Ituran Location and Control Ltd (ITRN) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran second-quarter 2010 results conference call. (Operator Instructions). As a reminder, this conference is being recorded August 25, 2010.

I would like to remind everyone that forward-looking statements for the respected 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 developments, and the effects 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 9-723-607-4717.

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

Yes. Thank you, operator. Good day to all of you, and welcome to Ituran's conference call to discuss the second-quarter 2010 results. I would like to thank Ituran management for hosting this conference call. With me today on the call are Mr. Eyal Sheratzky, the co-CEO; Mr. Eli Kamer, the CFO; and Mr. Udi Mizrahi, VP of Finance. Eyal will begin with a summary of the quarter and the quarter results followed by Eli with a summary of the financials and then open the call for the question and answer session.

I would like to remind everyone the Safe Harbor in the press release also covers the contents of this conference call. And now, Eyal, would you like to begin, please?

Thank you. Welcome, everyone. Thank you for joining us today.

We are pleased with the results of this quarter. 2010 continues to be a year of strong economic recovery, especially in our main markets of Brazil and Israel, and Ituran, in particular, continued to perform well with a continued growth in subscribers, profitability and cash generation. We ended the quarter with 587,000 subscribers, a net increase of 12,000 over the past quarter.

In Brazil we have invested in infrastructure and marketing in the past few quarters, and we continue to see the results as our subscriber base grows and we are constantly increasing our market share. Our relationships with insurance companies and car companies continue to expand, and we are increasingly cementing ourselves as market leaders in the region.

With Relation 245, which makes it mandatory for all cars to have location technology, is expected to come into force towards the end of this year, and we expect to reap the initial rewards in 2011. For the foreseeable future, we believe that Brazil with its robust economy and even without expected change in regulation will remain a strong growth engine for our Company. Our strong performance there, 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 generating business for us. New car sales continue to be strong, which contributes to our subscriber growth. We believe our Israeli business will continue its strong performance and cash generation for the foreseeable future.

I would like to mention the tax issue we are facing in Sao Paulo. The state's revenue services of Sao Paulo issued a tax deficiency notice against our subsidiary in Brazil, claiming that our subsidiary's vehicle tracking services should be classified as direct communication services and, therefore, subject to the imposition of state value-added tax, ICMS, of 25% retroactively on all revenues during the period between August 2005 and December 2007. The tax deficiency notice is approximately $20.5 million and taking into account interest and penalties, and the total amount is almost $70 million.

We received legal opinions from total (inaudible) in Brazil that the merits of the case are strongly favorable to us. Based on this, we believe that the claim by the state revenue services is without merit, and we intend to vigorously defend ourselves against such claims. On the basis of these opinions, we are not making any provisions in our financial statements.

It is important to note that the world process is a very long and slow process, which will take many years before a resolution, but we are confident that the end results will be in our favor, and we, therefore, do not expect this to have any impact on our results.

And finally, we had another quarter of strong cash generation. We generated operating cash flow of $6.6 million in the quarter and ended the quarter with $50 million in net cash. We also distributed a substantial $32 million in dividends to our shareholders during this quarter, sharing the rewards of our success with our loyal investors.

And with that, I will hand over to Eli.

Thank you. Revenues for the second quarter of 2010 reached $35 million, representing 23% growth over revenues of $28.4 million in the second quarter of 2009. Revenue breakdown for the quarter was $26.1 million coming from subscription fees from our location-based services, a 22% increase year-on-year growth.

Product revenues were $8.9 million, which was a 26% increase over the same quarter last year. The increase was due primarily to improved sales of products in Israel. The geographic breakdown of revenues in the quarter was as follows -- Israel 50%, Brazil 40%, Argentina 7% and the United States 3%.

Gross margin in the quarter was 49.5% compared with a gross margin of 50.3% in the second quarter of last year. Operating profit for the second quarter of 2010 was $7.3 million or 21% of revenues compared with an operating profit of $6 million or 21.1% of revenues in the second quarter of 2009. Financial income for the second quarter of 2010 was $0.2 million compared with the financial expense of $2.5 million in the second quarter of 2009. EBITDA for the quarter was $11.1 million or 31.8% of revenues compared to an EBITDA of $8.9 million or 31.2% of revenues in the second quarter of last year. Net profit was $4.8 million in the second quarter of 2010 or 13.6% of revenues, compared with a net profit of $2.4 million or 8.6% of revenues as reported in the second quarter of 2009.

Fully diluted EPS in the second quarter of 2010 was $0.23 compared with fully diluted of $0.12 in the second quarter of 2009. Cash flow from operations during the quarter was $6.6 million. As of June 30, 2010, the Company had a net cash position including marketable securities and deposits both short and long term of $50 million or $2.38 per share. This is compared with $81.5 million as of March 31, 2010, and $78.1 million as of December 30, 2009.

It is important to know that during the quarter a dividend of $31.6 million was issued to shareholders. Our average fully diluted number of shares for the quarter was 20.98 million shares.

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

Thank you. Looking ahead to the rest of 2010 and into 2011, we remain very well positioned in our main markets. Our business in Brazil, which continued to grow strongly, combined with our continued stability and cash generation in Israel. This makes us optimistic for continued growth and profitability, and we look forward to realizing our full potential throughout this year and next.

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

(Operator Instructions). Yair Reiner, Oppenheimer.

Thank you and congrats on the good quarter. My first question is, was there a FX impact to your top or your bottom line?

Comparing the last year (inaudible) quarter you mean?

Sure or the prior quarter.

You are talking about more or less on the top line an effect of about $2.5 million on the top line.

And that is all regarding service revenue?

Both. Service revenues and equipment revenues.

Okay. And do you have an idea of how much it hurt you on the bottom line?

On the operating profit, we are talking about more or less $0.5 million.

Okay. That is very helpful. And would you mind reminding us how much will the Regulation 245 expand your addressable market, do you think?

First of all, we have to understand that this regulation is only -- will start next month, and it will start gradually as we said in the past. And during 2011, although the Regulation required 100% of the new cars to be equipped with the (inaudible) or the OEM supplier, still we believe that it will take time until it will be more and more effective and influence our addressable market. But no doubt the awareness and the involvement of the car industry will increase, and this is part of the situation that we see now when we're talking about our growth in Brazil. So I would say that I would not count on 245 for the short future, for the short term, but still it will have some influence on the addressable market in the short term as well.

Paul Coster, JPMorgan.

This is [Maria] on behalf of Paul. I have little quick questions. First is just a housekeeping question. Could you just repeat the geographic breakdown of revenues. I just missed it.

Yes. Israel 50%, Brazil 40%, Argentina 7% and the US 3%.

Thank you very much. The second quarter is regarding the MVNO license. I was wondering if you could tell us a little bit about what exactly you intend to do with that? Will we start offering new voice solutions to expand the service offerings and when?

First of all, the current stage is that under the Israeli Communication Ministry, we had, if we want to keep the possibility and opportunity to build this operation where to get a license. So we are in a stage that we get this license. We got this license. We have an approval, but we still don't know yet what will be or what are the chances that we will decide actually to operate it. And this is based on some companies. Part of it is what will be the price, what will be the relationship, and what the regulation will require from the existing cellular operator. Once we will see and we will build the full business plan, then, of course, we will have more information to give.

Thank you. Perfect. And then my last question is, just if you could provide any other updates on your strategy for growth going forward shorter-term and longer-term?

Since our model is very strong on a subscribers base, so we will continue to increase our subscriber base in the current geographies. We are more concentrating in Brazil. In looking for other segments and new customers, we still have addressable markets which we did not sign contracts yet. And, on the other hand, we continued to look for non-organic growth based on potential partnerships or acquisitions, specifically in Latin America geographies. We will continue to do it.

Effie Wolle, GFI Investment Counsel.

With respect to Brazil, I remember maybe a year or two ago you were talking a bit about a private equity firm that was drilling up some competitors, etc. Could you speak to kind of the landscape in Brazil today, what you think your market share is, and what you're seeing within your competition?

Actually the same players that we mentioned in the past, specifically a year or two years ago, still represent the main competitive landscape. We spoke about company's name, [Zetix]. Probably this is the company that you just mentioned. It seems they are -- they are owned by local private equity. To be more specific, they are more focusing on fleet management and risk management for fleets, less for SVR and insurance companies, but still they are part of our competitors. Of course, they are the local licensor of LoJack, and there is a company called Sascar. I think those are the main three players.

Regarding marketshare, I would like to mention that all these three and the other smaller competitors are all private entities that do not provide any public data or public information regarding marketshare. But based on what the market is estimating, so I think that Ituran has about 30% market share. But this is based on the current customer base. When we talk about the incremental subscriber base on the month by month addition net subscribers, we believe that our marketshare is higher, is bigger, but, again, this is not based on any formal data.

(Operator Instructions). Alexander Ryzhikov, KWPMP.

Can you give a little bit more color on your CapEx expectations? I saw a large increase for the first six months this year. I guess part of it is with Brazil. So just a bit more color on your CapEx. Thank you.

Well, the CapEx, as you saw in the first six months of 2010, was about [$90 million], of which based on our business plan, mainly in Latin America in Brazil and in Argentina, we are working in the comodato method, meaning that we are leasing the units instead of selling them, and therefore, it is in -- it is booked as CapEx. The majority of this amount relates to this comodato, to the units. More or less our estimation going forward, let's say, for 2011 is that the CapEx should be more or less the same or even lower amount.

Daniel Baldini, Oberon.

You mentioned with respect to this tax dispute, that it takes a long time to come to a resolution. I'm wondering if you can tell me what you mean by long time and what the procedure is for coming to a resolution?

First of all, it is the period of time divided to two procedures. The first procedure, which is expected again based on what our advisors and lawyers are telling us, is that the first procedure, which is an administrative one, can take about four years. And then once this dispute will not be solved under this administrative stage and we will have to go to court, which is probably something that we have to take into account, so then in the courts in Brazil for those aspects is something between five to 10 years. So if you try to aggregate it, we are talking about more than 10 years unless there will be something in between. But based on our case and based on our decision and opinion, we will not compromise, and we will grow until the decision will be in favor with us.

And during this time period, do the penalties and interest accrue on this $70 million that you mentioned, and do further taxes accrue on the revenues you generate?

First of all, the interest portion is increasing by definition. But this is in case that we are losing the case. Because all the ideas are based on our chances to win.

Regard the penalties, this is something that is freezed until the moment that we're taking a decision to go to court. Because now it is still in the authorities administrative stage. We have to consider that, although it will take a few or more years, we will have our costs in order to defend ourselves and in order to do the best in courts and in the administrative stage. And this will cost us, which will include lawyers and advisors. And this is something that will be along this five to 10 years, but I think that it is not on an [irreversible] is not material.

Effie Wolle, GFI Investment Counsel.

You just piqued my interest again. Can you speak to why the tax ruling is for the years 2005 through 2007 only, and not for the years I guess 2008, 2009 and 2010, etc.?

It is based on the authority's decision right now, and it can be based on their calculations or thoughts, and it is not saying that they cannot come in the future again.

Right. So --

For other periods.

So you did not change the way you were accruing or accounting for tax, and it is possible potentially that they could come with 2008, 2009 and 2010 legals as well?

Theoretically yes, but we practically believe again based on all the opinions and the consultants that we got for I think the most professionals people in the local market in Brazil and specifically in Sao Paulo state that this is the way that we should behave. And, of course, we will continue to do it as we did until now.

Right. Okay. But you have not changed the way you account for anything since 2007?

No.

And is there any thought within your office as to why they are focusing on that time period?

No. We don't -- (multiple speakers)

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 the call will be available tomorrow on Ituran's website, www.Ituran.co.io.

Mr. Sheratzky, would you like to make your concluding statement?

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

Thank you. This concludes the Ituran second-quarter 2010 results conference call. Thank you for your participation. You may go ahead and disconnect.