Ituran Location and Control Ltd (ITRN) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran Third Quarter 2009 Results Conference Call. (Operator Instructions). As a reminder, this conference is being recorded November 17, 2009.

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 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 third quarter 2009 results. I would like to thank Ituran management for hosting this conference call.

With me on the call today are Mr. Eyal Sheratzki, the co-CEO; Mr. Eli Kamer, the CFO; and Mr. Udi Mizrachi, the VP Finance. Eyal will begin with a summary of the quarter's main events, followed by Eli with a summary of the financials. We'll then open the call for the question and answer session.

Before we continue, I would like to remind everyone that the safe harbor statement in today's 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.

This quarter, we are especially pleased with our strong growth in subscribers, positive development in Brazil, as well as strong generation of cash. In fact, neutralizing currency exchange effect on our business, this quarter would have been a record quarter from a revenue and operating profit point of view.

We generated record cash flow of $12.5 million, of which $4 million of them was primarily a one-time tax refund. Even if we exclude this additional $4 million, our cash flow was still very strong, and it is a very strong attribute of the strength of our business. In fact, we now end quarter in excess of $70 million in net cash.

In the past quarter, we have transferred most of our cash holdings from US dollars to Israeli shekels. This move will reduce the volatility of the exchange rates on our financial income or expense going forward. Exchange rates still do and will continue to affect our top and operating line as we charge our subscribers in their local currencies. Now that the dollar weakens and these currencies increase in strength, it increases our top line and vice versa. In particular, if we were to neutralize the effect of exchange rates, our monthly subscription fees would have grown 15% in local currency terms over last year.

We see particularly strong growth in subscribers in Brazil, which drove most of our net subscriber growth in the quarter. Additionally, we crossed the milestone of 200,000 subscribers in that region in Brazil. It's approaching half our subscriber base. We are very proud of our achievements and strong growth in Brazil over the past few years.

We also have a stable and large subscriber base and business in Israel, which is a strong cash-generating business for us. In total, we stand on 549,000 subscribers as for the end of the quarter.

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

We won a tender for stolen vehicle recovery services for at least 50,000 vehicles installed in over two years with a leading Brazilian insurance company, Sul America, and recently signed an agreement. This contract is a demonstration of our market leadership in Brazil and provides us with increased visibility into our long-term growth.

In addition, after the sharp dip in new car sales at the end of last year and beginning of this year, new car sales in October were at a record in Brazil, driving the sector forward and, subsequently, our business growth there. We see the reward of our efforts and investment in Brazil with continued subscriber growth there.

For the foreseeable future, we believe that Brazil, with its robust economy and the focus for continued strength in new car sales, will remain a strong growth engine for our Company.

In Israel, while at the start of this year new car sales slowed significantly compared with last year, macro signs are improving, and there was a pickup in new car sales in the third quarter. While it is difficult to know how new car sales in Israel will develop going forward, the third quarter growth in sales translated into a net few thousand new subscribers in third quarter. This is a good sign for our business potential in Israel, which, despite the downturn, has shown stability and resilience with the number of net subscribers, remaining mostly flat for the past few months.

As the economy in Israel improves and new car sales increase, driving our subscriber growth, 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 now over to Eli.

Thank you, Eyal. Revenue for the third quarter of 2009 reached $32 million. While this represents a 9% decrease compared with last year, it also represents a sequential improve of 12%.

Revenue breakdown for the quarter was $24 million coming from subscription fees from our location-based services. While this is only $0.4 million, or a 2% year-on-year growth, the increase was reduced by approximately $3 million as a result of currency differences compared with that of last year.

In local currency terms, subscription fees grew 15% year over year. The increase in subscription fees was due to the increase in the subscriber base, which grew from 495,000 at the third quarter of last year to 549,000 at the end of third quarter 2009. In the third quarter, our subscriber base grew by a net 16,000.

Product revenues were $8 million, $3.6 million below those of the same period last year. The decline in product sales was due to a number of factors - one, lower product sales in Israel due to the generally weaker economic climate; two, moving to a full use of leasing our products in Brazil rather than sales; three, the relative strength of the US dollar versus the Israel shekel, Brazilian real, and Argentine peso in the current quarter compared with that of a year ago.

The geographic breakdown of revenues in the quarter was as follows - Israel 52%, Brazil 37%, United States 3%, and Argentina 8%.

Gross margin in the quarter was 48%, compared with gross margin of 49.5% in the third quarter of last year.

Operating profit for the third quarter of 2009 was $6.5 million, or 20.2% of revenues, compared with operating profit of $7.4 million, or 21% of revenue, in the third quarter of 2008. The operating profit recorded in the third quarter of 2008 was the highest in Ituran's history. Excluding the above-mentioned currency effect, operation profits would have been higher than that of the third quarter last year.

EBITDA for the quarter was $9.7 million, or 30.2% of revenues, compared to an EBITDA of $10 million, or 28.4% of revenues in the third quarter of last year.

A financial expense of $700,000 was recorded and was primarily as a result of the depreciation of the US dollar against the Israeli shekel during the quarter compared with the previous quarter.

As of the end of the third quarter, the Company had transferred most of its cash holdings into Israeli shekels, its operation currency, and, therefore, fluctuation between currencies will have less effect on the financial income or expense going forward.

Net profit was $4.6 million in the third quarter of 2009, or 14.4% of revenue, compared with a net profit of $5.6 million, or 16% of revenues, as reported in the third quarter of 2008.

Fully diluted EPS in the third quarter of 2009 was $0.22, compared with fully diluted EPS of $0.27 in the third quarter of 2008 and fully diluted EPS of $0.12 in the prior quarter.

As of September 30, 2009, the Company had a net cash position, including marketable securities and deposits, of $70.6 million, or $3.36 per share. This is compared with $57.7 million, or $2.75 per share on June 30, 2009. Our average fully diluted number of shares for the quarter was 20.98 million.

Cash flow from operations during the quarter generated $12.5 million. Approximately $4 million of this was from a one-time tax refund.

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

In summary, as the global economies stabilize, we see acceleration in our progress, with strong sequential growth in our net subscribers and strong cash generation. Our unique business model based on recurring revenues from an established and growing customer base, as well as our exposure to Brazil, underlies my confidence in both our long-term stability and ability to continue to grow in all environments. The tender we won with a leading Brazilian insurance company, Sul America, is very much a demonstration of our market leadership in Brazil.

One other thing I would like to discuss. The Board approved a change in our annual dividend policy which strong benefits all shareholders. Whereby the annual dividend policy has historically been to issue approximately 25% of annual net income, the dividend policy for 2009 and beyond will be to issue a dividend on the basis of 50% of annual net income. This decision was made based on our [especially] strong balance sheet, combined with our ongoing and continued strong results in cash generation.

As this demonstrates, the Board of Ituran strongly believes in sharing the fruit of efforts by the Company and its reward with all shareholders to the fullest extent. At the same time, we intend to maintain the strength of our balance sheet and ability to make strategic acquisitions, if and when it may be required. The decision to double the dividend doesn't affect this ability at all, and we maintain more than enough cash on the balance sheet to attain all our strategic goals.

To close, we aim to continue capitalizing on the inherent long-term operating leverage in our business, build on our stable, core business and growing base of subscribers, and sharing the rewards of success with our shareholders.

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

(Operator Instructions). Maynard Um, UBS.

Just a few questions. Just on the wireless communications product gross margins, can you just talk about how we should look at those going forward? Are there any changes in trends that will move that gross margin in either-- directionally up or kind of where they are today? And then I have a couple more follow-ups.

Actually, as we can see, during the last quarters the last year, the way that we are selling our products in Brazil and Argentina, and specifically in Brazil, which is the main growth engine for Ituran today, is by making the comodato, like leasing. We are not selling it. And this is part of the reason that you see that part of the wireless product revenues is declining.

Regard the gross margin itself, we are not expecting that this will grow, although we are working very hard to decreasing our cost of goods. But, on the other hand, our main goal is still to add as much as we can in new subscribers, even in Israel. So we will continue to keep low margins on the products but, on the other hand, growing our subscriber base.

Okay. Great. Thank you. And then, secondly, on the Sul America deal, when do you start to see the net adds flowing into your numbers? And do you think--? How will that be from a linearity perspective over the next two years?

First of all, I must give more picture about this transaction. Sul America is one of our clients even before this tender. As you know, we are working with all the major players in the insurance industry in Brazil. But each terms of the relationship are different. And, until this tender, the relationship with Sul America was based on a daily basis relationship. When they decide to add subscriber, they did it. So they were already our customer.

But, by winning this tender, we get much stronger commitment, with much more potential numbers of subscribers that will come from this specific, big, insurance company. So I wouldn't consider all these 50,000 as an additional-- net additional, because we had some customer with them. And another issue is that this is the total. And, also, don't forget that our churn in Brazil is part of the total gain there. So I wouldn't consider all these 50,000 as the net subscribers. But, of course, it will contribute to our future growth.

Okay. Thanks. And just related to that, on your net subscriber additions, in the past, you noted ranges of around 15,000 to 20,000. Do you think the strength in Brazil is sustainable enough to kind of put you back into this range now on a go-forward basis?

With an average of about 17,000 in 2008, which was the highest ever, I think that this quarter is showing that our next target is to be above it. And I believe and I hope that, as it seems today, with our leadership in the Brazilian market, as with the growing of the market itself for 2010, we should expect to be back to those numbers. Yes.

And then, lastly, can you just give us directionally or quantitatively any guidance on your sales and marketing and G&A into next quarter? Thank you.

Can you repeat? We couldn't hear you.

Oh. Just a question on sales and marketing and G&A, OpEx, into next quarter, either directionally or quantitatively?

I think that this is not going to change.

Okay. Great. Thank you.

Yair Reiner, Oppenheimer & Co.

Congrats on the good quarter. So, first, a question on the balance sheet. Now that you've changed your cash into shekels, how will that translate onto the balance sheet as the price of the shekel relative to the dollar fluctuates?

First of all, the part which is the operating part-- there will be no change. We still will be subject to those changes. But when we're talking about the excess cash, which mainly influence the financial expenses or gains, this will be-- decline dramatically because, under the accounting method, once an Israeli company, which is our Company, holding their money in shekels, so it does not influence the P&L, and it goes only to the balance sheet to the equity part.

Okay. Got it. And my other question, just in terms of Brazil-- I know you don't give specific guidance for subscriber growth. But what do you think is a reasonable target for subscriber growth in 2010 for the Company?

You just mentioned that we are not providing guidelines as you ask for guidelines. I understand it. Actually, I think that I answered it more generally speaking when Maynard asked me. I think that we should expect, totally, to reach numbers as we did in 2008, which is between 15,000 to 20,000 per quarter. And I think that this is very-- We have a lot of reasons to feel confidence by saying it. And, of course, as long as the time will go on, maybe we can give different expectations. But today I wouldn't get too more details about it.

That's fine. That's helpful. A question about the accounting around the comodato business model. For that, is the cost of the hardware and the depreciation of the hardware actually factored into the service revenue and expenses?

That's correct. (Inaudible) are in the monthly fees, and the depreciation of the cost of the unit is in the direct costs-- in the cost of sales of the location-based services segment.

Got it. And it's depreciated over how long of a period?

Usually, three years.

Okay. Great. I'll get back into queue. Thank you.

[Doug Rosenberg], Oscar Gruss.

Ziv Tal speaking from Oscar Gruss. My question is with regards to the recent consolidation that we've seen in Brazil in the past quarter, where some of [Saska] was acquired by [GIV] Solution. We see additional acquisition by [Zaltex]. My question to you is - How do you feel about the industry consolidation in Brazil? How do you see yourself? Where do you see yourself in this consolidation?

As I said before, with or without this consolidation, we are showing better results. And we continue to gain market share in the Brazilian market. We see more and more insurance companies, as well as players from the car industry approaching us. Of course, we are doing the best effort to increase and to strengthen our relationships with them. And, actually, I can't say that the situation and the transaction that you mentioned influenced or damaged our working.

All right. And my next question is with regards to the strength of your brand looking into the possible implementation of the new resolution in Brazil. How strong is your brand? And how much do you think you can benefit when the market is consolidating and you're not taking any specific action with regard to that?

What do you mean we are not taking specific action?

No. I mean you haven't been consolidating or-- Are you planning any maybe?

What do you mean? You mean making acquisition?

That's correct.

Actually, right now we didn't do it, and we don't have a specific target to do it. We still know that the main player-- We are having 200,000 subscribers, which almost 100% of it comes from the stolen vehicle recovery. And I think that this has put us in a very, very high place in terms of leadership. We don't see the consolidation by itself anything that's frightening us.

And regard the new legislation, of course, this should, by definition, open and expand the market; hopefully, dramatically in two to three years from now. And this will be good for all the industry. But as the market leaders, I believe that the benefits for us will be the highest.

All right. And a last one from me. During the quarter, which segment in Brazil showed most growth? Was that the uninsured or the insurance business?

The insurance company.

Okay. Thank you.

Yair Reiner, Oppenheimer & Co.

My first question here is about ARPU. It seems as though ARPU increased quarter on quarter, even excluding the positive impact from FX. Can you talk about the factors that caused that to happen?

As long as we have the data, the ARPU is quite stable. So I'm not sure-- If yes, it's not dramatically and [not happened] because of any operating and pricing changes.

Okay. Very good. My final question is on Argentina and the US. Neither has improved or gotten much worse over the last year. Can you talk about how you see those markets going forward? And if you can talk about whether those markets are profitable for you at this stage--

Regard Argentina, Argentina, as it was in the last year, and this is continue with the same rhythm of growth this year. The absolute number becomes smaller compared to what the contribution of Brazil. This is the reason that we mention much strongly the Brazilian market. But Argentina is continuing to show the same growing results.

And the reason that we are not expanding it is because of two main reasons. First of all, the economic situation, which Brazil succeed to cover the bad period-- bad international economic period. And I think that everybody knows that Brazil industries and Brazil economy is quite well compared to the rest of the world. This is not the situation in Argentina - vice versa. Argentina is suffering a lot.

Second is something that it's [anomalic] situation. But, in Argentina during the last three years, the car theft rate declined. Usually, it should be the opposite. When the economic situation is in distress, the car theft usually is increasing. Actually, the crime in Argentina is increasing but not specifically the car theft rate. So these two items are blocking us from increasing our gross number and rates in Argentina. But, still, we show better results quarter over quarter and year over year.

Regard the United States, I think that the US market is changing. And this change seems to be in favor with us. If historically until about-- until this recession, LoJack was the sole market leader with a very high market share. This thing was changed. New players entered the market. The market today is increased by different and new dealers. The dealer's need is changing. Part of it is some more and more subprime rental car customers. Those dealers need to control customers that are not paying and have no enough credibility. And this has to be very dramatic numbers.

And during this time of the market change, we changed our management, and we replaced the CEO about two years ago. We changed many things in the Company and with the approach to the market. And recently it seems that we are getting on better tracks. So it still contributes low numbers. I must admit that, historically, and when I'm talking historically, I'm talking about a year ago, our US subsidiary contribute losses on accounting basis. And, recently, we are improved dramatically. And I believe that, if this trend will continue, we will change to net earnings in US during 2010. It's still low numbers. As Eli mentioned, its contribute about 3% of our total revenues, but it seems that the trend is better today for us, for the market that we are and the segment that we're approaching. And we're optimistic. But let's wait and see.

Very good. That's helpful. One final question from me, actually. The tax rate in the quarter was significantly lower than usual. How should we model the tax rate moving forward?

As you saw in the PR, this low tax rate is due to the tax refund that we had this quarter. Going forward, again, I believe that it will be again in the range of about 30% tax rate.

Okay. Thanks, Udi.

David Delleo, Canaccord Adams.

You talked briefly about the upcoming legislation in Brazil. Can we just get some color on any status update there, whether anything has changed or not as far as timelines? Thanks.

Actually, until coming February, the legislation required the car manufacturers and the car importers to take a standardization level. Each one of them choose their OEM suppliers for the hardware. And they are now check it and examine it with the right authorities-- the governmental authorities. And it's not yet in a commercial phase. And under the regulation from February 2010, it will start-- be commercially enforced. And until the end of 2010, it will come gradually. Every few months they will-- obliged to equip more and more models of cars. And, from the beginning of 2011 and, of course, with the assumption that there will be no delays and no changes, 100% of the vehicles, including motorcycles and heavy trucks in Brazil, will drive on the roads with hardware that companies such as Ituran will have the ability to sign services with the potential customer.

Great. Thanks. That's all from me.

(Operator Instructions). There are no further questions at this time. Before I ask Mr. Sheratzki 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. Sheratzki, would you like to make a concluding statement?

I would like to thank all of you. And I look forward to speaking with you next quarter. Thank you, and goodbye.

Thank you. This concludes the Ituran Third Quarter 2009 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.