Ituran Location and Control Ltd (ITRN) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran First Quarter 2010 Results Conference Call. All participants are present in a 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 25th, 2010.

You should've 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 9723 607 4717. I'll now hand the call over to Mr. Ehud Helft of CCG 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 of 2010 results. I would like to thank Ituran management for hosting this conference call. With me today on the call are Mr. Eyal Sheratzky, Co-CEO, Mr. Eli Kamer, the CFO. Eyal will begin the summary of the year of the quarter results followed by Eli with a summary of the financials. We'll then open the call to the question and answer session. I'd like to remind everybody that the safe harbor in the press release also cover 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. We are pleased with the results of this quarter. We achieved record EBITDA as well as continued growth in subscribers with another quarter of strong cash generation.

We ended the quarter with 575,000 subscribers, an increase of 13,000 over the past quarter. In Brazil, our subscriber base continued to grow strongly. And we are constantly growing our market share. Our relationship to the insurance companies continued to expand. And we are increasingly cementing ourselves as market leaders in the region.

In addition, Regulation 245, which makes it mandatory for all cars to have location technology, was passed by the Supreme Court. And we expect to see the initial rewards in 2011. For the foreseeable future, we believe that Brazil with its robust economy would remain a strong growth engine for our company. Our strong performance in Brazil combined with a strong market in general underlies our continued optimism in this region.

In Israel, our subscriber base is large and remains stable and is a strong cash generation business for us. All this is a good sign for our business potential in Israel, which shows stability and resilience in the downturn but can perform very well in a growing market.

As new car sales continue to increase, contributing to subscriber growth, the significant operating leverage built into our business enables 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, we start 2010 very well positioned, particularly in Brazil and Israel. The growth engine, which is our business in Brazil, combined with continued stability in Israel makes us optimistic for continued growth through 2010 and beyond. For Ituran as a whole, we look forward to building and unleashing our full potential throughout this year.

Our very strong cash levels and cash generation has provided us with more than enough cash to build increased strength and investment in our existing operations. We generated operating cash flow of US$7.5 million in the quarter and ended the quarter with US$81.5 million in net cash. Following the end of the quarter, we distributed US$32 million in dividends.

Our current cash levels allow us the flexibility to pursue our long-term strategic goals. And just as importantly, it also allows us to share the substantial reward of our strong performance with our shareholders. And with that, Eli, please?

Thank you, Eyal. Revenue for the first quarter of 2010 reached US$35 million, representing 28% growth over revenue of US$27.3 million in the first quarter of 2009. Revenue breakdown for the quarter was US$25.7 million coming from subscription fees from our location-based services, a 28% increased year-on-year growth.

Product revenues were US$9.3 million, which was a 30% increase over the same quarter last year. The increase was due to improved sales of products in Israel. The geographic breakdown of revenues in the quarter was as follows. Israeli 50%, Brazil 39%, Argentina 8%, and United States 3%.

Gross margin in the quarter was 49.1% compared with a gross margin of 49.7% in the first quarter of last year. Operating profits for the first quarter of 2010 were US$7.3 million or 20.8% of revenues compared with the operating profit of US$5 million or 18.4% of revenues in the first quarter of 2009.

Financial expense for the first quarter of 2010 was US$100,000 compared with a financial income of US$4.2 million in the first quarter of 2009. The high level of financial income in the first quarter of 2009 was due to exchange rate changes affecting the value of Ituran's cash holdings.

Our first quarter 2010 financial results were less impacted by the exchange rate due to the fact that a large portion of the cash was converted into Israel shekels, which was due to the volatility in our income statement.

EBITDA for the quarter was US$11 million or 31.4% of revenues compared to EBITDA of US$7.7 million or 28.1% of revenues in the first quarter of last year. Net profit was US$4.8 million in the first quarter of 2010 or 13.7% of revenues compared with a net profit of US$5.6 million or 20.5% of revenues, as reported in the first quarter of 2009.

Fully diluted EPS in the first quarter of 2010 was US$0.23 compared with fully diluted EPS of $0.27 in the first quarter of 2009. Cash flow from operations during the quarter was US$7.5 million.

As of March 31st, 2010, the Company had a net cash position, including marketable securities and deposits, both short and long term, of US$81.5 million or US$3.89 per share. This is compared with US$58 million on March 31st 2009 and US$78.1 million as of December 31st, 2009. Our average fully diluted number of shares for the quarter was 20.98 million. And with that, I would like to hand you back over to Eyal. Eyal?

Thank you, Eli. As we move through 2010, we remain very well positioned with an ability to achieving continued growth and performance, driven by our momentum in Brazil, a region in which we are a market leader. Our results and our long-term improvement in margins demonstrate the inherent strengths of our business. We look forward to continuing our growth through 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). The first question is from Yair Reiner of Oppenheimer & Company. Please go ahead.

Great. Thank you. Your wireless hardware sales were very strong in the quarter or stronger than they've been in awhile. Can you talk about what drove that?

Yes. Compared to last year, the Israeli market, where the major part of the product sales is happened, improved I think dramatically. Last year, through the peak of the recession, the new car market decline since the mid of 2009 and specifically the beginning of 2010, it's improved dramatically. And it means that we in a total number of units, we are selling much more.

So should that be translated into kind of resurgent growth in LBS services going forward as well?

I wouldn't say it. Don't forget that the difference between the total and the net is influenced by the churn. So we still make it better than last year. But still the net subscribers, the total number is not like it was three and four years ago. But again, compared to 2009, it's much better, yes.

Okay. Can you review for us what the new law in Brazil is and now that it's kind of passed through the courts what the key dates are going to be moving forward? Thank you.

The Regulation 245 is not something new. It's only become actual because the time that it's becoming enforce is now in August. And from August to January 2011, it will be gradually enforced. In January 2011, every car that will be manufactured in Brazil or imported into Brazil will have to be equipped with a location unit. And up until a month ago, there was still a question because it was in the Supreme Court. There was some case against it. But they decided that the law is legal. And it will be enforced.

The influence, as I said in the past, is not something that we'll see in before January 2011. Millions of cars come and signed for Ituran services. But of course, the market awareness, the market needs will increase. And of course, as the market leaders, I believe that we will enjoy from a more potential to increase our subscriber base.

Great. Thank you. And then a final question from me, do you have an estimate of your market share today in Brazil and maybe how that's changed over the last year? Thank you.

Our competitors are private entities. And everything is based on [results] and estimations and discussions among the [main] insurance companies et cetera. But something which I can say very clear, on the incremental subscriber, Ituran adds more than 50% of the total market. Regarding total customer base, since there was companies that are in the market even before we penetrate, so we have about 30%, 30% of the total. But I believe that this rhythm will continue, so very short in terms of months or years, we will hold more than 50% of the total market share.

When I'm talking about as we are -- we are in Brazil, are much more focused on stolen vehicle recovery than on the total location services. We are much less focused on (inaudible) management. In that segment, there are other players which have more subscribers than Ituran. But on the stolen vehicle recovery, which is more important now, specifically when the new legislation is enforced, I believe that we are having more than 50% in the incremental subscribers.

Thank you.

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

Hi. This is Maria on behalf of Paul. I have two quick questions. The first question is from the strategic growth perspective. Do you see any likelihood of expanding into new geographies, products, or services in the next year?

As it seems today and since we made a new discussions about our strategic expansion, I think that today we are very, very focused on the Brazilian market. Brazil represents much more than only one typical country in terms of the potential, in terms of the situation, and in terms of our position. We will focus in the coming year or two in Brazil. Of course, in terms of looking for acquisition based on our capability and balance sheet, we are looking for other regions. But today, there is not something there concrete.

Okay. And then on the competitive landscape in Brazil, how do you see the landscape evolving going forward? Do you think that the competitive pressures might increase in the future that might start to weigh on pricing there or no?

No, maybe the ground will allow more -- it will be more attractive for other new players to come. But the market players we think are well established in the market, already spend and pay attention to their brands. For example, Ituran are very welcomed and respect among all the insurance industries. And we spend hours and enough money during the last three years also to create relationship with the car manufacturers and the car dealers.

So I think that if some new player will come to the market, which can happen in every market, it will have much more disadvantages compared to company of Ituran than advantages. Of course, we have to be aware. We have to be awake but I not really think that this is frightening us.

Okay. Thank you very much.

(Operator Instructions). The first question is from Gilad Ben-Avi of Bank of Israel. Please go ahead.

Hi. Congratulations of your excellent report. I would like to ask about if you can repeat about a geography breakdown of the revenues for this quarter.

Israel 50%, Brazil 39%, Argentina 8%, and the United States 3%.

And I would like to add something regard differentiation between the -- and the breakdown between the geographies. Israel showed 50%. But I think that it should be mentioned that in Israel, it's considered not only the location and the core business of Ituran. It's include Mapa, the GIS services, and ERM, which is a product manufacturer for the GPS.

If we would differentiate the segments of the operations in Israel, I would say that Brazil and Israel are representing almost the same. And since Brazil is now the main growth engine, very short Brazil revenues from location services and products will be and we expect to be highest than this in Israel.

Okay. And what about the Argentina? There was some increase in the revenues there, from the growth of subscribers in Argentina in the quarter?

First of all, we are not providing nor differentiating between the quarter. But speaking -- generally speaking on an annual basis, Argentina continues to grow on the same reason as it was during the last years. But in terms of the ratio, since Brazil growing much more. So the breakdown percentage is a little bit lower in Argentina. But Argentina is continuing to grow in the same rhythm.

Okay. Thank you.

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 your concluding statement?

Yes, I would like to thank you for joining our call today. And I look forward to speaking with you next quarter. Thank you. And have a good day.

Thank you. This concludes the Ituran First Quarter 2010 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.