Ituran Location and Control Ltd (ITRN) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran Second Quarter 2011 Results Conference Call. (Operator instructions). As a reminder, this conference is being recorded August 11, 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 1-646-201-9246.

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

Good day to all of you, and welcome to Ituran's conference call to discuss the second quarter 2011 results. I would like to thank Ituran's management for hosting this conference call.

With me today on the line are Mr. Eyal Sheratzky, the Co-CEO, and 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.

Before we continue, I'd like to remind everyone the safe harbor in the press release issued earlier today also covers the contents of this conference call.

And now, Eyal, would you like to begin, please?

I'd like to welcome all of you, and thank you for joining us today. We are again pleased with the results of the second quarter of 2011, with revenues of $41.1 million growing 18% over last year and net income of $6.6 million growing 38% over last year. This is very much a demonstration of the stability and leverage built into our business.

We also generated operating cash flow of $13.9 million in the quarter, an all-time record for Ituran.

We ended the quarter with $53.6 million in net cash following the payment of our dividend to shareholders in the quarter. This is an indication of the continued strength and health of our business.

I'd like to go into some of the particulars of our performance this quarter and start by discussing Brazil.

If you remember, a few months ago, we made a few adjustments to our strategy in Brazil, one of which was the increase of the installation fee to our services. This was in order to reduce the overall churn rate by customers that now have to make a small, initial investment, making it more costly to leave our service. We believe this will significantly increase the average amount of time a subscriber will stay with us and will also increase our operating cash flow.

At the same time, we had expected an immediate, short-term, negative effect on our subscriber number due to an increase in churn, and we did see it both last quarter and this quarter. We expect our net subscriber adds to return to its former growth rate by the fourth quarter.

Another advantage of the strategy is that this new model improves our cash flow, as you can already see this quarter.

During the quarter, we also continued to increase our sales direct to the private sector in Brazil. This strategy will enable us to increase our ARPU and grow our margins in the region over the long term.

Brazil, with its continually growing economy, we expect will remain a 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 this region.

In Israel, our business continues to grow. New car sales continued to increase, which contributed to our subscriber growth in the region during the quarter, and it made up for the temporary shortfall in Brazil.

In addition, last year, we launched a new product line called Ituran [Safe]. This product is scheduled to be installed in [medium-add] vehicles, a market which was not previously targeted by us. We've already seen strong interest, as it is very cost effective and a better alternative than a car alarm. We are also currently speaking with local insurance companies in order to enable discounts for those customers which use the service.

Overall, Israel continued to remain a strong cash-generating business for us.

In summary, our business performance remains solid. Our two main regions, Israel and Brazil are both markets which continue to maintain strong economies and shown robust growth. Ituran remains on the right track for continued growth and expanded profitability over the coming quarters and years.

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

Revenue for the second quarter of 2011 reached $41.1 million, representing 18% growth over revenues of $35 million in the second quarter of 2010. Revenue breakdown for the quarter was $31.6 million coming from subscription feed from our location-base services, an 18% increase year-on-year growth. Product revenues were $9.6 million, which was a 15% increase over the same quarter last year.

The geographic breakdown of revenues in the quarter was as follows-- Israel 50%, Brazil 40%, United States 3%, Argentina 7%.

Starting from last quarter, we began presenting the installation revenues in the service segment rather than the product sales segment as it had been in the past. To enable a like-for-like comparison, we have also moved last year's installation revenues into the service segment.

Gross margin in the quarter was 48.5%, compared with a gross margin of 49.5% in the second quarter of last year.

Operating profit for the second quarter of 2011 was $8.7 million, or 21.2% of revenues, an increase of 19% compared with an operating profit of $7.3 million, or 21% of revenues, in the second quarter of 2010.

EBITDA for the quarter was $13 million, or 31.5% of revenues, an increase of 17% compared to EBITDA of $11.1 million, or 31.7% of revenues, in the second quarter of 2010.

Financial income in the second quarter of 2011 was $0.3 million, compared with the financial income of $0.2 million in the second quarter of 2010.

Net profit was $6.6 million in the second quarter of 2011, or 16% of revenues, compared with a net profit of $4.8 million, or 13.6% of revenues, as reported in the second quarter of 2010.

Fully diluted EPS in the second quarter of 2011 was $0.31, compared with fully diluted EPS of $0.23 in the second quarter of 2010.

Cash flow from operations during the quarter was $13.9 million.

As of June 30, 2011, the Company had net cash, including marketable securities and deposits for the short and long term, of $53.6 million or $2.56 per share. This is compared with $66.1 million or $3.15 per share as at March 31, 2010.

The Company distributed a dividend of $21.8 million to shareholders in the quarter

Now that we have a litigation obligation, according to the court, amounting to $22.7 million that has not yet been paid, even though we expect to pay this, it will not affect our P&L.

Our average fully diluted number of shares for the quarter was 20.97 million.

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

Looking ahead, I remain excited with regard to our future, as we continue to build and improve our business in Brazil and growing Israel. We remain very well positioned as the leader in our main two markets. I believe we will continue to grow in 2011 at a double-digit rate over 2010.

And, with that, I will now be happy to take your questions.

(Operator instructions). Paul Coster, JPMorgan.

Eyal, I wonder if you could just talk a little bit about the competitive dynamics in Brazil and how, if any-- what changes have come about as a result of the regulatory changes now that we've had a little bit of time pass.

Maybe I didn't understand your question clear, Paul.

I'm sorry. The competitive dynamics in Brazil-- do you think you're gaining market share? Have you taken a sort of proactive stance in terms of the pricing of the service down there? Are others following suit?

And then the other question is that-- We've had a little bit of time now since the regulations around new cars kicked in. What, if any, impact has it had on the nature of the business down in Brazil?

Okay. First of all, regarding gaining market share, we really see and feel that, in terms of SVR, the stolen vehicle recovery segment, we continue to gain market share, and we've become market leaders in terms of the incremental, new subscribers.

As I said, during the last year, we converted a little bit our focus from the only insurance companies-- also to the consumer markets. By doing this, we also changed a little bit our strategy regard installation and de-installation costs for the customer. This created a little bit decreasing in at least one insurance company that has become a little bit expensive for their model. So this represents a high churn in the last two and a half to three quarters. But we expect that it will finish soon.

On the other hand, we are gaining market share, and we are growing much higher and faster than in the past in the consumer market, the non-insured population. And it will-- We will see the right fruits, hopefully, Q4 and ahead.

Regarding new regulation, it's not yet in force. It's not yet practically happened. It expect to start January 2012. Everybody have confidence that it will not delay again, but I personally would say that, until it will not start, it is not start. Of course, we are making all the preparations, and we also continue to work toward car manufacturers in Brazil in order to be ready and to gain new customers based on this regulation as soon as it will be in force.

Okay. Another question is regarding Israel. For those of us who are on the outside looking in at the middle-class protests that are taking place there, is there a sort of sense of what this might do to the new car market moving forward? Is it positive? Will tariffs come down and cars become more affordable? Or is there no impact from the protests?

First of all, I don't know. I'm not in the right position to take the decision. This will be a government decision.

But, even with an assumption that there will be some changes in taxes or in custom taxes and, if we will be more specific and talk about the taxes that are with the cars, so it may be-- I don't think it will be dramatically, but, if it will happen, I think that it even can help us because the expensive cars, which are our main segment for many years, will not become cheap cars. When we talk about BMW, Mercedes, four-wheel-drive cars, Jaguar, et cetera, it will not be cars for mid and low segment.

On the other hand, some cars that can be more affordable, on the other end, with the Ituran Safe, I think that we have a solution for continual growth, even in this middle class.

So I don't know what will be, but I don't think it's material or will have a material influence on Ituran.

All right. Thank you, Eyal.

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?

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 to speaking with you and updating you again next quarter. Have a good day. Bye.

Thank you. This concludes the Ituran Second Quarter 2011 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.