Ituran Location and Control Ltd (ITRN) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran third-quarter 2010 results conference call. All participants are at 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 November 22, 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 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 filing 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 CCG Investor Relations at 1-866-704-6710 or 972-36074717. I would now like to turn 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 third-quarter 2010 results. I would like to thank Ituran's management for hosting this conference call.

With me today on the call are Mr. Eyal Sheratzky, the co-CEO; Mr. Eli Kamer, the CFO. Eyal will begin with a summary of the quarter results, followed by Eli with a summary of the financials. We will then open the call for the question-and-answer session. Now Eyal, would you like to begin, please?

Yes, thank you. I would like to welcome all of you and thank you for joining us today. We are very pleased with the results of this quarter. Both our subscription and product revenues continued to grow in the quarter, and we reached record revenues from our subscription fees and record product revenues, totaling $37.1 million.

We also generated strong operating cash flow amounting to $9.7 million in the quarter. We ended the quarter with $54 million in cash, an indication of the strength and health of our business.

We ended the quarter with 594,000 subscribers, and I do need to go more deeply into this figure. Our typical subscriber growth rate is around 12,000 to 15,000 net growth per quarter. In the third quarter, our quarter growth rate was a net 7,000 subscribers; but this figure is actually quite misleading.

Every so often our insurance companies' clients do some internal housekeeping, and in some cases they realize that they have either slightly overstated or understated their number of subscribers and need to make a small adjustment in the number of subscribers that they are paying us for. These adjustments are on a net basis normally very small and occur relatively infrequently. Most important to note is that they do not reflect real subscribers joining or leaving our service in that period.

In Brazil we continue to see the fruits of our investments in infrastructure and marketing over the past few quarters as our subscriber base grows, constantly increasing our market share. During the quarter we made some additional investments and generated some short-term increased costs in Brazil in order that we will be better able to capitalize on the growing demand in that market during the coming quarters.

This affected our subscriber gross margin during the current quarter, but we don't expect the effect to permeate into the coming quarters. Our relationship with insurance companies and car companies are strong and continue to expand, and we are increasingly cementing ourselves as market leader in this region.

We believe that Brazil with its robust economy will remain a strong growth engine for our Company for the foreseeable future. Our strong performance there, combined with a strong market in general, underlies our continued optimism in Brazil.

While Brazil has grown strongly over the past few years despite the global downturn, Israel was affected. So the business and our subscriber numbers there remain stable. In Israel our subscriber base is large and has regained its growth after remaining stable for the past two years throughout the downturn.

This indicates to us that the global downturn affecting our markets last year is truly behind us. New car sales continue to be strong, which contribute to our subscriber growth. Israel remains an increasingly strong cash generating business for us.

In summary, our business performance remains solid, and Ituran is on the right track. As our subscriber base continues to grow we expect to increasingly benefit from the inherent operating leverage in our business, and we look forward to sharing those results with you.

I will now hand the call over to Eli for a financial review.

Thanks, Eyal. Revenues for the third quarter of 2010 reached $37.1 million representing 16% growth over revenues of $32 million in the third quarter of 2009. Revenue breakdown for the quarter was $27.5 million coming from subscription fees from our location-based services, 15% increased year-on-year growth.

Product revenues were $9.6 million, which was a 20% increase over the same quarter last year. The increase was due primarily to improved sales in Israel. The geographic breakdown of revenues in the quarter was as follows -- Israel 47%, Brazil 43%, Argentina 8%, and United States 2%.

Gross margin in the quarter was 49% compared with a gross margin of 48.7% in the third quarter of last year. Operating profit for the third quarter of 2010 was $7.6 million or 20.5% of revenue, compared with an operating profit of $6.5 million or 20.2% of revenues in the third quarter of 2009.

Financial income for the third quarter of 2010 was $0.04 million (See- Press Release) compared with a financial expense of $0.7 million in the third quarter of 2009. EBITDA for the quarter was $11.6 million or 31.3% of revenues, compared to an EBITDA of $9.7 million or 30.2% of revenues in the third quarter of last year.

Net profit was $5.7 million in the third quarter of 2010 or 15.4% of revenues, compared with a net profit of $4.6 million or 14.4% of revenues as reported in the third quarter of 2009. Fully diluted EPS in the third quarter of 2010 was $0.27 compared with fully diluted EPS of $0.22 in the third quarter of 2009.

Cash flow from operations during the quarter was $9.7 million. As of September 30, 2010, the Company had net cash including marketable securities and deposits for short and long terms of $54 million, or $2.57 per share. This is compared with $50 million or $2.38 per share as at June 30, 2010, and $78.1 million as of December 31, 2009.

It is important to note that during the second quarter a dividend of $32 million was issued to shareholders. 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. Looking ahead we remain very well positioned in our main markets. Our business in Brazil continued to grow and in Israel our business has returned to its growth trajectory. I am optimistic and look forward to continuing to reap the rewards and realize our potential over the coming quarters.

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

(Operator Instructions) Yair Reiner, Oppenheimer.

Yes, just a couple of questions for me. First, Argentina appears to be substantially weaker than it has been in the past. Can you tell us about the dynamics there and how you see your position going forward, please?

What do you mean weaker than in the past?

I believe that you said that revenues represented 8% of your total, and I believe they were 21% for all of 2009.

First of all, compared to the last quarter it is almost the same. But more generally speaking, our percentage is of course influenced by the growth per quarter or per year. Of course as we said at the beginning, Brazil is the most growing geography among the four of them.

And this year also Israel started growing very impressive, specifically compared to the one and a half years of the recession. So of course although Argentina continued to be stable with growth, as we are expecting the ratio between Brazil, Israel, and Argentina of course is in favor of Brazil and Argentina, what influenced the percentage part.

Okay. So how is it on an absolute basis on the year-on-year? I guess more generally what do you see as your growth prospects there over the coming year? Why is that territory unable to grow in the way that maybe Brazil has recently?

It's a much, much smaller market, much smaller potential. I think that again any parameter that you can compare between Argentina -- and by the way between almost any other country in the world to Brazil recently it will be the same answer.

Brazil has much more population, much more advanced and mature markets today when we talk about car industry, insurance industry, communication industry, economic situation, socioeconomic growth in the citizens, etc. So of course its influence -- their requests influence the potential.

And this is not new. This is the case between those two regions.

Okay, thank you. That's helpful. Then in Brazil, can you talk about the factors that led your customers to rejigger things in the quarter? Is that, A, behind you now? And B, if it is, what type of net subscriber growth rate do you expect to return to in December?

This quarter is much lower than the range that we were expecting and what we are expecting today. It was like a one-time event. But it is a one-time event that we should understand it is results of almost two years of growing subscribers.

I can say that although it is a still lower number, it is something very, very technical. We should not expect it -- or if yes, it will be very low numbers as it is now every two or three years. I really don't think that it has any real or material meaning for the future.

Okay, thank you. Last question on Israel, can you give us a sense of the rate at which the subscriber base now is growing for you in Israel, and whether the September rate is also going to be -- you think is sustainable? Thank you.

We are not publishing specific numbers. But I am saying that compared to 2009 and compared to the first half of this year it was a very impressive quarter when we speak about the Israeli market.

As long as the Israeli market will continue to import high numbers of cars, as it was in 2008 and as it seems to be now, we are very linked to the new cars that are coming to the roads. We also made some plans which we are now operating in terms of penetrating other segments of the car levels, more lower valued cars.

We are also provide added-value services and fleet solutions for small fleets, things that haven't been in the past; and it supports our growth and our potential future growth in the Israeli market as well.

Okay, thank you.

Paul Coster, JPMorgan.

Hi, this is [Maria] on behalf of Paul. I had a couple of questions. First of all, could you discuss your intended uses of cash? Will you continue to do one-off dividends or will you pursue M&A going forward?

And then is the uncertainty with respect to the tax dispute in Brazil preventing you from using cash?

So first of all Ituran has a dividend policy that was approved by our Board of Directors which determined that at least 50% of the annual net profit will be allocated to the shareholders. Last year we paid much higher than then this number. For after the annual results of 2010 the Board of Directors will see it and will have to decide what to do, as long as we will continue to provide cash.

As you know our debt is zero. Off course we will be -- and I personally and of course the Company will be happy to allocate dividend as much as we can without ruining Ituran's plans.

Regard the M&A we are -- we didn't accomplish any M&A during the last years, the last 18 to 24 months. But we continue to see it as a part of our future growth by using our strong balance sheet to expand and to grow our business.

Regarding the question about the Brazilian tax assessment, as we today have strong confidence based on our advisers and attorneys that advised us that our chances are very high and that this suit is going to take many years with a high chances for Ituran not to lose or to win this case, we are not considering -- we will continue to behave as an ongoing with our policy and strategy as it was until this morning.

Thank you. Then just a few more. With respect to the growth opportunity associated with CONTRAN 330, could you provide an update with that?

And then the last one is just an update on the competitive environment in Brazil. Thank you very much.

What is 330? 245 you mean?

Yes, sorry, 245. That's right.

First of all, as I have said in the past this new regulation which is still not in force -- and it was delayed in the past and even recently it was delayed additional three months before it will be in full enforcement, I said that still it create a lot of revenues. It's created a lot of interest from the car manufacturers in Brazil and from the insurance industry.

We use this opportunity. As I said we are investing with a lot of power more in business development and in marketing. And we are improving the quality of the services and the applications in order to be ready when it will be enforced.

But even if not or if it will delay again, it is contributing a lot to the awareness and to the matureness of the market to get our solutions.

(Operator Instructions) 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, thank you. On behalf of the management of Ituran I would like to thank you for your continued interest and long-term support for our business. I do look forward to speaking with you and updating you out again next quarter. Thank you and have a good day.

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