Ituran Location and Control Ltd (ITRN) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran first-quarter 2012 results conference call.

All participants are 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 May 30, 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. Ehud Helft of CCG Investor Relations. Mr. Helft, please go ahead.

Thank you. Good day to all of you and welcome to Ituran conference call to discuss the first-quarter 2012 results. I would like to thank Ituran's management for hosting this conference call.

With me today on the call are Mr. Eyal Sheratzky, Co-CEO, Mr. Eli Kamer, the 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 refinances. We will then open the call for the question-and-answer session.

I would just like to remind everyone that the Safe Harbors in today's press release also cover the content of this conference call.

Now, Eyal, would you like to begin please?

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

During the first quarter, our business continued to perform well despite weaker fundamentals in the global economy. With revenues of $37.7 million, this was a decline of 6.6% over the first quarter of last year. But the decline was mainly due to the increasing strength of the U.S. dollar versus the other currencies in which we operate. The Brazilian Real and the Israeli shackle as well as the lower sales in Israel stand at [$]628,000 by [$]13,000 year-over-year and $5000 since the end of 2011.

It is important to know that our subscriber number has restarted its growth trend following the changes we made in 2011 which aim to lower the long-term churn rate and increase the average amount of time a subscriber will stay with us. In fact, we believe that, in the second quarter, the growth rate in our subscriber base in Brazil will improve back to the long-term growth rates we have seen during the past.

With regard to our product revenues, we saw a decline of 15% compared with the same period last year. This was mainly due to the lower sales in Israel primarily due to the product mix sold in the quarter and lower selling prices.

In addition, our MAPA and ERM revenues were also reduced compared with the first quarter of last year. The general decrease in product revenues we believe is related to a generally weaker global economy which is beginning to have an effect on the economy in Israel.

Our cash flow in the quarter at $3.9 million was also weaker than what the recent trend has been. It is important to note that this was due to a number of one-time large payments in the quarter, namely some legal fees in Brazil and taxes. We believe that our positive cash flow will increase in the coming quarters.

We ended the quarter with $43 million in cash and no debt, providing us with a significant level of working capital and demonstrate the strength and health of our business.

We continue to increase our sales direct to the private sector in Brazil which is enabling us to increase our ARPU and grow our margins in the region over the long-term. We recently signed an agreement with General Motors Brazil establishing a company jointly owned with it Ituran holding 51%. According to the agreement, General Motors Brazil will offer its customers mobilization, location and telematics services through the new subsidiary for its (inaudible) range of vehicles sold in Brazil. This agreement is an important milestone for our business in Brazil. We believe this agreement with GM Brazil will be significant for us as once the new 245 regulations obliging all new vehicles to incorporate antitheft devices comes into force. Right now, this is expected to be at the end of August of this year.

The further importance of this agreement is our close work together with GM, a leading global car manufacturer. We hope to be able to build and expand a long-term successful and fruitful relationship with them.

As you can see, our relationships with the insurance companies and especially the car companies are expanding and we are increasingly cementing ourselves as the market leaders in the region.

In summary, our business performance remains on solid footing. Ituran is on the right track as a stable, profitable and cash generating company for the coming quarters and years, whatever changes the global economy may bring. We will continue to share the fruits of our efforts and performance with our shareholders, providing at least half of our net income on a quarterly basis.

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

Thanks Eyal. Revenues for the first quarter of 2012 reached $37.7 million, representing a 6.6% decrease in revenues, compared with $40.4 million in the first quarter of 2011.

Revenue breakdown for the quarter was $29.2 million coming from subscription fees from our location-based services, a 3.7% decrease year-over-year. Product revenues were $8.5 million, which was a 15% decrease over the same quarter last year. The geographic breakdown of revenues in the quarter was as follows -- Israel 49%, Brazil 39%, United States 3%, and Argentina 9%.

Gross margin in the quarter was 48.7% compared with a gross margin of 49.3% in the first quarter of last year.

Operating profit for the first quarter of 2012 was $7.5 million or 19.7% of revenues, a decrease of 15% compared with an operating profit of $8.8 million or 21.8% of revenues in the first quarter of 2011. The decrease in operating profit was primarily due to the [tractioning] of the U.S. dollar versus the Real and shekel as well as lower operating profit from MAPA.

EBITDA for the quarter was $11.3 million, or 29.8% of revenues, a decrease of 16% compared to an EBITDA of $13.4 million or 33.1% of revenues in the first quarter of 2011.

Financial income in the first quarter of 2012 was $10,000 compared with the financial income of $200,000 in the first quarter of 2011. Net profit was $5.1 million in the first quarter of 2012, or 13.5% of revenue, compared with a net profit of $6.5 million or 16% of revenues as reported in the first quarter of 2011. Fully diluted EPS in the first quarter of 2012 was $0.24 compared with a fully diluted EPS of $0.31 in the first quarter of 2011.

Cash flow from operating during the quarter was $3.9 million. As of March 31, 2012, the Company had net cash, including marketable securities and deposits for short and long term, of $43 million or $2.04 per share. This is compared with $39.7 million or $1.89 per share as of December 31, 2011.

Our average fully diluted number of shares for the quarter was [20.98] million.

The Board of Directors announced a dividend amounting to $2.6 million or $0.12 per share. The dividend record date is June 12, 2012 and the dividends will be paid on June 27, 2012 net of taxes and levies at the rate of 25%.

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

Thank you Eli. Looking ahead, we see continued potential growth, especially in Brazil. There are many upcoming catalysts to look forward to as we continue to build our business. We remain very well positioned and the leader in our main two markets, in Israel and Brazil.

While I do see increased economic weakness ahead which will likely stall our growth, Ituran remains a profitable company generating strong returns for its shareholders.

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

(Operator Instructions). Marcelo Zinn, Maredin Capital Advisors.

Yes, hi, good morning. My first question was with regards to the $24 million increase in other current liabilities. If you could shed some light on that?

Yes, it's a dividend we for 2011 report that we declared on only on February, so in December numbers you do not see it but the March numbers you see it.

Okay. The other question I have for you is you just mentioned that your expectation is that for subscriber growth would increase but that sales could stall. My question for you is this. With the GM agreement, Chevrolet in Brazil produced over 632,000 vehicles in 2011. That's 100% of what -- your units that you guys monitor. If that deal goes through, if the law gets passed, would that not double your subscriber growth in 2013 and then increase it by another 50% in 2014, excluding the other 3 million vehicles that are produced annually in Brazil?

First of all, we have to understand that, under the regulation, only the common (inaudible) should be forced to install location units in the car but the people, the car owner, do not oblige to pay and sign contract for the services with companies such as Ituran.

This contract is of course increasing our potential penetration very strongly but still there is no commitment from GM to add some percent, whether it's 50% or 100%, of the car buyers to Ituran services. The contracts determine mainly that GM will sell, will recommend, will cooperate with their dealers and with their agencies to -- the car buyers to sign contracts with us. But nobody yet knows what will be the actual results of these sales activities and what will be the influence of the 245 regulation on the total car owners in Brazil.

No doubt that GM Brazil is one of the largest in Latin America and specifically in Brazil, which gives us a very good I would say footprint to start and to enter the market after the regulation will be enforced, but we cannot yet estimate what will be the actual numbers. No doubt that it will be gradually growth. I mean we will not or would don't have to expect, for example, at the end of 2012 or beginning of 2013 big numbers upon new and additional subscribers coming based on this relationship but looking more mid-and long future, of course it's increasing our potential.

Okay. Those are the only two questions I had. Thank you very much.

(Operator Instructions). Kfir Yagour of Ion. Please go ahead.

Good morning. Maybe you can give us more color about your comment in the press release related to Brazil in the second quarter. You're saying that you're expecting it to improve back to the long-term growth rates. So that's my first one.

I will start with a short background about a thing which we mentioned during our last I would say almost four quarters conference calls. We decided to make -- our strategic change in Brazil regards the segments that we are focusing.

In the past, as you remember, we concentrated mainly on the insurance companies' customers, a little bit ignoring the uninsured population, which is the major car owners in Brazil, the majority of them. Since we understood that these segments can contribute higher margins, higher profitabilities and loyalty and on the other end we had to contribute more in terms of our installations and cost of the hardware and then we decided to change it. It hurt our numbers in 2011 even dramatically. As you could see in our 20-F, we declined in Brazil in terms of our new net subscribers but actually we did it with -- by knowing that this is the situation for the short term in 2011. We did it by knowing the risks that we are taking but at the same time we built a new channel. We spent -- we invested resources and we spent almost a year penetrating it.

I think that today we know what we did was worse, and we are now reaping the fruits of this strategic change. We feel the ramping up of these new segments in our customer base and we have a strong confidence that what we can see since the beginning of the year but it's being more dramatic now, that at least now we succeed by doing it. I set it as an expectation. Of course, you know, always things can change. But as I see it currently, we will continue -- we will back to the historical high numbers of growth in terms of subscribers in Brazil, but today with much more profitable subscribers with a higher ARPU. This is the reason that I mentioned during my speech that, from Q2, we believe Brazil will contribute much more than it did in the last four or five quarters.

Great news, that's good to hear. My second question is about the capital expenditures that came quite low this quarter. So how should we look at that going forward?

First of all, based on our model change, we also are enjoying from retrieving much more units that are installed in the past in the cause of our customers or the insurance customers. In the past, there was not any incentive for the insurance companies or for the car owners to bring back the units when the customer is leaving. Today, there is a ticket for it so their interest is a mutual with us to bring back the hardware so we don't have to expend our CapEx again and again from the churn customers first.

Second, since we grow our subscriber in Brazil dramatically, the total, the new subscribers without talking about the channel, only for the hardware, we succeed to lower the cost of the unit for us with our suppliers.

Third, by doing these two things, we had or we decided to increase our inventory in Brazil again in order to lowering the cost of the unit. It means that the total of these movements is that our CapEx is much lower today and we expect that it will continue in the next quarters.

Okay, great. Thank you very much.

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.

There's another question from Marcelo Zinn of Maredin Capital Advisors.

So sorry to jump in so last-second. Just one additional question -- I don't know if you saw that, on last Wednesday, [GP Instrumentals] which is a Brazilian buyout firm, they bought out 56% of one of your competitors for a little over $100 million. I think it was $101 million, which with the 180,000 units of that that company manages, it basically values each one of their subscribers as $1000 per unit. If we apply the same math to you guys, just your Brazilian base, and added back the cash you guys have, that would equal your current market cap, which means the other 65% of your business, basically everything outside of Brazil, is basically free. With the $43 million you guys have in cash, at today's prices you could acquire back almost 3.5 million shares which reduce the share count by 16.5%. Is there any internal discussions about rebuying shares at current prices considering how undervalued the share price is?

First of all, I'm not the guy you have to convince that Ituran is a good company and what's more. But be more serious.

First of all, today, we have less than $43 million because we pay dividend after the end of the quarter. The reason that we choose the model of paying dividend instead of buying our own shares is mainly because of the volume with the share. If we are using these large amounts of cash to go to the market and buy shares in some limitation of time, probably it will be almost impossible to do it with the valuation which is so attractive as you mentioned; this the first.

Second, the result of it is that not practically but still paying the dividends is a result like buying own shares but we leave the owner of the shareholders of Ituran to take and make their own decision for the cash.

Today, we have actually less than $20 million after the dividend we paid, and it's a different story of course.

For me personally, I would prefer stock buyback. I know that the volume is low but, personally, volume is not as important to me. But there is a 25% tax on dividends so that is somewhat cumbersome. You know, reducing the size of the share count does, over time, especially with your guys continued good execution, does help with the EPS. So something that I'm sure you guys know already obviously, but just something to keep in mind from a little shareholder.

Thank you. Of course, we will consider it and keep it in our mind. Thank you.

I would like to again remind participants that a replay of this call will be available tomorrow on Ituran's website, www.Ituran.co. IL. Mr. Sheratzky, please go ahead with your concluding statement.

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

Thank you. This concludes the Ituran first-quarter 2012 results conference call. Thank you for your participation. You may go ahead and disconnect.