Ituran Location and Control Ltd (ITRN) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran fourth-quarter and year-end 2011 results conference call.

All participants are at present in listen-only mode. Following managements formal presentation instructions will be given for the question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, February 22, 2012.

You should have all received by now the Company's press release. If you have not received it, please call CCG Investor Relations at 1-646-201-2946.

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

Thank you very much. Good day to all of you and welcome to Ituran's conference call to discuss the fourth-quarter and full-year 2011 results. I would like to thank Ituran's management for hosting this conference call.

With me today on the call our Mr. Eyal Sheratzky, co-CEO; Mr. Eli Kamer, CFO; and Mr. Udi Mizrahi, VP, Finance. Eyal will begin with a summary of the year and the quarter's results followed by Eli with a summary of the financials. We will then open the call for the question-and-answer session.

I would like to remind everyone that the Safe Harbor statement in today's press release also covers the contents of this conference call. Now, Eyal, would you like to begin please?

Thank you, Kenny. I would like to welcome all of you and thank you for joining us today.

We are pleased with the results of 2011. We ended the year with record revenues of $160.2 million, growing by 8.5% over last year with both our subscription and product revenue continually growing. We also reported record net income of $25.8 million dollars.

While our revenues for the year grow incrementally by $12.3 million, our operating income was $3.8 million, higher than last year. This means that 31% of the incremental revenue generated over last year fell to the operating line demonstrating the strong operating leverage inherent in our business. We also generated strong operating cash flow from our [regular] business operations amounting to $45.9 million in the year.

During the fourth quarter our business continued to perform well. However, given the particular US dollar strengths versus the Brazilian real as well as the Israeli shekel during the quarter, our dollar-denominated revenues were weak.

During the fourth quarter we added a net 4,000 subscribers ending the year with 623,000 subscribers. It is important to note that our subscriber numbers have resumed their growth following the changes we made earlier in 2011 and we believe that in 2012 the growth rate will continue to improve.

As previously explained, in 2011 we took some strategic steps in Brazil to improve our operation which was expected to have the long-term effect of lowering the churn rate and increase the average amount of time a subscriber will stay with us. It already had a positive impact on our cash flow in the fourth quarter of 2011 and we expect it to improve our subscriber growth in 2012.

With regard to product revenue, we are happy with the level of revenue reported for the year, which was the same as last year reaching $39.8 million. In the quarter product revenues were $8.5 million, which fell 29% compared with last year and 26% compared with last quarter. The reasons for the decline is due to the following reasons.

In the previous quarter, Q3 2011, we had one particularly large licensing deal worth approximately $2 million in which we licensed Mapa data to a major map provider. Second, we had a negative currency effect on our revenues in the fourth quarter compared with the previous quarter and last year.

Third, the growth in the number of new cars sold in Israel in the fourth quarter slowed and we, therefore, sold less new systems. And, fourth, we had a decrease in sales of our subsidiary, ERM, compared with the same quarter last year.

I would like to go into some of the particulars of our performance in the main regions in which we operate and start by discussing our activities in Brazil. As I explained, we made a few adjustments for our strategy in Brazil earlier this year. We had a short-term dampening effect on subscriber growth.

We also continued to increase our sales direct to the private sector in Brazil, enabling us to increase our ARPU and grow our margins in the regions over the long term. We continue to see the fruits of our investment in infrastructure and marketing over the past few quarter as our subscriber base grows on gross basis consistently increasing our market share in the country.

Our relationship with the 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 will remain a growth engine for us for the foreseeable future.

In Israel, 2011 was on the whole a good year in which we maintained our growth and market leadership and we are pleased with our progress. While the first quarter did start to see a weakening in new car sales related to global economic concern, Israel continues to remain a strong cash-generating business for us and we are happy with our performance.

Our business remains strong in all geographies in which we operate, and we believe that in 2012 we will see the fruits of the efforts taken during 2011. In 2012 we expect our subscriber base to continue to increase. As we have demonstrated over the past years, we believe in sharing the rewards of our success to our shareholders and we do so again today with our dividend distribution.

Now I will hand the call over to Eli for the financial review. Eli?

Thanks, Eyal. Revenues for the fourth-quarter of 2011 reached $37 million, representing a 9% decline compared with revenues of $14.7 million in the fourth quarter of 2010. Revenue breakdown for the quarter was $28.4 million coming from subscription fees, a 1.2% year-on-year decline. Product revenues were $8.5 million, which were at 28.7% decline over the same quarter last year.

Revenue from both product and subscriptions declined primarily due to the weakening of the Brazilian real, the Argentinian peso, and the Israeli shekel versus the US dollar in the fourth quarter. In addition, the decline in product revenue was also contributed by the decrease in new car sales in the fourth quarter in Israel and a decrease in sales by our subsidiary, ERM. The subscriber base grew by a net 4,000 in the quarter.

Geographic breakdown of revenues in the fourth quarter was as follows -- Israel 50%, Brazil 39%, Argentina 9%, and USA 2%. Gross margin in the quarter was 50.1% compared with the gross margin of 49.1% in the fourth quarter of last year. Operating profit for the fourth quarter of 2011 was $7.6 million, or 20.6% of revenue, compared with an operating profit of $8.6 million, or 21% of revenue, in the fourth quarter of 2010.

EBITDA for the quarter was $11.5 million, or 31.2% of revenue, compared to an EBITDA of $12.9 million, or 31.7% revenue, in the fourth quarter of last year. Financial income for the fourth quarter of 2011 was $0.7 million compared with the financial expenses of $0.3 million in the fourth quarter of 2010. Net profit was $6.1 million, 16.4% of revenues, or fully diluted EPS of $0.29 in the fourth quarter of 2012 -- 2011, compared with a loss of $6.5 million or a loss per share of $0.31 in the fourth quarter of 2010.

In the fourth quarter of 2010 Ituran recorded a $12.3 million effect for the Leonardo litigation. Excluding this effect from last year's number, we grew our net income by 5% compared with a net profit of $5.8 million, 14.2% of revenues, or fully diluted EPS of $0.28 in the fourth quarter of 2010.

Cash flow generated from operating during the quarter was $12.6 million. Revenue for 2011 reached $160.2 million. This is an increase of 8.5% of revenues of $147.8 million in 2010. Part of this increase was contributed by the gradual weakening of the dollar versus the other currencies in which we operate during this first three quarters of the year, which partly reversed in the fourth quarter.

Revenue breakdown for the year was $120.4 million coming from subscription fees and 11.4% decrease year-on-year growth. Product revenues were $39.8 million, marginally higher than those of last year. Gross margin in the year was 49.5% compared with 49.1% in 2010.

Operating profit for 2011 was $34.5 million, or 21.5% of revenue, compared with an operating profit of $30.7 million, or 20.7% of revenues in 2010. EBITDA for the year improved to $51.5 million, or 32.1% of revenues, compared to an EBITDA of $46.6 million, or 31.6% of revenues, in 2010.

Net income in 2011 was $25.8 million or 16.1% of revenue, representing diluted earnings per share of $1.23. This compared with a reported net income of $8.7 million in 2010, which includes the previously mentioned $12.3 million effect from the Leonardo litigation. Excluding these effects, the net income in 2011 grew by 22.6% in 2011 compared with $21 million, or 14.2% of revenues, or fully diluted earnings per share of $1 in 2010.

Cash flow from operating for 2011 was $45.9 million. As of December 31, 2011, the Company had net cash including marketable securities and deposits for short and long-term of $39.7 million or $1.89 per share. This is compared with $56.9 million, or $2.71 per share, as of September 30, 2011, and $60.9 million, or $2.90 per share, as of December 31, 2010.

The cash level was reduced partly due to $27 million payment for the Leonardo litigation and ST arbitration in the fourth quarter of 2011.

Our average fully diluted number of shares for the quarter was 20.98 million. We announced a dividend amounting to $25.8 million, or $1.23 per share, which is 100% of the net profits for 2011. Based on an average share price during 2011 of $40.11, this represents a dividend payout of 8.7% for 2011.

Also, the Board of Directors approved a change to the dividend policy. Starting from the first quarter of 2012 the dividend will be issued on a quarterly basis instead of an annual basis as it has been today. The Board maintains the policy of issuing not less than 50% of the Company's quarterly net profits over the course of the year. The dividend record date is March 20, 2012, and the dividend will be paid on April 4, 2012, net of taxes and at the rate of 25%.

With that I would like to hand you back over to Eyal. Eyal?

Thank you, Eli. Looking ahead I am excited with regards to 2012. I continue to see strong potential in the regions in which we operate and we remain very well-positioned as the leader in our main two markets.

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

(Operator Instructions) Andrew Uerkwitz, Oppenheimer.

Thanks, guys, for taking my question. Two quick ones here. The first one is on the last quarter you kind of put out a run rate of customer gains; I think it was around 40 million a year. Did you guys still maintain that kind of goal? That is my first question.

The second question is could you give a little color on OpEx spending plans as you continue to try to grow the Brazilian business? Thanks.

Can you repeat the first question?

Yes, sorry. On the last call, last earnings call you mentioned that you are trying to add -- you thought you could get back to the 40,000 subscriber adds a year. So my question is are you maintaining that stance after what you saw in the fourth quarter and what you see in the first six weeks here of this year? So has that changed?

Actually, we didn't change it. But, of course, there will be kind of a ramp up during the year because of our assumption based on the new strategy in Brazil, which is going quarter over quarter is not yet accelerate that I can have already the full evidence. But our assumptions are still the same, yes.

Okay, great. And then on the OpEx?

Actually we don't have -- based on our budget we are not expecting any material increase besides two main things, which is -- depend mainly on some inflation in Argentina and Brazil, which leads usually to increase salaries. But still we believe the incremental profitability will be continued to be higher than in the past.

Great. I appreciate it. Thanks, guys.

[Kavir Yagur], [ION].

Hello, good afternoon. Can you give us your thoughts about Brazil? What do you see in Brazil, what do you seen in the economy, credits, car sales and implication [on each one]? Thank you.

First of all, if I would know about the currency I would prefer other business; we would make more money. Actually, I don't know anything specifically besides all the general fundamentals is being more specific power industry. So this is -- we are remaining very optimistic. First of all, because we changed the strategy and, as I said, we start seeing fruits and we believe that it will increase.

Our position in the market, specifically in the retail segment, is become much stronger than a year ago and in the past. But, to be honest and talk more about macroeconomy, I am not sure that I am the right -- we are the right people to talk about it.

Okay, fair enough. But do you see any changes on the credit side, car buyers?

Actually, we don't see something that influence our customer needs or requirements or customer retention. For us, as a company and as you are surely familiar with our balance sheet, we are not using any debts, any credit so personally we don't have any problem with this.

Regard to the customer, we don't see declining in the request besides talking specific seasons. Always beginning of the year in Brazil -- don't forget yesterday we just started Carnival there; nobody is working. But this is something that happen every year. But regarding the economy, we don't see something that influence our customer requirements.

Okay. And with regard to the new strategy, you said that it won't be linear, I mean the improvement. Do you see the first half weaker and then a boost in the second half of the year, that is what you meant?

Yes, I said it but again still the first half of 2012 going to be stronger than any quarter in 2011 in Brazil. But it's not yet will be the full -- I would say the full potential subscriber growth that we are expecting based on the new strategy. So in the next half of the year, probably it will -- we believe it's going to be more material and more dramatic.

Okay. Any changes in the competition in the environment?

No. I don't want now to start describing like we did in the past all the competitive landscape; talking very general. In terms of SVR, the stolen vehicle recovery segment, we are showing for many quarters growing our market share, becoming a market leader. This is something that is very stable.

Today there are many or other players that even decide to convert their segments more to fleet management and to our risk management and we find ourselves in a very, very good position. This meaning to our customer -- China is [one of them in] the insurance customers base.

Second, which is something more new and more, I believe, promising our future growth, is the [retail]. Many years we explained and we talked about the situation in Brazil that a major population of car owners do not insure their cars. We touched this segment in the past very slightly.

Since last year we convert our focus to this segment and today we see that we did the right decision. This segment has much more potential than the insured population and this is something that allow us to assume that we will -- in the coming years we believe we will show higher subscriber growth than the years that we only focused on the insurance.

Okay, great. Last for me. Could you share the number of subscribers in the (inaudible) region year-end?

No, actually our policy is that we will do it in the 20-F. But, again, generally I think that investors and the people can understand from every report during 2011, as well as every conference call like this one, that this year in Brazil was not a very good year based on our change of strategy.

The main growth didn't come from Brazil which is not typically to the next years and in the past. Since Israel and Brazil are the main market for us we can find some general understandings, but the exact numbers will be given in our 20-F in a few months.

Great. Thank you very much.

(Operator Instructions) [Bill Knight].

Thanks for taking my questions. As I recall last quarter that changes to revenue recognition in the GAAP impacted your revenues. Was there something similar this quarter?

No, it's something that we did in the last -- the end of the 2010. We started this one in the beginning of 2011.

Regarding installation, what we talked about in the previous quarter was one-time change that we did and there is no effect this quarter or going forward.

I see, thanks. And the Brazilian law that requires SVR devices in all new cars, was that actually implemented in January of 2012 or not?

No. As we get used to in the last two years, they delayed again to June 2012. We can only wait and see.

Okay. So that would not be impacting or sale of SVR devices in Brazil, the implementation of that yet?

Exactly.

Anyway it's not related to our sales of SVR. It's only to the service.

Right. The Leonardo litigation, now I noticed your press release talked about a pad of about $27 million and your cash flow statement said $22.4 million. Could you explain that please?

The $27 million that we said in the last call, previous quarter call relates to $22.7 million related to Leonardo litigation and about $4.5 million relates to ST arbitration related to the sale of Telematics in 2007.

I understand. Thanks for your answers.

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. I would also like to thank my employees for their hard work in 2011 and look forward to another good year.

I do look forward to speaking with you and updating you again next quarter. Have a good day.

Thank you. This concludes the Ituran fourth-quarter and year-end 2011 results conference call. Thank you for your participation. You may go ahead and disconnect.