Ituran Location and Control Ltd (ITRN) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Inturan Fourth Quarter and Year End 2010 Results Conference Call. All participants at 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, March 1, 2011. 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. I will now hand over the call to Mr. Ehud Helft of CCG Investor Relations. Mr. Helft, would you like to begin?

Yes, thank you. Good day to all of you and welcome to Ituran's conference call to discuss the fourth quarter and full year 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, Mr. Udi Mizrachi, the VP Finance.

Eyal will begin with a summary of the year and the quarter results followed by Eli with a summary of the financial. We will then open the call for the question answer session. I would like to remind everyone that the safe harbor and the press release also covers the content of this conference call. And now, Eyal, would you like to being please?

Thank you, Ehud. I'd like to welcome all of you and thank you for joining us today. We are very pleased with the results of 2010 in the first quarter. We have ended the year with record revenues at $148 million, a net income of $21 million with both our subscription and product revenues continually growing.

We also generated strong operating cash flow, amounting to $33.4 million in the year. We ended the year with almost $61 million in net cash, an indication of the strengths and the health of our business. Given this strong cash generation and high level of cash, we are sharing the fruit of our success with our loyal shareholders and distributing $21 million, which amounts to all of our full year's net profit.

In fact, we have declared almost $100 million in dividends to our shareholders since our NASDAQ IPO in 2005. In terms of subscriber numbers, we crossed the 600,000s mark, ending the quarter with 604,000 subscribers, adding a net 10,000 new subscribers in the quarter and adding 42,000 for the year.

Looking at subscribers on gross basis in Brazil we very much had a record year and we hope to continue our growth in the coming quarters and year. 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 expanded our program of charging for installation and unrecovered customer equipment in Brazil. This has had the effect of increasing our product revenues by higher than average amount during the current quarter. We believe that in the long term it will enable us to lower our churn rate and increase our overall revenues.

We've also made some additional investments in building our infrastructure and generated some short term increased cost in Brazil in order that we will be better able to capitalize on the growing demand in that market during the coming quarters. [Those two] changes have had a temporary and small negative effect on our subscriber gross margin there, but we expect the effect to diminish in the coming quarters.

Our relationships with insurance companies and car companies are strong and continue to expand and we are increasingly cementing ourselves as market leaders in the region. We believe that Brazil, with its robust economy, will remain a gross engine company for the foreseeable future. Our strong performance there combined with a strong market in general underlies our continued optimism in this area.

In Israel, 2010 also was a good year in which we reestablished growth in our business and we are very pleased with our progress there. After remaining stable for the prior two years throughout the downturn. New car sales continue to be strong as we move into 2011 which contributes to our subscriber growth. Israel remains an increasingly strong cash generating business for us.

In summary, our business performance and Ituran is on the right track for continued growth and expanded profitability. As our subscriber base continues to grow, we expect to increasingly benefit from the inherent operating leverage in our business. As we have demonstrated over the past years, we believe in sharing the rewards of our success to our shareholders and we hope to continue this well into the future. I will now hand the call over to Eli for a financial reviews. Eli?

Thank you, Eyal. Revenue for the fourth quarter of 2010 reached $40.7 million, representing 21% growth over revenues of $33.7 million in the fourth quarter of 2009. Revenue breakdowns for the quarter was $28.8 million coming from subscription fees from our location based services, a 10% increase year on year growth. Product revenues were at $12 million, which was a 57% increase over the same quarter last year.

The increase was due primarily to improved sale in Israel as well as our strategy of expanding the program of charging for instillation and unrecovered customer equipment in Brazil. The geographic breakdown of revenues in the quarter was as follows, Israel 48%, Brazil 43%, Argentina 7%, and United States 2%. Gross margin in the quarter was 48.7%, [fed] with a gross margin of 50.9% in the fourth quarter of last year.

The slightly lower gross margin as due to the product mix in the quarter between location based services and equipment sales. Operating profits for the fourth quarter of 2010 was $8.5 million, or 20.8% of revenues compared with an operating profit of $6.9 million or 20.6% of revenues in the fourth quarter of 2009.

EBITDA for the quarter was $12.9 million or 31.7% of revenues compared to EBITDA of $10.7 million or 31.8% of revenues in the fourth quarter of last year. Financial expense for the fourth quarter of 2010 was $0.3 million, compared with a financial income of $0.7 million in the fourth quarter of 2009.

Following arbitration between Ituran and [ST] as reported in the 2009, the purchaser of Telematix in 2007 in accordance with the milestone in the sell agreement of Telematix we increased the provision in our balance sheet which relates to Telematix milestones from $3.5 million to $4.4 million.

Excluding this effect, the net profit in the fourth quarter of 2010 would have been $6.5 million or 15.9% of revenues. Reported net profit was $5.8 million in the fourth quarter of 2010, or 14.2% of revenue compared with a net profit of $5.5 million or 16.4% of revenues as reported in the fourth quarter of 2009.

Excluding the above mentioned provision increased fully diluted EPS would have been $0.31, reported fully diluted EPS in the fourth quarter of 2010 was $0.28 compared with fully diluted EPS of $0.26 in the fourth quarter of 2009. Cash flow from operation during the quarter was $9.6 million compared with $12.5 million in the fourth quarter 2009. In which we received a tax refund in the amount of approximately $1.5 million.

Revenues for the -- for 2010 reached $147.8 million. This is an increase of 22% over revenues of $121.4 million in 2009. Revenue breakdown for the year was $108.1 million coming from subscription fees from our location based services and 18% increase year on year growth.

Product revenue was $39.7 million which is a 33% increase over last year. Gross margin in the year was at 49% compared with 49.9% in 2009. Operating profit for 2010 was $30.6 million, or 20.7% of revenues compared with an operating profit of $24.4 million, or 20.1% of revenues in 2009.

EBITDA for the year was $46.6 million or 31.5% of revenues compared to EBITDA of $36.9 million or 30.4% of revenues last year. Excluding the effect of the arbitration with ST the net profit in 2010 would have been $21.7 million, or 14.7% of revenues.

Reported net profits was $21 million in 2010 or 14.2% of revenues compared with a net profit of $18.2 million or 15% of revue, as reported in 2009. Fully diluted EPS in 2010 was $1 compared with fully diluted EPS of $0.87 in 2009.

Cash flow from operation for the year was $33.4 million, compared with $37.7 million in 2009, in which we received a tax refund from previous years of $6.5 million. As of December 31, 2010 the Company had net cash including multiple securities and deposits for short and long term of $60.9 million or $2.90 per share. This is compared with $78.1 million as of December 31, 2009.

Our average fully diluted number of shares for the quarter was 20.98 million. We announced the issue of dividends amounting $21 million or 100% of net profit for 2010. The dividends record date is March 23, 2011 and the dividend will be paid on April 6, 2011. Net of tax at the rate of 20%. And with that, I'd like to hand you back over to Eyal. Eyal?

Thank you, Eli. Looking ahead, I'm excited with regards to 2011. There are many catalysts in the coming year which we are looking forward to as we continue to build our business in Brazil and grow in Israel. We remain very well positioned as the leader in our main two markets. I believe we will continue in grow in 2011 at a double digit rate over 2010. And with that, I would now be happy to take your questions. Operator? Operator?

Thank you. Ladies and gentlemen, at this time I will begin the question and answer session.

(Operator Instructions)

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

Yes, thank you. Good morning, good evening. A few quick questions, the Israeli growth that you experienced in 2010 was it from market share gain or the cyclical recovery in the auto market or a secular sort of expansion of the market.

Hi, Paul. So first of all, no doubt that the growing -- growing car market is something that influenced our growth since we have -- in Israel we have very high market share, something between 75% to 80% so we are very relating to the car importing [scheme]. Second, what we actually did during 2010 and we started reaping the fruit mainly in the second half of this year is that we are offering lower cost solution for the low levels of the car since in the past we aimed only the segment of the exclusive cars and four wheel drive cars. Now, we are offering a system which is not based on a real time alert and we can provide it with a lower service cost and a lower system cost and by doing this we are -- we can grow our subscriber base also through different segments where a segment that in the past we didn't have.

Which makes it even more curious that your ARPU has actually increased every quarter in 2010. Why would that be if you're offering a lower price point solution in Israel that you see higher ARPUs overall by the end of the year?

I would say that generally speaking our ARPU in Israel didn't increase on local currency since we are translated into dollars to our financial reports is might look like this around the year or when you compare it to last year. But frankly speaking, the ARPU in Israel is quiet fixed and stable.

What is the ARPU doing in Brazil?

It -- no, the ARPU -- the ARPU in Brazil is also influenced by the exchange rate and is also quite stable. In Brazil is a little bit different because in Brazil we have two segments which historically we have one is the insurance companies which usually have paying lower ARPU, lower service fees because they are generating more customers. And the other segment is the -- is the private uninsured [calculation] which we are selling through direct agents and in that segment, our ARPU is higher. What you actually see is a combination is on weighted average ARPU and it's currently stable. As long as we will increase our private segment, probably I would expect that our ARPU will continue to increase in Brazil.

Got it, two more questions. The net adds has declined year on year for the last two years. Do you expect that to reverse course in 2011 and can you give us an update on the Sao Paulo tax dispute?

OK, so actually we believe that during 2011 and ahead we should and we can expect higher subscriber growth, mainly in Brazil. What we actually had in 2010 was we -- as we said in Q3 and it's also up here in Q4 in some way is we are growing a new subscribers in Brazil, the highest ever. Our main concern is the churn and what we actually realized is that it's very easy to stop the service since there was not any cost for doing that.

And during 2010 we renew contract with a different -- different terms with the insurance companies as well with the private segment and more and more contracts now includes payment for the installation which we didn't have in the past, and payment for -- for the installation unit. This is something that now a customer is thinking more before we just quit the services. We start to see this solution again, reaping the fruits very in the last quarter and I believe that this will influence our net subscribers growth in 2011. So, frankly speaking, for the future we believe that we should expect higher net growth in Brazil.

Regard Israel, as I said, I believe that the relation between new cars and new net subscribers for Ituran is a very close, very relating. So as long as the economy in Israel will continue to be strong and the consumer will continue to buy new cars, I believe that we will continue to grow at least as we grow in 2010. So totally the growth of net subscribers in 2011 as we expect should be even bigger.

Thank you and the Sao Paulo tax dispute?

The Sao Paulo tax now is in -- in terms of news, it's in a holding. It's a procedure that will take place now within the administrative stage which going to take few years. At least additional two or three years from now.

And then, if we will not win this case, which actually we said that in the administrative case we are not expecting to win, then we will -- we will go to the general courts and do something that based on our lawyer opinions will take additional six to ten years. So now what we only can do is working with our lawyers and wait.

Thank you very much.

You're welcome.

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

Hi, thanks for taking my question. This is actually [Michael Sokolo] in for Yair Reiner. Congratulations on the quarter. I was wondering if you could provide an update on the Brazil automobile regulation that's -- that we're anticipating to provide a benefit to you guys this year.

Actually we are expecting that it will be in force as it was declared by the government in the end of April. I mean in two months from now. But again, there is no something commercially still exit. As I said, we are communicating, we are negotiating and we are -- already have some starting of corporation with our common affections. But until the moment that this law will be enforced there is not yet something new. As I said, I believe that once it will be in force and there will be no more delays and this something that also will contribute to our net growth of subscribers in the coming future.

Is there any way you can help us get an idea of how much benefit that would be to you guys?

It's not something that we can now measure specifically or give numbers, but just to understand the idea is that when we are taking into account that every year there is additional of 3.5 million vehicles comes to the roads in Brazil and today they are stolen vehicle recovery industry adding total of about 200,000 its mean that potential market will open with almost 15 times bigger. The question that I cannot yet give you an answer is how many of the car users will decide to sign for the services? Because just to remind here for the audience is that the regulation required the car to have the equipment. But it's not required the car owner to sign for services.

But no doubt, that if until the regulation will be in force every car owner that want to sign for Ituran kind of services it still have to pay for the hardware in the future under the regulation it will not have to pay for the hardware, it will be already installed and part of his car. So it will allow us to penetrate more a wide population or potential population. So once we [deliver] a one year -- full one year that this market will be under the new regulation I will be wiser to tell you about it.

Don't forget that [20] will start in April, if it will start in April, it's starting gradually. Its mean -- it's not that in May every new car will be already equipped with it. It will go about even till it will be enough market situations. But again, no doubt that the market will -- the nature of the market will increase dramatically the potential. It also will increase the interest of the common [affecture] to find a way to generate revenues and profit from these costs. Because for them it's only cost and this is something that we are working very hard to convince them and those are heavy industries, heavy players. It is not something that happen tomorrow, but I hope that in the coming 12 months as long as the regulation will be in force we will have news to release, I hope.

Okay, thank you. That is very helpful. Could you maybe shed some light on how we should think about taxes and operating expenses for the coming quarters? Looks like fourth quarter is usually a little bit higher than usual OpEx and it kind of declines again in the coming quarters. How should we think about that as [all that] tax?

Regarded tax there is no something -- some material change. We always expect that it will be between a range of 27% to 30%. The tax line in Ituran as an international company with many subsidiaries in -- not in a specific geography. It's something that we cannot expect specifically one number, but I'm saying it is between 27 to 30% on an annual basis.

Regarding OpEx, based on our operating leverage model I wouldn't expect the OpEx to grow or to increase. Some volatility that you are see between the quarters is sometimes because of the foreign exchange. As it influence the revenues it's also influence the expensive. We are not exposed operationally to currencies, we are operating in local currencies in the sight of the expenses as well as in the size of the revenue slash ARPU. In terms of percentage of revenue, I would say that we are really expecting that it will stay stable.

Okay, then, that's helpful. Thanks very much.

You're welcome.

(Operator Instructions)

The next question is a follow up question from Paul Coster of JPMorgan. Please, go ahead.

Yes, thank you very much. Eyal, can you talk a little bit about strategic growth opportunities? You know you seem to have now sort of focused on Israel, Brazil and Argentina and are you still looking at other markets?

First of all, we are continue to look on other markets but since we saw in the last three years, part of it was the recession let's call period, and we didn't really find the right and appropriate target we are not -- we are not giving up of growing and we are pushing through the organic growth. And as I mentioned, even in Israel historically used to be maybe only cash cow. We are now aiming more aggressive penetration to the lower levels of the car. We are more aggressive in applications for drive diagnostic fleet, we even developed solution in house which we start -- we just launched here in Israel, allow us to gain the market share in this segment.

Regard Brazil, not doubt that the market itself based on the growth in the economy. The change, I think, from the historical Brazil as a third world country to a very, very developed and western country, allowing us to please to believe and to expect organic growth which should be and can be dramatic in the coming years. But no doubt that we try and we have to use our strong balance sheet to use it for acquisition and add to the organic growth and the non organic growth. But unfortunately I cannot now declare on any specific -- specific target or specific new transaction.

All right. And my last question I blanked out very temporarily there. What is that -- the tax rate going forward?

Between -- as we said, between 27% to 30%.

Okay, got it. I'm sorry about that. All right, thank you so much.

Thank you, Paul.

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 completing statements?

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

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