Ituran Location and Control Ltd (ITRN) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran First Quarter 2009 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 May 18th, 2009.

I would 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 effect 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 security 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 will now hand the call over 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 first quarter 2009 results. I would like to thank you to our management for hosting this conference call.

With me on the phone today are Mr. Eyal Sheratzky, the Co-CEO, Mr. Eli Kamer, the CFO, and Mr. Udi Mizrachi, VP, Finance. Eyal will begin with summary of the quarter results followed by Eli with a summary of the financials. We'll then open the call for a question and answer session. 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. Again, we are happy with our results, in particular with strong margins and continued growth in our subscriber base despite the very sharp global downturn.

It is important to note that our global subscriber base grew 12% year over year to 521,000 while the ARPU measured in local currency remained more or less the same. Thus, the fall in revenues is actually a currency translation issue since we charge our customers in the local currencies but report in US dollars.

The sharp changes in currency levels, particularly the deep drop in the Brazilian real versus the US dollar, down over 30% from last year, as well as the weaker shekel, down over 10%, and Argentinean peso against the dollar, down over 12%, had some significant distorting effect on our top line.

So I'm going to the sector results. So you better understand the currency effects on our numbers and get a better feel for our underlying business performance. In local currencies, our monthly subscription fees in Israel grew 20% year over year, 24% in Brazil year over year, and 23% in Argentina year over year. So you can see that in all our regions, we are actually growing.

I think that this, despite a weakening global economy throughout the last year, gives a better picture of the health of our business.

The strength of the US dollar also had an effect on our product margin since we purchased in dollars but fell in local currencies. However, our financial income benefits from a strengthening dollar against the shekel since our large cash position is kept in dollars for strategic purposes.

Given our functional currency in Israel is 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 a financial income when our dollar deposits gain in shekel terms. But this is a quarter-over-quarter effect. And the shekel fell 10% against the dollar since last quarter.

Again, 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, a generally stable large subscriber base, and business in Israel which is strong cash generating business for us.

I believe Ituran has demonstrated that over the long term, our solid performance is reflected in continued profitability, solid margins, and cash generation. And now I'll talk more about our performance in our main two regions.

In Brazil, as I said last quarter, the growth potential remains, despite the slowing economy there. Our services are gaining increased traction. And our strength there is becoming a significant asset as we [cement] ourselves as market leaders. We have strong relationships in place with a number of insurance companies. We see the reward of our efforts and investment in Brazil with continued subscriber growth there.

Unlike in Israel, where we are number one and our market share is high at around 75%, in Brazil we still have a lot of room to increase market share. And therefore, we can grow our business also during periods where the market itself is slower. We believe that Brazil will remain a strong growth engine for the Company, more than compensating for the stability in Israel.

In Israel, it is quite clear that new car sales have slowed significantly with the downturn in the global economy. And this figure is forecasted to be at multi-year low. This obviously limits our ability to grow our customer base in Israel. And indeed, in the first quarter, the number of subscribers there did remain flat. However, I want to stress that our business model doesn't require growth to maintain profitability and cash generation.

Even in a serious recession as we are seeing, our Israeli business will continue to remain a strong cash generator for Ituran, even in the absence of subscriber growth. In fact, farther than that, any slack in Israel is being more than made up for in Brazil. And I feel very comfortable in reaffirming my expectation that in 2009 our global subscribers will continue to grow on an annual basis.

I reiterate that Ituran is a defensive business. History suggests that during recessions, while there may be a decline in new car sales, there also tends to be an increase in car theft. And therefore, demand for our services remains, particularly by the insurance companies. And with that, I will hand over to Eli.

Thank you, Eyal. Revenues for the first quarter of 2009 reached $27.3 million. This represents a 17% decrease compared with revenues of $32.8 million in the first quarter of last year. As Eyal mentioned, given the sharp increase in the dollar during the first quarter compared with that of last year, our revenues decreased in dollar terms.

Revenue breakdown for the quarter was $20.1 million coming from subscription fees from our location-based services which showed a year-over-year growth of 1.5% and $7.1 million coming from product sales which showed a year-over-year decline of 45%. The geographic breakdown of revenues in the quarter was as follows -- Israel 55%, Brazil 32%, United States 3%, and Argentina 10%.

In terms of subscriber number, we reached 521,000 as of end of March 31st, 2009, a net increase of 10,000 in the last quarter.

Gross margin in the quarter was 48.8% compared with a gross margin 46.1% in the first quarter of last year. The improvement in margins comes mainly from the mix that favored revenues from subscribers, which carry a higher gross margin.

Operating profit for the first quarter of 2009 was $5 million, or 18.4% of revenues, compared with operating profit of $6.3 million, or 19.1% of revenues, in the first quarter of last year. EBITDA for the quarter was $7.7 million, or 28.1% of revenues, compared to EBITDA of $8.5 million, or 25.9% of revenues, in the first quarter of last year.

We recorded a financial gain of $4.2 million as a result of the strong 10% appreciation of the US dollar against the Israeli shekel during the quarter compared with the prior quarter. As Eyal mentioned, this is due to our large cash balance that is mostly in US dollars. In the first quarter of 2008, Ituran had a financial expense of $4.4 million.

Net profit was $5.6 million in the first quarter of 2009, or 20% of revenue, compared with a net profit of $0.9 million, or 3% of revenue, as reported in the first quarter of 2008. In the first quarter of 2009, this translates to earnings of $0.27 per fully diluted share compared with earnings of $0.04 per fully diluted share in the first quarter of 2008.

As of March 31st, 2009, the Company had a net cash position, including marketable securities, of $58 million compared with $55.3 million at the end of December 2008. Our average fully diluted number of shares for the quarter was 20.98 million. Cash flow for operations during the quarter was $7.7 million.

And with that, I'd like to hand you back over to Eyal. Eyal?

Thank you, Eli. In summary, 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 untapped market with regulation on our side, underlies my confidence in both our long-term stability and ability to continue to grow in any environment.

And with that, I would now be happy to take your questions. Operator?

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. (Operator Instructions) The first question is from Maynard Um of UBS. Please go ahead.

Hi, thanks. Eyal, last quarter, you said that it could take a couple of months to see the positive benefits from the increasing climb in these places like Argentina and Brazil. Does that still hold? Do you think you start to see the benefits in this quarter?

And then I understand that there's a lack of visibility in this environment. But can you just provide us a sense of how the net adds are tracking, at least through the first half of this quarter since we have half the quarter pretty much done? Do you think we're tracking towards another 10,000 net sub add quarter? Thanks.

Hi, Maynard. First, as long as I remember, the most dramatic change that I talked about was in Argentina. And this really proved itself. In Argentina, the car theft rate is in a growing mode let's say. And we enjoy from it by increasing our subscriber base in Argentina, which we all know that it's one of the most problematic countries in terms of economy recently.

In Brazil, this is not the main reason. There is a car theft rate which is quite high. But the most important issue is that the market is still much bigger than the need for location solutions.

Can you just maybe at least through what you've seen through the first half of this quarter from a subscriber standpoint?

The reason that we are seeing in Brazil and Argentina is quite similar to the first quarter of 2009.

Okay. And then can you just provide us any updates on your thoughts on acquisitions, whether things have gotten more attractive here, given the environment from a valuation perspective and what your plans are, any update there? Thanks.

Part of our duty I can say is to continue search for growing our business also from a nonorganic way by making acquisitions. But on the other hand, one of the things that we had lucky is that we were conservative. And these days, we are even more conservative. We have some markets specifically in South America that we are looking for target companies on target players. But I can't talk about specific negotiations taking place.

Okay. Thanks. I'll get back in the queue. Thank you.

Thank you.

The next question is from Jonathan Ho of William Blair. Please go ahead.

Good morning. Could you guys give us maybe a quick update on the progression of what's happening in Brazil relative to legislation there and some of the OEM opportunities you guys have?

Actually, as I said and I will say now again, is that nothing really are canceled by the governmental authorities. But based on our experience in Brazil, I still prefer to be conservative and believe that this rule or law will delay to 2010 because I assume that the recession will reach the government to help the car manufacturers in Brazil because this is increased cost, additional cost for them.

But there is another thing done by the government is that they reduce taxes on cars in the market, which still keeps the size of the market stable. Of course, there is a decline in the new cars in the market. But as I tried to compare it with other markets, it seems a lower decline. So this is the case regarding regulations in Brazil I think.

Okay. And we haven't heard much about the Mapa business in a while. Could you maybe update us on what's happening there?

Actually, Mapa is a part of the declining in the total group of Ituran based on two main issues. One thing is not very -- not part of our focusing is the publishing of the geographic and data books, which is, of course, suffering from the situation.

And the other issue is that they depend on selling of navigation systems as well as cellular and handset that has a GPS modem. And of course, this is part of merchandise that in this situation of the economy are suffering. And Mapa has declining in their activity in the Q1. And we assume it will continue this year.

Thank you.

You're welcome.

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

Hi, Eyal. Good afternoon. Can you speak to us about the competitive landscape in Brazil? Are there any changes? Are you seeing any changes there?

Actually, the same competitive landscape still exists. But I think that one of the things that probably is helping us and will help us as long as the economic situation is as is, is if you remember the markets that billed by the insurance companies tend to work by kind of a way --- a leasing, what they call the comodato. Which means when we sell to the insurance companies hardware and service, we sell it as a package that's paid along the years of the contract. And in that case, we are actually financing the unit for those insurance companies or for those leasing companies.

And our cash position -- and if you just can see on 2008 about $12 million in our cash flow from investment went for this goal. It's something that provide us advantage this year when mostly our competitors has no net cash. There's no cash in the balance sheet as long as we can see, as long as we understand. I'm not talking about all of them. But we find this hole in some competitive situation. And this is helping us to gain more market share.

Okay. And were there any significant achievements during the quarter in Brazil or Argentina? How has that advantage translated?

You mean again the same for the competitive situation?

No, I'm saying you mentioned that you have an advantage and you are leveraging your balance sheet. I'm just trying to understand whether that translates into significant achievements in Brazil or Argentina during the quarter.

Look, I'll tell you something. Under the economic situation, to grow it's not an easy goal. And just without talking about numbers, the majority of our net subscribers, the growth in the net subscribers came from Brazil. So I think that this is part of how we use this advantage.

Okay. And, Eyal, in your opening statement, you mentioned the growth for each region; I think it was your fourth or fifth sentence. I just missed that. Can you repeat that, please?

Let me just -- yes, I mentioned the growth in the subscribers revenue based on year over year by canceling the influence of the currency translation to dollar. And I said that in Israel we grow 20% year over year. In Brazil, we grow 24% year over year and 23% in Argentina year over year. The reason why it showed differently in the report is because we report in dollar. And when we translate it and the dollar is weak, much stronger than this against those currencies, of course, this is why.

Okay. Thank you.

The next question is from [David Dello] of Canaccord Adams. Please go ahead, sir.

Hi, thanks for taking my call. With respect to the products division here, the impact on the quarter, is that both a market environment impact and the strengthening of the US dollar combined? Or is there something else affecting those results this quarter?

Actually, as you mentioned, it's both of them. The main effect is the currency effect. But other than that, as a result of the global downturn, also, if I'm taking for example Israel, there is less sales. And those two combined is the reason for that.

Okay. And then turning to kind of your operating expenses, looks like absolute dollar values are down in the quarter compared to last quarter and last year. And we expected that just kind of with the global downturn here. How should we think about going forward? Is this quarter a good kind of run rate to go at? Or should we see those costs ramp up a little bit more as the market recovers?

Actually, you're right. And in terms of budget planning, we have no planning to increase the expenses. Vice versa, it's better to think about how we can be even more efficient. But the reason are the currency exchange will continue to influence how it will appear in the dollar reports.

Okay. Then just last question, on the tax rate, about 36.5% or so in the quarter, I guess I was kind of expecting a little bit lower of a tax rate there. Any kind of color on that?

As we mentioned in the past, our average tax rate should be around 31%, 32%. As you mentioned, this time it was much higher than that. The reason is that we have intercompany or currency effects as the result of the intercompany balance sheet that actually has been canceled on the consolidation. But the tax still remains.

This is a one-time expense as a result of the currency change from the beginning of the quarter to the end of the quarter, meaning that if the next quarter or the end of next Q2 will be in the same currency as it was in the end of Q1, those expenses should not be.

Got it. Okay. That's it for me. Thanks, guys.

(Operator Instructions) The next question is from Yair Reiner of Oppenheimer & Company. Please go ahead.

Yes, a question about the PND segment for you -- I know you started making investments in that a while ago. And we haven't heard you mention that in a while. I was wondering if it had any impact in the quarter, whether in terms of sales and marketing or in terms of products and margins.

You mean the navigation systems?

Yes.

In the past, we made some campaigns related to this navigation system. As of today, our sales and marketing related to this segment is quite low, almost zero. And we're already starting to penetrate the market. The mass market already knows Ituran navigation. And now we are just keeping selling them.

And can you quantify what impact that has had on your products, both in terms of revenue and in terms of margin impact?

Actually, no, we are not providing this data on a quarterly basis. But as Eli said, we use it mainly to continue our penetration through the car dealers in Israel. And this our main channel to sell these units. And we are on an average stable numbers. We are not growing through this quarter and last quarter. And we believe that in 2009, as I mentioned in my first speech, it will not grow as well.

Okay. A question on pricing -- can you talk about how pricing has trended in constant currency basis, given the kind of macroeconomic challenges? Have you felt that in terms of pricing pressure? Or has pricing been stable?

No, actually, since our model is based on monthly fees, which are per client, it's not dramatic. And this is the prices which our competitors use as well. On a local currencies basis, we don't see pressure. And we don't see different.

One final question from me -- can you give us a sense of your market share right now in Brazil and in Argentina and where you think that could go long term?

We don't have a full data because most of our competitors are private entities. But without talking about one company that has their own system, I think that what we have as data, it's about between 25% to 30% market share in Brazil.

In Argentina, we have about 30%. And I'm talking specifically about the segment of stolen vehicle recovery. In fleet management, which is our secondary application, it's much lower.

Thank you very much.

You're welcome.

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 tomorrow on Ituran's website, www.ituran.co.il. Mr. Sheratzky, would you like to make a concluding statement?

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

Thank you. This concludes the Ituran first quarter 2009 results conference call. Thank you for your participation. You may go ahead and disconnect.