Ituran Location and Control Ltd (ITRN) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran Second Quarter 2009 Results Conference Call. All participants are at 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 August 12, 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 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 972-3-607-4717.

I'll now like to 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 second quarter 2009 results. I would like to thank Ituran's management for hosting this conference call.

With me on the call today are Mr. Eyal Sheratzky, co-CEO; Mr. Eli Kamer, the CFO; and Mr. Udi Mizrahi, the VP, Finance.

Eyal will begin with a summary of the quarter results, followed by Eli with a summary of the financials. We will then turn over the call to the 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. This quarter we are very happy with our overall performance especially our strong profitability.

This is a combination of our efforts to lower costs and improve margins over the past years. While the weaker dollar in the quarter versus the shekel, affect our bottom-line through an increase in financial expenses, we were looking into lowering the volatility and we will update you in the coming quarters.

Our global subscriber base grew 11% year-over-year to 533,000, while the ARPU measured in local currency remained more or less steady. While there was a slight decline in revenues over the second quarter last year, this was due more to a currency translation issue since we charge our customers in the local currencies, but report in U.S. dollars, and the dollar weakened compared to local currencies in the quarter.

I'd like to reiterate that we judged the performance of 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 lot subscriber base business in Israel, which is a strong cash generating business for us.

Just to give you a better idea, if we were to take local currencies into account, our monthly subscription fees grew 17% in local currency terms over the last year. So you can see that we were actually growing stronger.

With regard to our two main regions; in Brazil, our business continued to grow strongly every quarter. Our services are constantly gaining increased traction. We are continuously growing our market share, developing new relationship with insurance companies, and increasingly cementing ourselves there as the market leader.

We see the reward of our efforts and investment in Brazil with continued subscriber growth there. For a foreseeable future, we believe that Brazil will remain a strong growth engine for Ituran.

In Israel, we are -- at start of this year, new car sales slowed significantly by half compared with last year. Macro signs are improving and there has recently been a pickup in new car sales. This is potentially a good sign for business in Israel, which despite a downturn has shown stability and resilience with the number of net subscribers remaining more or less flat.

It is important to know that our Israeli business is strong cash generator for Ituran even in the absence of subscriber growth. However, when subscriber growth returns the significant operating leverage built into our platform that we have nurtured over the past two years, will enable us to incrementally add every new subscriber in Israel at almost no cost. This will strongly benefit our cash flow and bottom line.

And with that, I will hand over to Eli.

Thank you, Eyal. Revenue for the second quarter of 2009 reached $28.4 million. This represents a 19% decrease compared with last year. It also represents a sequential improvement of 4%.

Revenue breakdown for the quarter was $21.4 million coming from subscription fees from our location-based services, which showed in local currency terms, a year-over-year growth of 17% and $7 million coming from product sales, which showed a year-over-year decline of 47%.

The decline in product sales was due to a number of factors. One, due to lower cost sales in Israel; two, moving to use of leasing our products in Brazil rather than Israel; the seasonality of lower springs and summer sales in the non-core operation of our subsidiary Mapa Publishing; and the currency translation from local currencies to U.S. dollar.

The geographic breakdown of revenues in the quarter was as follows -- Israel 52%, Brazil 35%, United States 3% and Argentina 10%.

In turns of subscriber number, we reached 533,000 as of the end of June 30, 2009, a net increase of 12,000 in the last quarter.

Gross margin in the quarter was 49.5% compared with a gross margin of 46.9% in the second quarter of last year, and it is also a highest since our record set in the second quarter of 2006.

Operating profit for the second quarter of 2009 was $6 million or 21.1% of revenues, compared with the operating profit of $6.8 million or 19.3% of revenues in the second quarter of last year.

EBITDA for the quarter was $8.9 million or 31.2% of revenues compared to an EBITDA of $9.3 million or 26.4% of revenues in the second quarter of last year.

We recorded a financial expense of $2.5 million as a result of a 6% depreciation of the U.S. dollar against the Israeli shekel during the quarter compared with the prior quarter. This is due to our large cash balance that is mostly in U.S. dollar. In the second quarter of 2008, Ituran had a financial expense of $2.3 million.

Net profit was $2.4 million in the second quarter of 2009 or 8.6% of revenues compared with a net profit of $2.5 million or 7.1% of revenue as reported in the second quarter of 2008. In the second quarter of 2009, this translates to earning of $0.12 per fully diluted share compared with earning of $0.12 per fully diluted share in the second quarter of 2008.

As of June 30, 2009, the Company had a net cash position, including marketable security, of $57.7 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 from operations during the quarter was $5.1 million.

And with that, I would 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. Our business remained primed for long-term growth with increasing profitability.

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

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, sir.

Hi, thank you. Just between the market share gains in Brazil and new car sales picking up a little in Israel, I mean how do you look at the net adds? Do you think that could be up -- flat to up sequentially next quarter or do you think summer seasonality will have an impact on your net adds?

Actually Brazil is the main, I think, customer generator during these times, and it seems that the reason is that we saw in Q2. In Israel, what actually happened during the last two months is that there was increasing in the new cars market. But actually there was change in the regulation regard some taxation issues with cars in Israel. So we don't know yet whether this is the main reason or this is the only reason.

Actually it seems that there is a change and a good change in new cars market in Israel, but I prefer to wait and see what are actually the reasons for it, and I believe and hope that the market is in progress.

Okay. But -- so it sounds like Brazil should still grow, and then Israel would be kind of the factor that could make your subscriber base then go up or down, is that the right way to think about it?

Brazil will continue to grow regardless I am very sure about it. With regard to Israel, we estimated before the beginning of 2009 that we will be in a flat situation in a net subscriber issue, and I would like to assume that this will be the case of this until the end of this year. Any good change in this assumption will be in February results.

Okay. And then, just can you talk about the OpEx and maybe any kind of directional guidance there? I mean, looks like R&D and sales and marketing are relatively stable, but G&A decreased. Should we expect OpEx to increase next quarter?

So, first of all, it's very important to explain it. Part or a major part of the G&A -- the major part of the G&A is the volume sales that based on the profitability of Ituran, which is run across all the management of the Group and the subsidiaries, and it's based on profitability before tax. Since we have volatility in our financial gain or losses, so actually it's influenced on the G&A.

So this quarter, as you can see, we had losses in the financial part, so it reduced some part of the G&A. I would not expect that this will continue, and part of the reasons that I mentioned that we are going to and now we are discussing, what should we do in order to cancel this volatility, this is part of it. So, the G&A now, it's influenced by these issues, but it's not because it's going to decrease.

Okay, great. And then, lastly, can you just talk about your acquisition strategy, where you are there? Any updates? Thank you.

We have -- we have no news. When we have we will send our -- again, our efforts are to make some transaction that will create a non-organic growth, but up until now we didn't finalize -- we didn't finalize it. We are working on others, and if something will finalize we will report.

Okay, great. Thank you.

And the next question is from Ziv Tal of Oscar Gruss. Please go ahead sir.

Hi, Eyal and Eli. I would like to turn the focus to Israel following the check -- that at the [tax change], specifically having a negative implication on the more expensive cars, and that is a segment that you are targeting in Israel. How should we think about that going forward? What are your plans to regenerate growth in Israel that are not directly dependent on new car growth?

First of all, the main market is a new car growth, and we have, I think, that new car is -- on an average year it's about 100,000 to 50,000. And the cars that are installing location solution is about third of this market and we will present between 70 to 80% of them. So, actually this is a main market and will continue to be.

What we actually do, we are always adding application like we acquired Mapa and we had the type of OnStar solution, which we call Mr. Big, which is adding some part of office. We also think always and we are working on a solution for lower tiers of cars. So, actually once we will find ways to approach these markets with the low cost solution as well as the lower cost service, so then this can be another segment. But until that moment, the main market will continue to be the luxury cars, the working -- the commercial cars and fleets.

Okay. And then, subscribers grew significantly over the previous quarter, but the sales of hardware remain the same. How do you explain that?

I explain it because the main growth is coming from Brazil. And in Brazil, we are no -- we don't have sales of product. If you'll remember the way of selling the hardware in Brazil, which has become almost 100% of the way to sell in Brazil, is by what is calling a comodato, like a leasing. We lease it. So on accounting method, we are not recognize it as a sale. It's continued to be asset and we have amortization in our report.

So what actually happens is during the last six months, most of our sales for growing were in Brazil, so we don't see it. In Israel because the market is decreasing, of course, we are selling less hardware. This is why we are not growing the net subscriber. So this is the reason why our sales of hardware is reducing.

Okay. And with regards to the regulation in Brazil, are there any updates over there?

The relation in Brazil is -- it has to start in full force in August. Actually it started, but it start with some changes. And it was now all the car importers in Brazil, all the car manufacturers in Brazil has to install in 30 cars a unit, only 30. And until the end of this year, they have the right only to test it and to make a legislation for it. And in February 2010, the full regulation will be in force, which will say that 20% of each car of every importer will have to have -- will have to be equipped with location solution after six months -- additional 20%, and in the end of 2010, 100% of the new cars will have to be equipped with the hardware. Don't forget that we are aiming the service part of the business. The regulation is stating that companies, that provide the OEM solution, are not allowed to provide the services, which are -- this is why we are not competing in the hardware part. We prefer to be in the service side. In the service, we have leadership in Brazil. We are very known by the insurance, we're known by the car manufacturers, and we are talking with all of them, but of course, the results and the decision we will be taking in the end of this year because until then it's only in [terms of pilots] of themselves.

And Eyal, last for me. Is the February 2010 an official -- an official date?

What?

Or is that --

Can you repeat?

Is February 2010 an official date or is that your estimate?

Everything that I said is official.

That's all.

But as we are pounding the past all those official decisions, first of all, can be changed. There is a lot of lobbies against this, but as it seems today this is officially and up until now during the last [three] years they didn't change beside changing some timeline, they didn't change the regulation itself. And for us, of course, I hope that -- it will be in force because it will open market or potential markets for a dramatic change for us.

Thank you very much.

The next question is from Paul Coster of JPMorgan. Please go ahead, sir.

Thank you. Eyal, in your prepared remarks you talked about the Company being well positioned for long-term growth, what kind of growth rate do you think Ituran can achieve? I mean you came up several years of nearly 20, 20 plus percent growth. Can you get back to that kind of level and what will drive that kind of growth?

I wouldn't consider a specific number, whether it's a 20 or 18 or 22, but I think that the double-digit growth -- again based on local currencies, it's something that we can achieve organically. In our assumption based on Brazil, which we see that we are gaining market share, our brands become strong. The awareness of the market to solutions such as Ituran has is increasing. The regulation which in some way or another will be in force for sure in the coming years, give me a confidence that Brazil can be a strong engine to achieve it. Add to this that also is Israel because if we will face 2009 with the flat situation, so also we have a confidence that there is no doubt that we will continue to show growth like we had in 2007 and 2008, which also was very close or a little bit more than 20,000 per year. This is not the right time to achieve it because of the economic situation and psychologically affect on people when they go to buy cars.

So 2009 and 2010, Israel is not yet proved it, but if we will achieve a situation of a flat and not decreasing in the results, I think that once the economic situation will change, will turn and the psychologically effect on people like was last month when also they changed some regulation and then allowed people to think here in Israel that they save $1,000 -- or $500 to $1000 and the car market increased almost double an average month every year and we are still in a recession.

So I think that we have a good reason to think that also Israel can contribute it. Of course, they didn't mention Argentina, but Argentina is still by the way in the same rhythm. So, all these three together can support in the coming two to three years, growing of -- in a double digit. Of course, how it will appear in dollars depend on currency exchange, which we cannot control and also it's based on the assumption that I just mentioned.

I also want to add that in the U.S. although we are not talking because it's quite small yet, we are -- see a better situation for us and a better growing position than in the past. We are penetrating. It's not a very, very good work this time. Its sub-prime, but in the car there is also a very big market of a sub-prime situation. It's not the same as it was with the real estate, but this market today requires and the request is very [tough] and we entering more and more dealer that their financial sponsors require them or mandating that they will put some solution to locate and find the car.

It's also helping us to grow also in the U.S. much more than we did during the last year. So it's not yet material to the total result, but if the situation will continue and we will continue to penetrate and our penetration will continue to be stronger months over month, so again in the coming years also will support our growth. So, I think that we have a good reason to believe that we will make it.

If you have to sort of wait the growth of variables to what extent is growth can be driven by subscriber count versus the value-added applications, the Mapa and Mr. Big apps?

I think that still the situation which we are facing now and historically in Ituran has that subscriber base that's based on the SVR, Stolen Vehicle Recovery, will continue to be the main growing engine supported by those applications, but still will be in terms of a ratio between them. It will be more than 90% to the SVR. But we are now again working and think and discussing regard the straightening our fleet division organically here with new application all by making some small or mid acquisition and to penetrate other fleets with things such as drive diagnostic things like with application that measuring the way of driving the car, which we see that at least today in Europe has become an issue that many fleet are willing to pay for it as well as insurance and leasing companies. So this is not yet a part of what we are doing today, but once -- and I believe we will entering it in the coming -- in a short period from now. So, this also can contribute for another potential growth or another segment that we can potentially grow.

Okay. Last question to what extent are smartphones with turn-by-turn navigation threat at any of your locations -- I guess for stolen vehicle recovery they're not, but in Israel, am I correct in thinking that any turn-by-turn application on a mobile phone will probably have to license Mapa -- any ways is not an issue?

First of all, they have to license Mapa, so for us it's a -- it's very positive. They have to -- they have to pay something for having this mapping solution. Regard the service parts, which is SVR or even Mr. Big or others, I am also not seen and it's a competing or direct compete or frightening us.

Regard the navigation -- the GPS navigation solution that we have here, of course, this is competing, but this is the case as it was between the cameras and the cameras in the smartphones and we see today the cameras are selling more than in the past. So I think that it will open in the market. It will increase the market and for us don't forget that the navigation systems for us is more to support our sellings to -- our sales to the car dealers and car manufacturers and this is not a very large profitability division here. It's more to support the rest of the profitability division.

Okay. Thank you.

We have a follow-up question from Ziv Tal of Oscar Gruss. Please go ahead, sir.

Eli, can you address me Forex implication, the general revenues there because of real and what do you see now this quarter with the improving real?

What -- can you repeat it?

Sorry, can you relate to the impact of the real versus the dollar exchange rate on your revenues during the second quarter?

Yes there was a positive impact from it. You compare the second quarter to the first quarter, I really think we are talking about a little bit more than that, let's say $0.5 million.

Okay. And with regards to the gross margin on wireless communication products, it was significantly low this quarter. I was just -- I just want to ask how should we think about it going forward? Is that mainly relates to the Mapa Publishing or is that what should preserve going forward?

As you can see more or less it's the same as in the first quarter. If you compare it to previous year, yes then it went down. The main reason is currency, which -- don't forget that we are buying the units in dollars, but the sales are actually in local currency, so the margin went down.

Okay. And last, Eyal, what you did mention on the U.S. and the potential [was still over there], is that -- how should we think about that as an opportunity in the next three years or next five years, how should we think about that?

I think that at least we are looking for the coming two years as a first stage of the opportunity. And, of course, we still think that it's an opportunity otherwise we wouldn't be there. And I would say that as it seems to me today, since we changed the management more than a year ago and we changed a little bit of policy internally in the Company. We are added more marketing and sales force in budget and we are approaching different segment than the past. I would say that we will be more aggressive with our expectations and have a look on the coming two to three years.

Okay. And with regards to the depreciation and amortization for second half of 2009 should the same levels remain?

Should be more or less the same. There should be increase because of the comodato, but we were not talking about something significantly.

Okay. And just the last one. With regards to Brazil, the number of subscribers that you have added in the previous quarter was that along the same numbers that you have added this quarter in Brazil?

We are not providing (inaudible)

No, not numbers. No not the actual numbers, just yes or no. Not the actual number.

Yes and no. It's around the same because you see that's --there is no big different although we have higher gross in total net subscriber in Q2 and Q1, but it's not dramatically. So this is the case in Brazil. It's more or less but a little bit more than Q1. I believe that in the future again we are expecting that this is -- we will grow much more dramatically.

Thank you very much.

The next question is from David Delleo of Canaccord Adams Capital. Please go ahead, sir.

Hi, thanks for taking my call. You had mentioned that subscription growth in local currency terms was 17%. Do you have the break down of that by regions?

We are not -- we have the breakdown number. We are providing it by region. So, we are talking about on the consolidation basis.

Because you did last year, you did break it down, but you don't have those.

No. We are breaking down the contribution of each geography, but this is based on dollar basis. This is how it's appeared in the final report.

Okay.

And Eli mentioned in it Israel is 52%, Brazil is 35%, United States 3% and Argentina is 3% -- its 10%. But those are all the total -- represented total revenues in dollar that Ituran show in the report now.

Okay. So, moving on to tax rate, any color on -- is that a little bit lower than average?

Yes, this is because as we explained in the past taxes are not consolidating. Each entity has to pay their taxes internally. So -- but on the other hand we are transferring between the companies inside, which is not affect the taxes. It only affects the revenue and the profit. So actually this why we have volatility between quarters and this is not because the tax rate by itself was changed in each country.

Okay. That's helpful. And that's all I have. Thanks a lot.

Thank you.

(Operator Instructions). Please standby while we poll for more questions. 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 at www.ituran.co.il. Mr. Sheratzky, would you like to make a concluding statement?

Yes. Thank you for joining our call today and I would like to thank everybody here in Ituran for their hard work in the quarter, to our investors, and I look forward to speaking with you next quarter. Thank you, and have a good day.

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