Ituran Location and Control Ltd (ITRN) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Ituran's fourth quarter 2008 results conference call. All participants are present in listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded February 23rd, 2009. I'd like to remind everyone that forward-looking statements for the respective company's business, financial condition, and results of its operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated.

Such forward-looking statements include but are not limited to product demand, pricing, market acceptance, changing economic conditions, risks in product and technology development, and the affect of the Company's accounting policies, as well as certain other risk factors, which are detailed from time to time in the Company's filings with the various securities authorities. You should have all received by now the Company's press release. If you have not received it, please call GK Investor Relations at 1-866-704-6710 or 9-723-607-4717. I'll now hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Thank you. Good day to all of you. And welcome to Ituran's conference call to discuss the fourth quarter and full-year 2008 results. I would like to say thank you to our management for hosting this conference call. With me today on the call are Mr. Eyal Sheratzky, the Co-CEO; Mr. Eli Kamer, the CFO; and Mr. Udi Mizrachi, the VP - Finance.

Eyal will begin with a summary of the year and the quarter results, followed by Eli with a summary of the financials. We'll then open the call to the question-answer session. I would like to remind everyone that the safe harbor in the press release also covers the contents of this conference call. And now, Eyal, would you like to begin, please?

Thank you, Ehud. Welcome, everyone. Thank you for joining us today. And thank you for your interest in our company. We are happy with our fourth quarter and full-year results, in particular in regards to our subscriber growth, improvement in profitability and bottom line. [Notice] given that we sold Telematics at the end of December last year, myself and Eli will be analyzing the results on a pro forma basis, which focuses on the core business excluding Telematics and removes Telematics contribution to last year results, including the one-time income from Telematics sale.

We believe that this enables investors to better compare it to our historical results with current results on a similar basis. Our revenues grossed 27% over last year to $132.6 million for the year. This was primarily driven by the continued growth in our core business, the subscriber base; although last year, we ended the quarter with 511,000 subscribers, surpassing the 0.5 million mark milestone, while at the same time last year we had only 444,000.

As has been the case for the many of the past few quarters, the massive volatility in the currency markets, particularly the US dollar against the Israeli shekel and the Brazilian real, had significant impact on our financial results. Given that our revenues are recorded in the currencies of the geographies in which they are generated, the significant strengthening of the dollar between the third and the fourth quarter makes our revenues appear sequentially lower in dollar terms. In fact, if currencies would have remained at Q3 2008 levels, our revenue would actually be sequentially $5 million higher.

However, our financial [outcome] benefits from a strong dollar against the shekel since our large cash position is kept in dollars, given that our fractional currency in Israel, the Israeli shekel, for reporting purposes, the Company's accounts in Israel are prepared in shekels and then translated to US dollars. Thus, we record financial income when our dollar deposits gain in shekel terms.

Note that we keep our cash in dollars for strategic purposes. This is because if and when an opportunity arises that requires spending part of our cash, it will be priced in dollars. And strategically, I do not want to be at a disadvantage or unable to execute a strategy because of currency fluctuation. I would like to stress that we judge the performance of the business based on what we see on the ground locally. And what we see is particularly strong growth in subscribers in Brazil and the stability of our large business in Israel, which is a strong cash-generating business for us.

I believe Ituran has demonstrated that over the long term, our solid performance is reflected in our financial results despite the short-term volatility the currency markets cause us. As you can see, the investment we made last year led to our improved profitability in the second half of this year. And now I would like to talk a bit more about our performance in various regions.

Start with Brazil. As I said, last quarter, we still see strong growth potential and expect this to continue, even given a slowing Brazilian economy. Our services are gaining increased traction around the country now that we provide nationwide coverage. We have strong relationships in place with a number of insurance companies. And we are already seeing the reward of our efforts with our strong subscriber growth.

In Israel, new car sales have slowed with the downturn in the global economy, which is now reaching Israel. Thus, we do not see growth in Israel during the coming year. And there is a chance that we will see a small decline in subscribers level there. However, the Israeli business will continue to remain a strong cash generator for Ituran, even in the absence of subscriber growth.

Know that I believe Ituran is a defensive business. History suggests that while there may be a decline in new car sales, there also tends to be an increase in car theft and therefore more demand for our services, particularly by the insurance company. Our unique business model based on recurring revenues from an established and growing customer base as well as our exposure to Brazil, a very large and generally [theft] marked with regulation on our side, underlies my confidence in both our stability and ability to continue to grow in any environment.

Finally, we have a strong net cash position, standing at $55.3 million at the end of the quarter. And this, after sharing the fruits of our success with our shareholders in the past few quarters, including distributing the proceeds of our sale of Telematics by giving dividends and executing a buyback. And with that, I will hand over to Eli.

Thank you, Eyal. As Eyal said, I will be using pro forma numbers, which exclude the contribution of Telematics to Ituran in 2007. Revenues for the fourth quarter of 2008 reached $29.4 million. This represents 0.5% decrease compared with pro forma revenues of $29.5 million in the fourth quarter of last year. Revenues for the full-year 2008 reached $132.6 million, a 27% increase compared with revenues of $104.6 million last year.

As Eyal mentioned, given the sharp increase in the dollar, during the fourth quarter, our revenues decreased. Revenue breakdown for the quarter was $20.8 million coming from subscription fees from our location-based services, which showed a year-over-year growth of [15%], and $8.6 million coming from product sales, which showed a year-over-year decline of 25%.

The geographic breakdown of revenues in the quarter was as follows -- Israel 57%, Brazil 31%, United States 2%, Argentina 10%. As Eyal mentioned, in terms of subscriber number, we reached 511,000 subscribers as of end of December, a net increase of 16,000 in last quarter. Gross margin in the quarter was 48.1% compared with the pro forma gross margin of 46% in the fourth quarter of 2007.

Operating profit for the fourth quarter of 2008 was $5.2 million or 17.6% of revenues compared with pro forma operating profit of $4.7 million or 15.8% of revenues in the fourth quarter of 2007. Operating profit in the quarter was negatively affected primarily by $0.6 million due to currency volatility. Operating profit for the year was $25.7 million or 19.3% of revenue compared with a pro forma operating profit of $17.8 million or 17% of revenues in 2007.

EBITDA for the quarter was $8 million or 27.1% of revenue compared to a pro forma EBITDA of $6.6 million or 22.4% of revenues in the fourth quarter of last year. EBITDA for the year was $35.8 million, 27% of revenues, compared with a pro forma EBITDA of $24.8 million, 23.7% of revenue last year. In the fourth quarter, the Company recorded a $1.6 million write-off related to investment in South Korea, which was made in the first half of 2007. Net profit was $5.9 million in the fourth quarter of 2008 or 20% of revenue compared with a pro forma net profit of $3.7 million or 13% of revenue, as reported in the fourth quarter of 2007.

EPS in the fourth quarter of 2008 were $0.28 per diluted share compared with a pro forma EPS of $0.16 per fully diluted share in the fourth quarter of 2007. And while net profit was $14.9 million in 2008, 11.2% of revenues or earnings per diluted share of $0.69, compared with a pro forma net profit of $13.5 million, 12.9% of revenues or earnings per diluted share of $0.58 as reported in 2007.

As of December 31, 2008, the Company had a net cash position, including marketable securities of $55.3 million compared with $57.6 million at the end of September 2008. Our average fully diluted number of shares for the quarter was 20.98 million shares. Cash flow from operations during the quarter was $9 million. And with that, I'd like to hand you back over to Eyal. Eyal?

Thank you, Eli. In summary, the fourth quarter of 2008 was a good quarter, particularly in terms of our strong profitability, on our bottom line, as well as our continued growth in subscriber base. I do expect our overall subscriber base to continue growing through 2009. Most importantly, our strong cash position and generation, particularly in current environment in which valuations have dropped substantially, bodes very well for us.

It enables us to continue growing our business, particularly at the expense of weaker competitors and also allows us to pursue and invest in opportunities which will further enhance our competitiveness and growth in the coming years. I hope to share the reward of our continued success with you, our shareholders, for many quarters to come. And with that, I would now be happy to take your questions. Operator?

Thank you. Ladies and gentlemen, at this time, we'll begin the question and answer session.

(Operator Instructions)

The first question is from Maynard Um of UBS. Please go ahead. One moment, please. Maynard, please go ahead.

Hi. Thanks. Just a few questions. Can you hear me?

Yes, Maynard.

Okay. Can you just talk about the outlook? Obviously, in the fourth quarter, you saw strengthen in Brazil but weakness in Israel, yet you still saw decent net sub growth of 16,000. Is the 15,000 to 20,000 range still the right range, given the potential for increasing car thefts? Or should we look at a lower range kind of given the overall broader economy?

Hi, Maynard. Actually, we prefer these days not to give projections as we did this year because, as you know, what is happening with the financial situation in the world, of course, it's influencing Brazil as well as in Israel as well as in any other place. Actually, it gives good things and bad things for our industry.

Usually, in financial problems, there are more violence, more car thieves, something that will drive the needs of our solutions. But on the other hand, much less cars come -- going on the roads, much less money to companies as well as to people to invest in their cars. So actually, I think that we are living in an uncertain situation. So we believe that we will grow in subscribers. But I can't commit for the same level of growing of subscribers of 2008.

Okay. And can you talk about what happens to churn in this kind of environment, too? Does churn increase because people have less money to pay for insurance and these types of services?

I don't think so. Most of the customers of Ituran are coming based on insurance companies, others, or insurance companies' contracts with us. And in that case, once we are recruiting a customer, it's much more difficult to stop the service. And this is helping us. But the current churn rate is a churn rate that goes with us few years already. And we're assuming that it will not increase.

Okay. And then just related to that, since there isn't a whole lot of visibility given this environment, can you just talk about what your plans are from an OpEx standpoint in terms of cost reduction if we do start to see some weakening on the top line? Or can you just talk about your OpEx?

As you can see the results, as we believe the results in 2009, although there is uncertainty still, Ituran providing a positive cash flow. Ituran will continue to show profitability and I think an impressive profitability. So we are not planning anything regarding reducing cost because of the situation. Ituran for many years I think from the beginning are very, very conservative and very, very -- not [generous] with expenses. We are judging our expenses even in 2008 and 2007 that was very good years in the economy. And this will continue to be the case, even in bad years. And I think that it's reflected in the results.

Okay. And then just last one from me. And I'll get back in the queue. Just in terms of expansion in Latin America, can you talk about your plans there? I think some of your competitors outside of Brazil are also seeing some strength. Do you feel you need to be in those markets today to compete? Or is that something that you're happy to do somewhere down the road where you think you can regain some of that market share in those regions? Thanks.

As you may remember, in the last two years, we try to expand our business in the Latin America countries, such as Mexico and others. And we try to do it maybe by acquisitions. The current situation and some checks that we did shows us that some companies that may be interested in the past are now in problem.

And on the other hand, the Brazilian market is still very big with a very big potential. I remind that there is still the issue of the regulation, although we should assume that part of the regulation will delay. Still, the Brazilian market is, from our point of view, still premature. And there is enough space and enough market share that Ituran with the strength that we have can do. So of course, we'll continue to look for expansion. But we will be -- we always were conservative. But we will be more conservative in 2009. There will be an opportunity which we will find it if it's the right opportunity. And it's enough conservative, so it might be. But today, we don't have a specific plan.

Thank you.

Thank you. The next question is from Paul Coster of J.P. Morgan. Please go ahead.

Thanks. Can you hear me?

Yes, yes. Hi, Paul.

Yes. Okay. Hi there. Maybe, Eli, I can start with you. It looks like you've taken some of your cash and you've bought some marketable securities. Am I correct? What have you actually purchased and why?

Most of the money -- we bought [TBOs], United States. The United States.

Why have you done that?

(inaudible)

Why?

Yes.

Because we are -- we advise with professionals in us. And we are reading papers. We see what's happened in some banks in the major countries, such as US And instead of holding it under securities depend on the banks, we decide to do it based on advice that we got. And we thought it makes sense.

We are not holding the money. We are not holding it because of future strategic needs. We less -- it's not that we don't care. But it's less important to have 0.5% more or less but not to be in any risk. And this is what the reason.

Okay. Understood. Now can I just dwell on average revenue per subscriber for a moment? It was going up pretty steadily for about two years. It came down this quarter. I think it's entirely because of foreign currency. But can you just confirm that, that your subscribers are not trading down to fewer options, for instance?

You are right, Paul. I mean, if you consider all of the change that we saw in Q4 came from currency impact, on local currency, we are talking about more or less the same level as in previous quarters.

Okay. Can I perhaps go back to one of Maynard's questions regarding churn? What is the average contract length for a subscriber? And what are you seeing at the end of the one-year or whatever it is period? Are people renewing automatically? How does that work?

Usually, it depends on the region and the customer in the end of the day. If I -- for example, if we take in Israel, the length of the contract is actually on a monthly basis. The customer can end the contract every month. But in the end of the day, it looks from our experience from the past, usually, a customer stays with that between, let's say, five to seven years.

Let me just add something because in the end of the day, there is like a subregulation within Israel, which is the insurance companies that provide discounts or put it as a condition in the policy. So although our contract with the customer is on a monthly basis, the actual situation is that he's staying with us six to seven years.

And in other regions, such as Brazil and Argentina, the contract that we have with insurance companies, usually the length, let's say, in the range between two to four years. And even then, it's a replacement of the unit from one customer that leaves the insurance company to another insurance -- to another customer that comes to the insurance company. So in the end of the day, from a unit point of view, from a service point of view, it's again in the range of five years.

In the LoJack conference call, they said that though the law has now passed in Brazil mandating use of this technology on new cars, the enforcement of the law is not very consistent. Can you tell us what you think is happening down in Brazil at the moment?

Actually, this is the case. First of all, the law is not yet enforced. It should start in August. Then they change it and the spread it on a one year. I told -- and I will tell again -- this regulation, we should assume that because of the situation -- and don't forget that the main car manufacturers in Brazil are GM, for example, which we know what is its situation, that there is a lot of problem regard start operating this regulation. It will happen. And as always, when it happen, it will be in favor with us. But we -- in order to be conservative, we assume that the influence of this regulation in 2009 will be very, very low, if at all.

All right, thanks very much, gentlemen. Appreciate it.

Thank you very much. The next question is from Jonathan Ho of William Blair. Please go ahead.

Good morning, guys.

Good morning.

Just a quick couple of questions from a housekeeping perspective. Can you give us a breakdown of subscribers by geography for the end of the year?

We have a policy, unfortunately, that we publish it only under the 20-F. It is part of our policy, so --

For commercial reasons.

Only for commercial reasons.

Okay. We'll wait for the 20-F then. And then my second housekeeping question is how should we think about the tax rate for next year, given sort of the swinging around in the geographic revenue?

I think that the tax rate will be -- as you saw now in the average in the fourth quarter was about 31%. I do believe that in 2009, again, the range will be between 30% to 32%. That will be the range.

Okay. Great. Just talking a little bit about the business, can you give us maybe some sense of what you're seeing in the current environment in the first two months of the year and how it is relative to last year, at least as far as the end markets and what you're hearing from your sales guys?

As we said on general, we said it because we see what happens. So actually, in the two main markets for us are Israel and Brazil for us. Of course, we have Argentina. But it's less material. In Israel, as you can see in any newspaper, there are much less new cars on the roads. And we are already here more than [13] years. So we need a growth of cars on the road. And this is not the case now. So in Israel, we are -- we can talk about [that situation].

On the other hand, in Brazil, though the economic situation there is not also very, very good now, still we succeed to grow. But it's -- don't forget, this is the only first two months of the year. And this week, everybody there goes to holidays, like every year for the carnival. And this is their summer. So we still -- I think we still cannot use the first two months as a symbol for the next year, for the next months of the year.

Okay. Just taking a look at the higher end services, like Mr. Big, do you expect an increase in churn on that side? I know you guys talked about the churn on the insurance side just for the vehicle location. But for the additional services, do you see a drop-off on that side?

No, the Mr. Big comes as an added-value service to reduce the churn to create better brand. And of course, it's generated some part of the revenues. But first of all, it's a lower part. And second, we don't see it very material in churn from these services.

Okay. And my last question would be for the product revenue sequentially. That dropped pretty substantially. Was that also mainly due to currency? Or were there any discounting or mix shift issues on that side?

You're comparing for Q3 [or from] last year?

Q3 to Q4.

Okay. It went down by almost $5.8 million. And as Eyal mentioned before, the currency impact was very, very high. We're talking about approximately $5 million that just came from this. So this is the maturity.

Great.

Other than that, as you know, the downturn of the global economy, also we saw a bit of it also here in Israel and in one of our subsidiaries that sold less to a third party, not to something that we [leave] to our core business.

Okay. And my last question is on South Korea. You guys said that you had written down an investment there. Can you just give us a little bit of color on what that write-down is for?

Yes, actually, before we sold Telematics, one of the projects that we were involved with was the operation in South Korea. And during the last year, after we sold Telematics -- and in the past, we invested in South Korea based on the contracts that gave us this transaction. And this year, we start to [trace about] their situation, based on the situation in the economy. But also, today, after more than three years, they didn't succeed to get to breakeven points. And they're still looking for raising money. We decide from a conservative reason to cancel this investment. Again, in order to be conservative, we think this is the way that we should behave.

Great. Thank you.

You're welcome.

Thank you. The next question is from Ziv Tal of Oscar Gruss. Please go ahead.

Hi, Eyal and Udi.

Hi.

Got a question for you -- what was the Brazilian real rate that you (inaudible) revenue from Brazil this quarter?

2.28.

Okay. And, Eyal, can you please talk about Argentina? I mean, it grew as a percentage of revenue this quarter. And do you think that will offset some of the slowdown that you've seen in Israel? You did mention higher theft in that region in the last call.

No, I think that the difference in the ratio between the countries was influenced, I think, materially by the currency exchanges. It's not because of the -- it's not because the case that Argentina is growing faster than before. Argentina actually grew this year, growing a level that we got used to. But it's still not so material.

Okay. Thank you.

Thank you. The next question is from Yair Reiner of Oppenheimer. Please go ahead.

Hi. This is Mike calling for Yair Reiner. Quick question -- do you see any change in collections or any heightened risk there?

First of all, our experience showed that it didn't change. And we have a very good collections. Our customers, as you know, are divided also in Israel but in Brazil as well between private people that pay monthly fee, which is not dramatic for customers that use luxury cars. On the other hand, when we are talking about insurance companies in Brazil, so as you know, in the last years, we provide them solutions through the [commodato], which is like leasing. And by this, it helps their balance sheets. So we don't see any problem. And our collections are very good.

Okay. Great. Thank you.

You're welcome.

Thank you.

(Operator Instructions)

There are no further questions at this time. Before I ask Mr. Sheratzky to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available on Ituran's website, www.ituran.co.il. Mr. Sheratzky, would you like to make your concluding statement?

Yes. Thank you for joining our call today. As always, I'd like to thank all our employees for their hard work in the quarter. To our investors, I look forward to speaking with you next quarter. Thank you. And have a good day. Bye.

Thank you. This concludes Ituran's fourth quarter 2008 results conference call. Thank you for your participation. You may go ahead and disconnect.