Ituran Location and Control Ltd (ITRN) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran fourth 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 February 17, 2010.

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 CCG Investor Relations at 1-866-704-6710 or 972-3-607-4717.

I will now hand the call over to Mr. Ehud Helft of CCG Investor Relations. Mr. Helft, would you like to begin?

Thank you. Good morning to all our listeners in the US and Canada and good afternoon to our listeners in Israel. Welcome to Ituran's conference call to discuss the fourth quarter and the full year 2009 results. I would like to thank Ituran management for hosting this conference call.

With me on the call today are Mr. Eyal Sheratzky, the co-CEO and Mr. Eli Kamer, the CFO. 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 for 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're especially pleased with our profitability, achieving our highest gross margin, over the -- crossing the 50% mark. We are also very satisfied with our cash generation in both the quarter and the year as a whole. We generated a record operating cash flow of $12.5 million in the quarter and our ability to generate a strong cash flow is another strength of our business. In fact we end the year with $78.1 million in cash, having generated $37.7 million in operating cash flow during the year.

We ended the year with 562,000 subscribers. In Brazil, our services have been gaining traction throughout 2009 and we are constantly growing our market share. We continually developed new relationships with insurance companies and increasingly cemented ourselves as a market leader throughout the year.

The car sales market in Brazil substantially improved in the second half of the year with new car sales now at record highs. For a foreseeable future we believe that Brazil, with its robust economy and a focus for continued strength in new car sales, will remain a strong growth engine for our Company.

Our strong performance in Brazil combined with a strong market in general underlies our continued optimism with regard to our potential in this region.

In Israel our subscriber base is large and remains stable and is a strong cash generating business for us. The macro picture was much improved in the fourth quarter and new car sales continued to recover and were up 7% of the third quarter, approaching the yearly 2007 level that was in fact a record year for us, and was the period before the global economic crisis began.

This is a good sign for our business potential in Israel, which showed stability and resilience in the downturn, but can perform well in a growing market. As the economy in Israel improves and new car sales increase, contributing to subscriber growth, the significant operating leverage built into our business will enable us to incrementally add every new subscriber in Israel at very low cost. This will continue to strongly benefit our cash flow and bottom line.

Overall, the growth engine, which is our business in Brazil combined with the continued stability and potential of renewed growth in Israel, makes us optimistic for continued growth into 2010. Beyond this our very strong cash levels and cash generation over the past year has provided us with more than enough cash to build increased strengths and investment in our existing operation.

In addition to that it also allow for stability in pursuing our long-term strategic goals. Finally, and just as importantly, it also allows us to share the rewards of our strong performance with our shareholders. Today, we announced a dividend of $32.8 million, more than 180% of our net profit for the year.

If you remember, in November, the Board of Directors approved an increase in the dividend policy providing for an annual dividend distribution of minimum 50% of the Company's net profit. This doubled our original policy of issuing approximately 25%. However, our high level of cash generation, combined with our strong cash position ending 2009, has allowed us to share with our shareholders a significantly higher dividend than this minimum level that was set.

With that I would like to thank all of you for continued support throughout the downturn over the past year. And now, I will hand over to Eli.

Thank you, Eyal. Revenue for the third quarter of 2009 reached $33.7 million, a 15% increase compared with last year.

Revenue breakdown for the quarter was $26.1 million coming from subscription fees from our location-based services, with 25% increased year-on-year growth. Product revenues were $7.6 million, which was a 12% decrease over the same quarter last year. The decline was due to a lower sales of product in Israel and the full switch to leasing rather selling the equipment in Brazil.

The geographic breakdown of revenues in the quarter was as follows -- Israel, 50%; Brazil, 40%; Argentina, 8%; and United States, 2%. Gross margin in the quarter was 50.9% compared with a gross margin of 48.1% in the fourth quarter of last year. Gross margin in the fourth quarter 2009 was the highest in the -- our history.

Operating profit for the fourth quarter of 2009 was $6.9 million or 20.6% of revenues, compared with an operating profit of $5.2 million or 17.6% of revenues in the fourth quarter of 2008.

EBITDA for the quarter was $10.7 million or 31.8% of revenues compared to an EBITDA of $8 million or 27.1% of revenues in the fourth quarter of last year.

Net profit in the fourth quarter of 2009 was $5.5 million, or $0.26 per share, compared with a net profit of $5.9 million, or $0.28 per share, in the fourth quarter of 2008.

Cash flow from operations during the quarter was $12.5 million.

Revenue for 2009 were $121.4 million, a 8.5% decrease compared with last year. The main reason for reduction compared with 2008 was due to exchange rate change which negatively affected the results throughout the year and lower product sales in Israel.

Revenue breakdown for the year was $91.6 million coming from subscription fees from our location-based services, a 6% increase, year-on-year growth. Excluding the effect of changing exchange rates, the increase in local currency terms would have been 14%. Product revenues were 28.8 -- $29.8 million which is a 36% decrease over last year.

Gross margin in the year increased to 49.9% compared with 47.7% in 2008. Operating profit for 2009 was $24.4 million or 20.1% of revenue compared with an operating profit of $25.7 million or 19.3% of revenues in 2008. Excluding the above-mentioned negative exchange rate change in the operating profit, the operating profit would have increased by the further $1.8 million in 2009.

EBITDA for the year was $36.9 million or 30.4% of revenues compared to an EBITDA of $35.8 million or 27% of revenues last year. Excluding the above-mentioned exchange rate changes, the EBITDA would have increased to $40.7 million in 2009.

Net profit was $18.2 million in 2009 or 15% of revenue compared with a net profit of $14.9 million or 11.2% of revenues in 2008. Fully diluted EPS in 2009 was $0.87, compared with fully diluted EPS of $0.69 in 2008.

Cash flow from operations for the year was $37.7 million. As of December 31, 2009, the Company had a net cash position, including marketable securities and deposits, of $78.1 million or $3.72 per share. This is compared with $70.6 million on September 30, 2009, and $55.3 million as of December 31, 2008.

Our average fully diluted number of shares for the year was 20.98 million shares. As Eyal mentioned, we declared a dividend of $32.8 million representing $1.50 per share. You can find more information in the press release we issued today. And with that I would hand you back over to Eyal.

Eyal?

Thank you, Eli. We start 2010 very well positioned with an ability for achieving continued growth and performance, driven by our momentum in Brazil, a region in which we are a market leader. At the same time, our business in Israel is stable and cash-generating. Our results and continually improving margins demonstrate the inherent strengths of our business. We look forward to continuing our growth into 2010, a year in which we see a lot of potential for Ituran.

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) Please stand by while we poll for your questions.

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

Hi, and congrats on the quarter. My question is with regard to the regulations in Brazil, based on the understanding that it has been postponed again. What are your thoughts about the implementation of those regulations?

Generally speaking, it didn't change. It's actually -- it's -- they convert some levels during this year, but still the regulation is enforced, and it will be 100% enforced as it was expected in the past, at the end of this year, of 2010. It's -- gradually will increase, the [determent] will increase during 2010.

Because to my best understanding it was supposed to be in force from February, and now moving to July, but what you are saying is that the full deployment will still be in December.

The full deployment is expected to be anywhere in -- January 1, 2011. So that's what I said. It -- they already started, but they delay how they divide between the quantities from February to August.

Okay. My next question is with regards to the net subscribers added during the quarter; it came in a bit lower. Are you seeing high degrees of churn in your geographies, and if so, in which geography?

Actually as it was during the year, the major part of our net new subscribers is being generated from Brazil, and actually is a little bit lower than the Q3. But I must say that in terms of the big numbers, we cannot expect exactly quantities in terms of 1,000 or 2,000 a year. But actually, we are quite satisfied with the net subscribers.

There is some quarters which the churn is a little bit higher, there are some quarter which the new total subscriber a little bit higher, and this time it is a little bit low. But I'm not -- I still don't think that this is -- represents the next four quarters. I -- We believe that the net new subscribers in 2010 will be higher.

The last from me and then I'll jump back. Eyal, has Brazil got a larger subscriber pool than Israel at the moment?

Can you repeat again, Ziv?

Yeah. Has the number of subscribers in Brazil, do they exceed the number in Israel, at the moment?

Almost, yes. But I believe and -- that based on the current situation in both geographies that in 2010, Brazil will be higher.

Okay, thank you.

You're welcome.

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

Hi, this is actually [Mike Clingert] for Yair. Congrats on the quarter. Just a real quick housekeeping. Can you repeat what the geography breakdown was?

Israel 60%, Brazil 40%, Argentina 8%, and the United States 2%.

Okay, thank you. And before you've guided to over 10,000 net adds per quarter; that still hold, do you think, going forward, looking at 2010?

Yes, we believe that 10,000 is really the lower part of the range, is the pessimistic one.

Okay. And the ARPU change is that really just a function of FX, or is there some kind of mix going on?

ARPU is still stable, and it's much the same as it was last year.

Okay. Thank you very much.

Welcome.

You're welcome.

The next question is from Maynard Um of UBS. Please go ahead.

Hi, thank you. I was just wondering if you can tell us how much of your subscriber net adds this quarter came from SulAmerica. And I guess I'm just trying to understand if that had been significant to net adds in this quarter.

Maynard, we are not publishing so specific data, but I must admit that it's not significant and we said it's not going to be significant but it's -- contribute to the trend of additional growth.

Okay. And then on product revenue, should we expect that to be down in 2010, or maybe put another way, do -- when do you think that we see a bottom -- a bottoming in trends from a revenue perspective on the product side?

Actually, we have a good reason to believe that this is -- will increase because of the two major reasons that support the decreasing in 2009. Don't forget that in Brazil and Argentina, our revenue from sales is quite low since most of our commercial relationships is done by the comodato, by -- like leasing.

So the main engine for revenue from sales comes from Israel. And in Israel in 2009, there was decline, which we believe, as we see the trend, that it's changing.

The second aspect, of course, is the ForEx aspect on the products part, when we buy it in one currency and sell it in shekels. So this is -- this was another thing that influenced. And as it now -- as we see the Israeli car market, I believe that this is -- will not decline.

I don't know to provide any guidelines regard how much it will increase, but I believe that it should increase based on the current assumption.

Okay, and then related to that you said last quarter gross margins for the products, for the hardware shouldn't increase but we did see an improvement, so I'm just wondering if that is a sustainable trend we should see going forward.

No, I would say again when we sell a product in Israel, which is the major part of it, we sell it with a quite a low gross margin. And since this was declined so the ratio between those products and the other products like our ERM [assembly] or Mapa or the others that we are selling in the US, which is not a lot.

But this year the ratio changed over those revenues, so we saw it increasing. As much as we will sell location units in Israel probably it will be low.

Okay, thanks, and --

Only this portion of course of our total revenues.

Okay. And will that start -- will the product start to ramp, you think, in this quarter or is it just gradual through the year where it increases?

Probably gradual through the year.

Through the year, okay. And then just lastly from me on OpEx, if you can provide any other qualitative or quantitative guidance with R&D and SG&A and interest income for Q1. Thank you.

No, we actually don't have any plan to increase our budget, but again I would like to mention to remind as I do always is that our OpEx is based on different currencies and how it appear in the reports can be changed. But actually from the operational part and from the local currencies we are not planning any things dramatic in order to increase it.

Okay, thank you.

You're welcome.

(Operator instructions) The next question is a follow-up question from Ziv Tal from Oscar Gruss. Please go ahead.

Hi Eyal, just a follow-up question on the comodato and the pricing environment in Brazil. Do you see any chance for a price increase in Brazil? Or looking at products again do you see a decreasing degree of comodato in Brazil now that you've established yourself as a market leader?

I didn't understand the question, can you repeat?

Yes. You said you raised subscription fees in Brazil in 2010, and do you expect to do less comodato in 2010 in Brazil?

Why you think we should do less comodato, how you get to this conclusion?

No, just be less aggressive with the comodato in Brazil, looking at the products.

No -- the comodato is not part of the strategy. The comodato is the mentality of the relationship with the insurance company; this is -- in our industry, which is location-based services, or more specifically, the SVR.

And our main -- the main customers in this field is the insurance companies. They are historically and specifically in the last three, four years, they decided and they determined that the contracts and the transaction will be done by this without spending their own money on buying the products.

Regard the future, of course, in some negotiation and in some plans we are coming with an alternative, which say, buy the units and pay only for the service, and we create also some creative plans. But up until now you can see or I can tell you that in 2009 very close to 100% done by comodato.

I must say that the disadvantages and the advantages are in both plans almost the same. So we are almost indifferent. So it's not part of our strategy but this is how the customers prefer it, and we go with that in order to gaining market share and growth and get more and more customers and more and more insurance companies.

And with regard to the pricing environment do you expect or do you see any increase in subscription fees in Brazil in 2010?

I can't expect that this will happen; again depend whether we will sign a new contract, a different contract. We are actually also not expecting that it will reduce -- it will decrease, so I think that the current value will remain.

Okay. Another question is you've mentioned your market leadership in Brazil, and my question is why aren't you -- or are you planning to take additional steps in order to dominate the market and carry out an acquisition?

First of all, as I said, Brazil is very interesting and we are continuing to search the opportunities. I must say that there are -- as we see it there are not so many of those opportunities and we believe that we can continue and grow on organic basics very impressive.

And we are -- we have today even more advantages compared to our competitors, which is not only what we faced in 2009, which was our strong balance sheet that allow us to continue the comodato while other players couldn't do it. But we are continuing to design our RF technology which is mainly in Sao Paulo and Rio units with the new devices which are better with better results and with lower costs.

And in that case our advantages will not be only [compared as] but will be absolute and I believe that even if we will not find the right target for acquisition organically we have a lot of reason to believe that our growth can exponentially continue in the coming years.

Okay. And last, do you expect a -- seasonality in the first Q to have a meaningful impact on revenues especially in Brazil?

Actually we know that February and beginning of January -- the beginning of January already past. The last week it was the carnival period. I don't think that it is going to be material when we look backwards.

Beside last year which is -- it wasn't only the season itself but it was the peak of the economic problems in the world. I think that historically last year's, it wasn't dramatic decline and since we are also diversified between geographies, and as we said Israel is, in terms of new cars, is back to better shape, I believe that the Q1 will not show bad season.

Okay, and sorry you've -- another question. You've increased your deposits in escrow in your balance sheet. Can you give us a little bit of detail on that?

The increase in deposit is coming from the -interest that's cumulative to the deposits added.

Okay, thank you.

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

Hello this is [John Waddenwergen] for Jonathan today. Very impressive performance in the quarter. With the economy on the rebound, can you give us an update on your thoughts for expanding into new markets?

We are concentrating in the Latin American markets. And to be more specific, even in Brazil, we have a lot of space to grow, and to move forward. But it's -- I'm not saying that we are not looking for opportunities out of Brazil, but we still focus in -- on emerging markets, and specifically other countries in Latin America, in South America.

Beside that we are working a little bit more on opportunistic way, and we are judging every proposal or every interesting opportunity in other countries. But of course, based on conservatives, and as I said always, to be a service provider is different than to sell only hardware or only software. We have to limit our geographies to those which we decide that are having the best chances for growth.

I understand. Okay, thank you very much.

You're welcome.

The next question is from [Ethan Beard of G4]. Please go ahead.

Thank you. Actually, it's a follow-up to the intricate possibilities of new markets. I noticed at the end of last month, on iTunes, there was a release of an Ituran GPS system for maps of North America. What's your thinking about North America as a potential market for growth?

You're -- I'm talking specifically about the US.

Yes.

We have an operation which we -- I think I can call it -- we made a turnaround about a year-and-a-half ago in terms of management and in terms of strategy. But when we did it, it was exactly the same time when the recession and the US economy problem started. So we didn't yet -- so we didn't yet have, I think, the result that showed that our turnaround succeeded.

As I see today, we start seeing fruits from our turnaround position. But as you saw, our total revenues in our -- our [parts] from the US operation is about 2%. So even if I can see growth of 30% or 50%, on a total result, it's very, very minor. So I prefer not to emphasize it.

But internally, I believe that when we look more longer term, the US market is really an -- a market and a promising -- maybe promising market but we have to continue our strategy there, and then see how it will continue.

Thank you.

The next question is a follow-up question from Maynard Um of UBS. Please go ahead.

Hi, thank you. Hello, can you hear me?

Yes, yes.

Okay. Just on the tax rate, it was lower in -- actually for the quarter and for the full year. I'm just wondering if, as we look out into 2010, should we expect a lower -- I think, historically you said maybe 28% to 30%. I'm just wondering if that's the proper tax rate for 2010.

Regarding the tax rate, as we said in the previous quarters, the tax rate is influenced by the intercompany balances, but we expect that this -- the tax rate in the next year will be around 30%, 32%.

Okay. And just on OpEx -- I just want to make sure I'm clear. I think in the past, you've had some one-time type of G&A increases. So I just want to make sure that as we look into the next quarter, that there aren't any one-timers, the G&A would be flat, flattish sequentially in Q1?

Actually the G&A is influenced by the profits pretax because again as we mentioned the -- all the managers around the world and the VPs are based on the compensation which is related to the results of the Company. So one time this year, it was that the foreign exchange rate influenced dramatically. So the -- it was a one-time higher compared with the EBIT.

Actually, today, when we're no longer holding the cash in foreign currencies, from the country that we are operating, it's mean -- and you could see it in this quarter. Our interest and our foreign exchange expenses or our profits was very close to zero, and this will continue to be like this. So the G&A should be related to the results, without volatility.

Okay. On a quarterly basis?

On a quarterly basis, and it should remain almost the same unless we will -- unless (multiple speakers).

And just last question, just you talked about new car take-ups in Israel, I'm just wondering if that was a trend in January or the fourth quarter. And if it was in the fourth quarter, I'm just curious why we didn't see a bigger uptick in subscribers in the fourth quarter? Thanks.

The trend or the economy in Israel which influenced the new car sales is -- started in the last quarter, and it's continued to date. But again, we are not yet in the rhythm that we were in 2007 and 2008. But compared to 2009, the first six months, it's a better shape.

Thank you.

There are no more 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 your concluding statement?

Yes. Thank you for joining our call today. I'd like to thank all our employees for their hard work in making this year a resounding success despite the challenges we all faced. 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's fourth quarter 2009 results conference call. Thank you for your participation. You may go ahead and disconnect.