Ituran Location and Control Ltd (ITRN) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran third quarter 2013 results conference call. All participants are 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 13, 2013.

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 would now like to hand the call over to Mr. Kenny Green of CCG Investor Relations. Mr. Green, please begin.

Thank you very much. Good day to all of you, and welcome to Ituran's conference call to discuss the third quarter 2013 results. I would like to thank Ituran's management for hosting this conference call. With me on today on the call are Mr. Eyal Sheratzky, co-CEO; Mr. Eli Kamer, CFO and Mr. Udi Mizrahi, VP, Finance.

Eyal will begin with a summary of 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.

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

Thank you, Kenny. I'd like to welcome all of you and thank you for joining us today. We are very pleased with our results this quarter, which are very much a record for Ituran in many parameters.

Our subscriber growth was strong in the quarter adding a net 19,000 subscribers and reaching a record of 721,000 subscribers globally.

Very clear, this quarter is our strong growth and operating margins with gross margins at the strongest ever levels of 52% mainly due to our strong gross margins on product sales as well as subscription fees. At the same time, our ongoing operating expenses increased at a much slower rate than our revenues, which means much of the increase in our revenues combined with our higher gross margins and record gross profit was able to fall substantially to the operating line. This is a clear demonstration of how our business is benefiting from the operating leverage in our model.

We generated a strong operating cash flow in the quarter of $13.3m and our net income was $7m, a record in terms of our ongoing operation.

As you know, we have a policy to share at least half of our net profit with our shareholders, and we distributed $3.5m in dividends this quarter.

I would like to provide you an update with regards to our performance in our two main regions, Brazil and Israel. In Brazil, our business is continuing to grow strongly and Brazil remains a strong contributor to our overall subscriber growth. We continue to market our brands strongly, and we see increased interest in the region from the private market.

Looking ahead, as more and more cars in these major market incorporate telematic technology, we expect to continue growing and we look forward to further realizing our full potential in the region.

In Israel, our business has been very strong this year and has significantly contributed to our subscriber growth. In particular, our budget Ituran's Save program is seeing strong traction enabling us to penetrate new segments in the markets.

In summary, we are very pleased with our performance in the quarter. We continue to benefit from the operating leverage built into our business model enabling us to substantially benefit from the continued growth in our subscriber base and we look forward to further reaping the rewards of our past efforts. We believe 2013 will end as a record year for Ituran in terms of both revenue and ongoing profitability and we look forward to maintaining our growth strength as we move into 2014.

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

Thanks Eyal. Revenues for the third quarter of 2013 were $42.4m, representing a 15% growth from revenues of $36.8m in the third quarter of 2012. Revenue breakdown for the quarter was $31.3m coming from subscription fees, and 11% year-on-year growth increase. Product revenues were $11.1m, which was a 27% increase over the same quarter last year.

The geographic breakdown of revenues in the third quarter was as follows. Israel 52%, Brazil 36%, Argentina 9% and USA 3%.

Gross margin in the quarter was 51.8% compared with the gross margin of 50.3% in the third quarter of last year.

Operating profit for the third quarter of 2013 was $10.8m, or 25.5% of revenues, an increase of 47% compared with an operating profit of $7.4m, or 20.1% of revenues in the third quarter of 2012.

EBITDA for the quarter was $13.6m, or 32.1% of revenues, an increase of 28% compared to EBITDA of $10.6m, or 28.9% of revenues in the third quarter of 2012.

Net profit was $7m in the third quarter of 2013, or 16.5% of revenues compared with the net profit of $5.2m, or 14.2% of revenues in the third quarter of 2012.

Fully diluted EPS in the third quarter of 2013 was $0.33 compared with fully diluted EPS of $0.25 in the third quarter of 2012.

Cash flow generated from operation during the quarter was $13.3m. As of September 30, 2013, the Company had net cash, including deposits in Escrow of $41m, or $1.95 per share. This is compared with $34.2m, or $1.63 per share as of December 31, 2012.

For the third quarter, a dividend of $3.5m was declared in line with the Company's stated policy of issuing at least 50% of net profit in a dividend on a quarterly basis. The dividend's record date is December 23, 2013 and the dividend will be paid on January 8, 2014 net of taxes and levies at the rate of 25%.

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

Thank you, Eli. We continue to remain very well positioned as the leader in our main two markets, Israel and Brazil. I want to stress that while our results are at record high, we still see further potential in both these markets.

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

(Operator Instructions). Oded Manor, Psagot.

Hi, there. I was wondering if you can elaborate a little bit about the CapEx. They -- I noticed they were a little high this quarter.

Hi, Oded. As you know, the reason for volatility between the quarters on the CapEx is we are purchasing units. So, basically, if you want to take the right amount, you should do an average more or less of the -- let's say of the nine months, something like that. In this quarter we purchased more than the previous quarter.

So, if we still look at nine months, you still -- your CapEx is significantly higher than 2012. What's the main reason for that?

Supplying more in order to be prepared for the next year.

Okay, thanks.

Yes, I would add something, Oded. When you see our results and you see our growth in subscribers, it also means that we are installing more and more and much more units in cars. And most of our CapEx represent purchasing of hardware, of end units and thanks to this growth, no doubt that our CapEx is a little bit higher. That's all.

Okay, thanks.

Nadav Zeller, Sphera Fund.

Hi guys. Good afternoon. I was just wondering with regarding the Brazilian units, with regarding their mix in revenues with the private and the insurance.

We are not providing specific numbers. But, generally speaking, I would say that since the strategic change that we did about two years ago with the decision to focus on the retail market, something that we a little bit ignored in our first 10 years Brazil. Thanks to this, our subscriber's base from the segments of the retail is growing today much more than the insurance customer segments. And based on that, I would say that the ratio between these both segments is now going towards having major portion from the retail markets --

On the incremental --

On the incremental. Looking forward two or three years with assumption that this trend will continue, so, major portion of our subscribers in Brazil will come from the retail. It has, of course, one main or two main benefits. First is that the ARPU and the revenues and the collections are much better than the insurance segment. And second, diversified customers to many or hundreds of thousands of a household is much less risky, much less depend than having six, 10 or 15 insurance company on your balance. And we believe that this is going to continue to be the trend.

Okay. Thank you. It was very helpful. And can you add a bit color regarding the Ituran Save and the margins on this product? Is it similar to the product that you are already providing in Israel?

No, and I will explain. The Ituran Save is a low cost solution for the low cost -- I would say cars, low cost end users. And in order to allow us to penetrate this segment, we have through the Save, the Ituran Save, we have a little bit different solution which again allow us to sell it for a lower price with a lower subscribers fees. So, it represents about half of the, let's say the luxury to earn, which goes to luxury cars. It has some different characteristics.

On the other hand, it's required less human attention because we have no false alarms. We have no real-time alerts. It means that in terms of profitability on the growth, on the top line, it's higher, but in terms or total revenue, it's lower. But, don't forget that in the past we didn't have customers from this segment at all. So any --

Okay, so there is no overlap between this offering and the offering you already have?

What, sorry? Can you repeat your question?

Sure. There is no overlap between this offering and the offering that you already have. It's not cannibalizing your sales.

Of course not. This was part of our first diversify between the solution and it really goes to different segments. And this is only additional potential market for us which we currently have almost two years of our proven track record that shows that it contributes to our growth also in Israel, which you know it's -- our market share is very high. It's a very mature market and still we succeed to grow in terms of subscribers, revenues and profits in Israel.

Okay. Thank you very much.

You're welcome.

Matthew Handorf, Graham Partners.

Hi. Thanks for taking my questions. I was just looking for a little bit more detail on Brazil. So, first, it looks like there is a bit of a slowdown in revenue growth this quarter after the last two, so just wondered if you're seeing any increasing competition there.

And then secondly, just if you have any update on the Contran 245 in terms of expectations for timing and potential opportunity for you guys. Thank you.

First of all, as we described in our results in our PR, and if you are tracking the Brazilian real, the currency, you would see that it's become much more weakness through quarter -- the third quarter. And since we are translating our results to dollar, so it's influenced our report and this is the main or the only reason that you see a small growth in the revenues. If we would translate it to the local operation currencies, you would see that we grow very material, and this is actually what we are aiming because we are always having the cost and the revenues on the local currencies. Since we are trading in NASDAQ, we translate it to dollars. So, it's not really non-growth. We are growing, and we are also increasing our market share in the Brazilian market.

So, can you repeat your -- and regard the 245, I don't know if to say fortunately or unfortunately, but by looking on the ground, it's not yet operate, but -- and it's always delayed. But what we can see and we of course are approaching the decision makers and we go -- we are looking every day what's going on with this regulation and we see that its moved on. But there are -- or there was other barrier which was that the technological barrier, the barrier of regulation to create some open platform, create cooperation from the car manufacturers to install the right end units that can talk with the software sitting in location companies like Ituran etc.

So, it's like -- look like it's going to be delayed again, but now people are more confident that it will be around mid-2014. But I would like to repeat what I say almost two years, we are -- we succeed to gain more market share and to growth in the market by offering new segments, even as you can see without this regulation. And this regulation, what it -- once it will be enforced, we believe, of course, that it will increase the market potential for us as well.

Great. Appreciate the color.

(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?

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

Thank you. This concludes the Ituran third quarter 2013 results conference call. Thank you for your participation. You may go ahead and disconnect.