarter of 2019, the Company invested NIS 149 million ($43 million) in fixed assets and intangible assets and others (including, among others, investments in the Company's communications networks, investments in optic fibers deployment, information systems, software and TV set-top boxes and capitalization of part of the customer acquisition costs as a result of the Adoption of IFRS15), compared to NIS 160 million ($46 million) in the third quarter of 2018.

Dividend

On November 26, 2019, the Company's Board of Directors decided not to declare a cash dividend for the third quarter of 2019. In making its decision, the board of directors considered the Company's dividend policy and business status and decided not to distribute a dividend at this time, given the intensified competition and its continued adverse effect on the Company's results of operations, and in order to strengthen the Company's balance sheet. The board of directors will re-evaluate its decision in future quarters. No future dividend declaration is guaranteed and is subject to the Company's board of directors' sole discretion, as detailed in the Company's most recent annual report for the year ended December 31, 2018 on Form 20-F dated March 18, 2019, or the 2018 Annual Report, under "Item 8 - Financial Information – A. Consolidated Statements and Other Financial Information - Dividend Policy."

Debentures, Material Loans and Financial Liabilities

For information regarding the Company's outstanding debentures as of September 30, 2019, see "Disclosure for Debenture Holders" section in this press release.

For information regarding the Company's material loans as of September 30, 2019, see "Aggregation of the Information regarding the Company's Material Loans" section in this press release.

For a summary of the Company's financial liabilities as of September 30, 2019, see "Disclosure for Debenture Holders" section in this press release.

Other Developments During the Third Quarter of 2019 and Subsequent to the End of the Reporting Period

Adverse Effects on our Financial Condition, Restructuring Plan, and Labor Dispute

In the third quarter of 2019 the Company's rating in relation to the Company's debentures traded on the Tel Aviv Stock Exchange was downgraded to ilA and the Company's rating outlook was maintained at "negative." Our and another cellular operator's controlling shareholder recognized a substantial impairment of goodwill expense associated with the Company and the other cellular operator, in their respective financial reports for the second quarter of 2019 and the already intense competition in the cellular market further heightened with campaigns announcing tariffs as low as US$ 3-4 per month for a cellular package. These developments had an adverse effect on the Company's financial condition and the perception of the Israeli telecommunications market in general and more specifically of the Company – given its substantial debt, resulting in the substantial decrease of the Company's shares, hardening requirements to access additional credit from banks and increase of the Company debentures yield, signifying increased cost of future debt raised from the capital market. Therefore, the Company may be required to raise debt on less favorable and costly terms to the Company than in previous debt raisings. Assuming there will be no adverse effects on the Company's condition, the Company expects to raise additional debt before 2021 year end, or earlier, depending on market conditions.

As previously reported, the Company is taking actions to improve its financial condition and strengthen the Company in light of the intense competition in the market. In September 2019 the Company announced that following extensive work and analysis of various courses of action carried out by the Company in the past several months (certain aspects of it in consultation with Deloitte Israel, a firm in the Deloitte Global Network), the Company's board of directors approved a comprehensive restructuring plan for the Company (the "Plan") and instructed the Company to take immediate action to execute the Plan.

The Plan sets the following goals, with a target to achieve them by the end of 2020:

(1)   return to positive net income (excluding special and unusual items)
(2)   reduce the Company's net debt to EBITDA (excluding IFRS16 ramifications and special and unusual items) ratio to below 3
(3)   prepare the Company to better cope with market conditions, the intense competition and future investments

The Plan includes the following major components and target timetable:

1. Cutting expenses - annual reduction of appx. NIS 150 million from current OPEX level (to be executed by the end of 2020), including through substantial reduction of expenses and payments to suppliers, substantial reduction in manpower (which at this point will not include sale and service customer facing personnel) and reduction of landline wholesale access fees.

Cost cutting initiatives have begun immediately following the publication of the Plan and includes reduction of consideration to suppliers for a certain period, sale of internet services using IBC Israel Broadband Company (2013) Ltd. ("IBC")'s infrastructure under the previously reported Indefeasible Right of Use Agreement, or IRU instead of the more costly landline wholesale arrangement,  and entering negotiations with the employees' representatives in order to change the current collective employment agreement and reach new agreements. As previously reported, in September 2019, the Histadrut, the union representing the Company's employees sent the Company a labor dispute announcement. Under the announcement, the Company's employees would be entitled to take organizational steps (including a strike), as of October 10, 2019.  Notwithstanding the aforesaid, the employees' representatives commenced a sudden and unlawful strike encompassing the vast majority of the Company's operations which ended the following day following an understanding that negotiations would commence after the Jewish holidays of October, which happened. The negotiations do not annul the labor dispute announcement and do not prevent the employees' representatives from taking additional organizational steps, including a strike.

2. Cutting investments – reduction of the company CAPEX level to appx. NIS 450 – 500 million per annum, (to be executed by the end of 2020), excluding new frequencies related CAPEX which may require added investments. For additional details regarding such CAPEX see "Frequencies Tender" below.

3. Capital raising of appx. NIS 400 million.

To be executed prior to 2019 year-end, as part of the Plan. Specific timing and structure to be determined in accordance with the evolvement of the Plan.

The execution, timing, terms and amount of any such contemplated offering have not yet been determined and are subject to further approval of the Company's Board of Directors, publication of a supplemental offering report and the prior approval of the Tel Aviv Stock Exchange of the supplemental offering report. There is no assurance that such offering will be executed, nor as to its timing, terms or amount.

4. Factoring of customers' end-user equipment of appx. NIS 100 – 150 million.

Presently under negotiations with financial institutions. Subject to reaching agreements and entering a definitive agreement, which cannot be guaranteed.

5. Debt reduction – Open market repurchases of the Company's debentures up to NIS 150 million.

To be carried out by management, at its discretion, at such timing, amounts and structure, according to market conditions.

Execution of the Plan may entail significant one-time expenses. Those are not included in the Plan components above.

The Company cannot guarantee  execution of the Plan, its timing and results, as they are subject to uncertainties and assumptions about the Company's ability to carry out the Plan, including its ability to reach agreements with the relevant parties and receive required approvals, including the Company's ability to reach agreement with the employees' representatives on changes to current collective employment agreement, the terms under which such agreements will be reached and their timing, Israeli capital market conditions and Israeli telecommunications market conditions. The final agreements and conditions could lead to materially different outcome than that set forth above. 

Furthermore, whereas successful outcome of the Plan is expected to strengthen the Company and enable the Company to participate in mergers, acquisitions and other opportunities that may present themselves / arise  in the telecommunications arena in the next few years, a less successful outcome or other adverse effects on the Company's results of operations may result in the strengthening of other competitors through mergers, acquisitions and the likes to which the Company is not a party, which may result in further weakening of the Company's competitive standing, including loss of its leading position in the cellular market and related benefits to size.

The Company actively pursues mergers, acquisitions and the like opportunities but cannot guarantee any such opportunities may arise or reach fruition.

For additional details, see the Company's annual report on Form 20-F for the year ended December 31, 2018 filed on March 18, 2019, or 2018 20-F, under ITEM 3. Key Information.  - D. Risk Factors - "We operate in a heavily regulated industry, which can harm our results of operations. Regulation in Israel has materially adversely affected our results", "We face intense competition in all aspects of our business", "As a result of substantial and continuing changes in our regulatory and business environment, our operating results, profitability and cash flow have decreased significantly in the past several years, with a loss for 2018. Further decline may adversely affect our financial condition", "The unionizing of our employees may impede necessary organizational and personnel changes, result in increased costs or disruption to our operation", "We may be adversely affected by the significant technological and other changes in the telecommunications industry" and "Our substantial debt increases our exposure to market risks, may limit our ability to incur additional debt that may be necessary to fund our operations and could adversely affect our financial stability", ITEM 4. Information on the Company – B. Business Overview – Competition" and the Company's current reports on Form 6-K dated August 15, 2019 under "Other developments during the second quarter of 2019 and subsequent to the end of the reporting period - Rating downgrade in relation to debentures traded in Israel", September 23, 2019 and September 24, 2019".

For additional details regarding the holdings in the Company's outstanding share capital, see 2018 20-F under "Item 7. Major Shareholders and related party transactions – A. Major Shareholders".

This document does not constitute an offer to sell, or a solicitation of an offer to purchase, any securities. Any securities referred to herein have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold within the United States absent registration or an applicable exemption from, or in a transaction not subject to, the registration requirements of the Securities Act.  There is no intention to register any securities referred to herein in the United States or to make a public offering of the securities in the United States. 

IBC

In July 2019, the Company reported the completion of an investment transaction in IBC and the sale of the Company's independent fiber-optic infrastructure in residential areas to IBC, which joins IBC's existing and future deployed fiber-optic infrastructure. As previously reported, the Company undertook to purchase IRU (as long as the network is active) to 10-15% of IBC's fiber-optic 'home pass' (i.e. fiber-optic actually reaching / connected to the building) as shall be deployed by IBC in the next 15 years (current undertaking of 15% and may decrease to 10% under certain conditions). The IRU consideration is subject to actual IBC's 'home pass' deployment. Currently the annual consideration the Company pays IBC for the IRU amounts to approximately NIS 18 million (substantially lower than the alternative payment to Bezeq) and is expected to increase in accordance with the actual addition of 'home passes' deployed in the future. The IRU consideration is paid to IBC in installments over a period of 9 years.

As the Company is presently IBC's sole IRU customer, IBC's revenues and financial position depend largely on the Company and therefore adverse effects to the Company's financial position, as previously discussed, may adversely affect IBC's ability to raise debt to finance its operations. Should IBC require additional investments in order to fund its operations, the Company, as indirect shareholder of IBC, is expected to invest additional funds in IBC for the continued deployment of its network, thereby adding further burden on the Company itself. Further, any adverse changes to IBC's competitive standing and increase of the competition level which IBC faces, such as Bezeq the Israeli Communications Company Ltd., or Bezeq, commencing to operate its fiber-optic network (Bezeq has already executed a substantial part of the investments thereof), may adversely affect the Company as IBC's indirect shareholder, as well as its customer, given the Company's 15 year undertaking to purchase IRU to IBC's network at the agreed price, regardless more favorable proposals should such be available to the Company in the future. 

For developments which may influence the competition level in the fiber-optic infrastructure field and IBC's competitive standing, see also "Public hearing regarding fiber-optic deployment policy" below

For additional details see the Company's 2018 20-F under Item 4. "Information on the Company - B. Business Overview – Networks and Infrastructure - Fixed-line Segment - Fixed-line Infrastructure – Investment in IBC", the Company's current report on form 6-K dated August 15, 2019 under "Other developments during the second quarter of 2019 and subsequent to the end of the reporting period  - Company's Investment Transaction in IBC and Company's sale of fiber-optic infrastructure transaction completed" and elsewhere in this report under "Adverse Effects on our Financial Condition and Restructuring Plan; Labor Dispute".

Frequencies Tender

In July 2019, the Company reported that the Israeli Ministry of Communications published a frequencies tender including for 5G services, expected to be conducted in Q4/2019. After carefully reviewing the tender documents, including the tender principles and license requirements, the Company is of the opinion that certain tender principles and license requirements are unreasonable and must be corrected before the tender process proceeds any further. The Company and its network sharing partners' requests to the Ministry of Communications, or MOC, to remedy the material failures noted by the operators and delay the tender process until such corrections are made, were not answered to the point and therefore the Company and its network sharing partners intend to petition the competent court to instruct the MOC to remedy the failures and delay the tender process until such failures were corrected. The Company cannot guarantee a favorable outcome to such petitions. Failure to remedy such shortcomings may result in the Company having to pay sums substantially higher than those paid by other contenders in the tender, not win frequencies or win a smaller quantity of frequencies than the quantity it requires and undertake to make material investments regardless of their economic viability, in order to maintain its competitive standing in the cellular market. Further more, the tender includes additional material economic uncertainties, some of which are relevant to all contenders, such as whether certain frequencies fees discounts proposed by the tender committee would be approved by the relevant Ministries, and others relevant only to part of the contenders, the Company included, such as in relation to the previously reported frequencies transfer. Failure to resolve such uncertainties before the tender is held, would require the Company to participate in the tender under material uncertain conditions and under unequal burdens. At this time, before the Company and its network sharing partners have submitted a joined proposal agreement for the tender committee's prior approval, as the Company may only participate through a joined proposal with its network sharing partners under the principles of the tender, and as the Company cannot anticipate what would be the minimum bids set by the MOC, nor what would be the final payment the Company would have to pay for the frequencies, the Company cannot evaluate its implications on the Company. Failure to agree on a, joint proposal agreement (or other solution, if possible), may prevent the Company from participating in the frequency tender and thereby materially adversely affect its competitive abilities. Further, winning additional frequencies would require the Company to make substantial investments in its cellular network, thereby imposing additional financial burden on the Company which may have adverse effects on the Company's financial condition and may lead to additional downgrade of its debentures' related rating. In addition, the additional frequencies require the construction or change of hundreds of cell sites. The difficulties in obtaining the required consents and permits, particularly building permits for cell sites from local planning and building authorities (none of the frequencies proposed in the tender are specifically detailed in the charts attached to the Israeli National Zoning Plan 36, to which several local planning and building authorities  refuse to provide building permits in reliance on such plan) and the substantial limitations on the Company's ability to construct new cell sites or change existing cell sites based on an exemption from the requirement to obtain a building permits, may prevent the Company from meeting the deployment requirements which will be set in its license with relation to the frequencies proposed in the tender (should the Company win them) and from meeting the deployment requirements which may entitle the Company to performance based incentives, as well as expose the Company to additional litigation and such litigation's consequences.

For additional details see the Company's 2018 20-F under "Item 3. Key Information – D. Risk Factors – Risks Related to our Business – We operate in a heavily regulated industry, which can harm our results of operations. Regulation in Israel has materially adversely affected our results" "We face intense competition in all aspects of our business", "We may not be able to obtain permits to construct and operate cell sites", "We may be required to indemnify certain local planning and building committees in respect of claims against them", "We may be adversely affected by significant technological and other changes in the cellular communications industry" and "Item 4. Information on The Company – B. Business Overview – Network and Infrastructure- Spectrum allocation", " – Government Regulations – Permits for cell site construction", the Company's current report on form 6-K dated August 15, 2019 under "Other developments during the second quarter of 2019 and subsequent to the end of the reporting period- Frequencies Tender Published" and elsewhere in this report under "Adverse Effects on our Financial Condition and Restructuring Plan; Labor Dispute".

Public hearing regarding fiber-optic deployment policy

In November 2019, a joined team for the Israeli Communications and Treasury Offices and the Competition Authority, tasked with examining the need for updating  fiber-optic deployment and service obligations of landline operators who own their own infrastructure (and under current regulation are required to universally deploy each network they deploy) and the need for deployment incentives in areas where no deployment obligations be determined, after economic viability tests, published its recommendations for public hearing. The recommendations include:

• Under reasonable scenarios, no economic viability exists for one company's universal deployment.
• Bezeq will not be subject to universal deployment requirement in regards to deploying fiber-optics but would rather select the areas in which to deploy its fiber-optics and in those areas Bezeq will be obligated to provide service to all homes within 5 years.
• A trust established by the State of Israel for that purpose (the "Trust") will conduct tenders to subsidize deployment of fiber-optic by Bezeq's competitors in areas where Bezeq chooses not to deploy fiber-optic ("Non-Bezeq Areas"), based on economic viability and efficiency. The winner would be obligated to provide wholesale services to other competitors at wholesale rates. Bezeq may not participate in the tenders nor acquire wholesale service in those areas (though its subsidiaries may do so). The winner of the subsidy tender may use Bezeq's infrastructure in the Non-Bezeq Areas for rates significantly lower than the current wholesale rates. Only the winner will be entitled to the subsidy as well.
• Subsidy will be funded through additional 0.5% tax levied on all Israeli communications license holders revenues for the previous year (including Bezeq), whose annual revenues exceed NIS 10 million, as of 2022 and until all household in Israel are connected to fiber-optic. The funds will be managed by the Trust.
• Bezeq may not deploy fiber-optic in Non-Bezeq Areas for 3 years from the date of each respective subsidy tender for that area. Non the less, Bezeq may update its original deployment obligation by up to 10% and so long as such Non-Bezeq Area was not being chosen as an area to receive subsidy by the Fund.

Bezeq's obligations regarding its already existing infrastructure shall remain unchanged.

Adoption of the recommendations requires, among others, changes to applicable legislation and licenses.  

Hot Telecom L.P.'s universal deployment obligations are still under examination of the joined team.

For additional details see "IBC" above, the Company's 2018 20-F under "Item 3. Key Information – D. Risk Factors – We operate in a heavily regulated industry, which can harm our results of operations. Regulation in Israel has materially adversely affected our results","-We face intense competition in all aspects of our business", and "Item 4. Information on The Company –B. Business Overview – Competition – Fixed-line Segment" and "- Government Regulations – Fixed-line Segment – Wholesale land-line market".

Changes to the Board of Directors and Management; Financial and accounting expert

In September 2019, following Mr. Sholem Lapidot's resignation from office as a director, the Company's board of directors elected Mr. Eran Saar to serve as a director of the Company, until the Company's next general shareholders meeting. In November 2019, the Board of Directors has determined that Mr. Saar also qualifies as financial and accounting expert as defined in the regulations promulgated under the Israeli Companies Law. Thereafter, the Company's financial and accounting experts are Messrs. Bior, Hauser and Saar. Mr. Hauser also qualifies as "audit committee financial expert" under US law.

Mr. Saar has served as CEO of Equital Group and Isramco Negev 2 from 2012. From 2011 to 2012 Mr. Saar served as CFO of Equital Group, from 2006 to 2010 Mr. Saar served as CEO of Isal Amlat Investments and CFO of Kaman Holding and from 1997 to 2005 Mr. Saar served as Deputy Director Corporations Dept., Israel Securities Authority. In September 2019, Mr. Saar was nominated as CEO of DIC (the Company's indirect controlling shareholder) and IDB Development Corporation Ltd., as of December 2019. Mr. Saar is an attorney and a Certified Public Accountant and holds an M.B.A (finance) in business Management, LL.B and a B.A. in accounting, all from the Hebrew University of Jerusalem.

In September 2019, following Ms. Sharon Amit's resignation form her position as VP of human resources of the Company, the Company's board of directors has nominated Ms. Orly Pascal as the Company's VP of human resources, effective January 1, 2020. 

Ms. Orly Pascal has served as SVP, Senior HRBP for International Markets & Global Support Functions at Teva Pharmaceutical Industries Ltd. ("Teva") from 2018 and From 2015 to 2017, she served as SVP, HR Regional Lead for Israel and Sr. HRBP for Global Support Functions, at Teva. From 2013 to 2014, Ms. Pascal has served as VP, HR Strategy & Integration, at Teva, and From 2012 to 2013, she served as Head of Employee Engagement, at Teva. Ms. Pascal holds a B.A. in Political Science from the Hebrew university of Jerusalem and M.B.A. in Business and Organizational Management, from the College of Management ‐ Academic Studies.

In October 2019, following Mr. Yoni Sabag's resignation form his position as VP of Marketing in September 2019, the Company's board of directors has nominated Mr. Rafi Shauli, the Company's VP of television and content, as the Company's vice president of marketing, as well, effective December 1, 2019.

Mr. Shauli has served as the Company's VP of television and content since June 2019. From 2012 to 2019 he served as the Company's head of private customers marketing department. From 2008 to 2011, he served as director of products and business development in the marketing division of Yes and from 2011 to 2012 as director of products and business development in the marketing division of Bezeq. From 2005 to 2008, Mr. Shauli served as director of communications solutions for businesses in the marketing department of 013 Netvision. Mr. Shauli holds a B.A. in economics and statistics from the Hebrew university of Jerusalem.

For additional details, see the Company's annual report on Form 20-F for the year ended December 31, 2018 filed on March 18, 2019, under "Item 6. Directors, Senior Management and Employees – A. Directors and Employees" and the Company's current reports on Form 6-K dated September 24, 2019 and October 30, 2019.

Conference Call Details

The Company will be hosting a conference call regarding its results for the third quarter of 2019 on Thursday, November 27, 2019 at 09:00 am ET, 06:00 am PT, 14:00 UK time, 16:00 Israel time. On the call, management will review and discuss the results, and will be available to answer questions. To participate, please either access the live webcast on the Company's website, or call one of the following teleconferencing numbers below. Please begin placing your calls at least 10 minutes before the conference call commences. If you are unable to connect using the toll-free numbers, please try the international dial-in number.

US Dial-in Number: 1 888 281 1167              UK Dial-in Number: 0 800 917 9141
Israel Dial-in Number: 03 918 0685               International Dial-in Number:  +972 3 918 0685

at: 09:00 am Eastern Time; 06:00 am Pacific Time; 14:00 UK Time; 16:00 Israel Time

To access the live webcast of the conference call, please access the investor relations section of Cellcom Israel's website: www.cellcom.co.il. After the call, a replay of the call will be available under the same investor relations section.

 About Cellcom Israel

Cellcom Israel Ltd., established in 1994, is a leading Israeli communications group, providing a wide range of communications services. Cellcom Israel is the largest Israeli cellular provider, providing its approximately 2.767 million cellular subscribers (as at September 30, 2019) with a broad range of services including cellular telephony, roaming services for tourists in Israel and for its subscribers abroad, text and multimedia messaging, advanced cellular content and data services and other value-added services in the areas of music, video, mobile office etc., based on Cellcom Israel's technologically advanced infrastructure. The Company operates an LTE 4 generation network and an HSPA 3.5 Generation network enabling advanced high speed broadband multimedia services, in addition to GSM/GPRS/EDGE networks. Cellcom Israel offers Israel's broadest and largest customer service infrastructure including telephone customer service centers, retail stores, and service and sale centers, distributed nationwide. Cellcom Israel further provides OTT TV services, internet infrastructure and connectivity services and international calling services, as well as landline telephone services in Israel. Cellcom Israel's shares are traded both on the New York Stock Exchange (CEL) and the Tel Aviv Stock Exchange (CEL). For additional information please visit the Company's website http://investors.cellcom.co.il.

Forward-Looking Statements

The following information contains, or may be deemed to contain forward-looking statements (as defined in the U.S. Private Securities Litigation Reform Act of 1995 and the Israeli Securities Law, 1968). In some cases, you can identify these statements by forward-looking words such as "may," "might," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about the Company, may include projections of the Company's future financial results, its anticipated growth strategies and anticipated trends in its business. These statements are only predictions based on the Company's current expectations and projections about future events. There are important factors that could cause the Company's actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause such differences include, but are not limited to: changes to the terms of the Company's license, new legislation or decisions by the regulator affecting the Company's operations, new competition and changes in the competitive environment, the outcome of legal proceedings to which the Company is a party, particularly class action lawsuits, the Company's ability to maintain or obtain permits to construct and operate cell sites, and other risks and uncertainties detailed from time to time in the Company's filings with the U.S. Securities and Exchange Commission, including under the caption "Risk Factors" in its Annual Report for the year ended December 31, 2018. 

Although the Company believes the expectations reflected in the forward-looking statements contained herein are reasonable, it cannot guarantee future results, level of activity, performance or achievements. Moreover, neither the Company nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. The Company assumes no duty to update any of these forward-looking statements after the date hereof to conform its prior statements to actual results or revised expectations, except as otherwise required by law.

The Company prepares its financial statements in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). Unless noted specifically otherwise, the dollar denominated figures were converted to US$ using a convenience translation based on the New Israeli Shekel (NIS)/US$ exchange rate of NIS 3.482 = US$ 1 as published by the Bank of Israel for September 30, 2019.

Use of non-IFRS financial measures

Adjusted EBITDA is a non-IFRS measure and is defined as income before financing income (expenses), net; other income (expenses), net (excluding expenses related to employee voluntary retirement plans and gain (loss) due to sale of subsidiaries); income tax; depreciation and amortization, profits (losses) of equity account investees and share based payments. This is an accepted measure in the communications industry. The Company presents this measure as an additional performance measure as the Company believes that it enables us to compare operating performance between periods and companies, net of any potential differences which may result from differences in capital structure, taxes, age of fixed assets and related depreciation expenses. Adjusted EBITDA should not be considered in isolation, or as a substitute for operating income, any other performance measures, or cash flow data, which were prepared in accordance with Generally Accepted Accounting Principles as measures of profitability or liquidity. Adjusted EBITDA does not take into account debt service requirements, or other commitments, including capital expenditures, and therefore, does not necessarily indicate the amounts that may be available for the Company's use. In addition, Adjusted EBITDA as presented by the Company may not be comparable to similarly titled measures reported by other companies, due to differences in the way these measures are calculated. See the reconciliation of net income to Adjusted EBITDA under "Reconciliation of Non-IFRS Measures" in the press release.

Free cash flow is a non-IFRS measure and is defined as the net cash provided by operating activities (including the effect of exchange rate fluctuations on cash and cash equivalents) excluding a loan to Golan Telecom, minus the net cash used in investing activities excluding short-term investment in tradable debentures and deposits and proceeds from sales of such debentures (including interest received in relation to such debentures) and deposits. See "Reconciliation of Non-IFRS Measures" below.

Financial Tables Follow

 

 

 

 

 

 

 

 

 

 

 

 

Cellcom Israel Ltd.

Disclosure for debenture holders as of September 30, 2019

Aggregation of the information regarding the debenture series issued by the Company ⁽¹⁾, in million NIS

 

Comments:

(1) For a summary of the terms of the Company's outstanding debentures see the Company's 2018 Annual Report under "Item 5. Operating and Financial Review and Prospects - B. Liquidity and Capital Resources - Debt Service - Public Debentures". In the reporting period, the Company fulfilled all terms of the debentures and Indentures. Debentures financial covenants - as of September 30, 2019 the net leverage *** was 2.51. In the reporting period, no cause for early repayment occurred. (2) Including interest accumulated in the books. (3) Semi annual payments other than regarding Series L. (4) Regarding the debentures, the Company undertook not to create any pledge on its assets, as long as debentures or loans are not fully repaid, subject to certain exclusions. (5) Regarding the debentures - the Company has the right for early redemption under certain terms. (6) Regarding debenture Series F, in June 2013, following a second decrease of the Company's debenture rating since their issuance, the annual interest rate has been increased by 0.25% to 4.60%, beginning July 5, 2013. (7) In February 2015, pursuant to an exchange offer of the Company's Series H and I debentures for a portion of the Company's outstanding Series D and E debentures, respectively, the Company exchanged approximately NIS 555 million principal amount of Series D debentures with approximately NIS 844 million principal amount of Series H debentures, and approximately NIS 272 million principal amount of Series E debentures with approximately NIS 335 million principal amount of Series I debentures. Series D and E debentures were fully repaid in July 2017 and in January 2017, respectively.

(*) On these dates additional debentures of the series were issued, the information in the table refers to the full series.
(**) As of September 30, 2019, debentures Series H, I, K and L are material, which represent 5% or more of the total liabilities of the Company, as presented in the financial statements.
(***) Net Leverage - the ratio of Net Debt to Adjusted EBITDA, excluding one-time influences. Net Debt defined as credit and loans from banks and others, debentures and interest payable, net of cash and cash equivalents and current investments in tradable securities. The definition of net leverage refers to Adjusted EBITDA for a period of 12 consecutive months. Accordingly, the net leverage ratio above includes the effects of the new standard IFRS 16 (applied by the Company as of January 1, 2019) on the Adjusted EBITDA for the first, second and third quarters of 2019. For details of the effects of IFRS 16 on the Company's results see footnote 2 on page 1 of this press release and note 3 to the Company's financial statement for the period ended on September 30, 2019, included elsewhere in this report.

Cellcom Israel Ltd.

Disclosure for debenture holders as of September 30, 2019 (cont'd)

Debentures Rating Details* 

(1)     In August 2019, S&P Maalot updated the Company's rating outlook from an "ilA+/negative" to an "ilA/negative".

(2)  In May 2012, S&P Maalot updated the Company's rating from an "ilAA/negative" to an "ilAA-/negative". In November 2012, S&P Maalot affirmed the Company's rating of "ilAA-/negative". In June 2013, S&P Maalot updated the Company's rating from an "ilAA-/negative" to an "ilA+/stable". In June 2014, August 2014, January 2015, September 2015, March 2016, August 2016, June 2017, January 2018, June 2018, August 2018 and December 2018 S&P Maalot affirmed the Company's rating of "ilA+/stable". In March 2019, S&P Maalot updated the Company's rating outlook from an "ilA+/stable" to an "ilA+/negative". In August 2019, S&P Maalot updated the Company's rating outlook from an "ilA+/negative" to an "ilA/negative".  For details regarding the rating of the debentures see the S&P Maalot report dated August 5, 2019, included in the Company's current report filled in the Israeli Securities Authority website ("MAGNA") on August 5, 2019.

* A securities rating is not a recommendation to buy, sell or hold securities. Ratings may be subject to suspension, revision or withdrawal at any time, and each rating should be evaluated independently of any other rating.

 

Cellcom Israel Ltd.

Aggregation of the information regarding the Company's Material Loans ⁽¹⁾, in million NIS

Comments:

(1) For a summary of the terms of the Company's loan agreements see the Company's 2018 Annual Report under "Item 5. Operating and Financial Review and Prospects - B. Liquidity and Capital Resources - Other Credit Facilities" and the reference therein to "- Debt Service - Public Debentures". (2) In the reporting period, the Company fulfilled all terms of the loan agreements. (3) Loan agreements financial covenants - as of September 30, 2019 the net leverage* was 2.51. (4) In the reporting period, no cause for early repayment occurred. (5) In the loan agreements, the Company undertook not to create any pledge on its assets, as long as the loans are not fully repaid, subject to certain exclusions. (6) According to the loan agreements the Company may prepay the loans, subject to a prepayment fee.

(*) Net Leverage - the ratio of Net Debt to Adjusted EBITDA, excluding one-time influences. Net Debt defined as credit and loans from banks and others, debentures and interest payable, net of cash and cash equivalents and current investments in tradable securities. The definition of net leverage refers to Adjusted EBITDA for a period of 12 consecutive months. Accordingly, the net leverage ratio above includes the effects of the new standard IFRS 16 (applied by the Company as of January 1, 2019) on the Adjusted EBITDA for the first, second and third quarters of 2019. For details of the effects of IFRS 16 on the Company's results see footnote 2 on page 1 of this press release and note 3 to the Company's financial statement for the period ended on September 30, 2019, included elsewhere in this report.

 

Cellcom Israel Ltd.

Summary of Financial Undertakings (according to repayment dates) as of September 30, 2019

a.       Debentures issued to the public by the Company and held by the public, excluding such debentures held by the Company's parent company, by a controlling shareholder, by companies controlled by them, or by companies controlled by the Company, based on the Company's "Solo" financial data (in thousand NIS).

b.      Private debentures and other non-bank credit, excluding such debentures held by the Company's parent company, by a controlling shareholder, by companies controlled by them, or by companies controlled by the Company, based on the Company's "Solo" financial data (in thousand NIS).

c.       Credit from banks in Israel based on the Company's "Solo" financial data (in thousand NIS).

d.      Credit from banks abroad based on the Company's "Solo" financial data (in thousand NIS) - None.

Cellcom Israel Ltd.

Summary of Financial Undertakings (according to repayment dates) as of September 30, 2019 (cont'd)

e.       Total of sections a - d above, total credit from banks, non-bank credit and debentures based on the Company's "Solo" financial data (in thousand NIS).

f.       Out of the balance sheet Credit exposure based on the Company's "Solo" financial data - None.

g.      Out of the balance sheet Credit exposure of all the Company's consolidated companies, excluding companies that are reporting corporations and excluding the Company's data presented in section f above (in thousand NIS) - None.

h.      Total balances of the credit from banks, non-bank credit and debentures of all the consolidated companies, excluding companies that are reporting corporations and excluding Company's data presented in sections a - d above (in thousand NIS) - None.

i.        Total balances of credit granted to the Company by the parent company or a controlling shareholder and balances of debentures offered by the Company held by the parent company or the controlling shareholder (in thousand NIS) - None.

j.        Total balances of credit granted to the Company by companies held by the parent company or the controlling shareholder, which are not controlled by the Company, and balances of debentures offered by the Company held by companies held by the parent company or the controlling shareholder, which are not controlled by the Company (in thousand NIS).

k.      Total balances of credit granted to the Company by consolidated companies and balances of debentures offered by the Company held by the consolidated companies (in thousand NIS) - None.

^[1] Please see "Use of Non-IFRS financial measures" section in this press release.
^[2] As of January 1, 2019, the Company is applying International Financial Reporting Standard, IFRS 16, Leases. The effects of applying the standard in the third quarter of 2019 amounted to an increase of NIS 72 million in Adjusted EBITDA, an increase of NIS 71 million in Cash flows from operating activities and an increase of NIS 1 million in the loss.

 

 

 

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SOURCE Cellcom Israel Ltd.