Ituran Location and Control Ltd (ITRN) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran's Second Quarter 2017 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

You should have all received by now the company's press release. If you have not received it, please contact Ituran's Investor Relations team at GK Investor and Public Relations at 1 (646) 688-3559 or view it in the News section of the company's website, www.ituran.co.il.

I'll now hand the call over to Mr. Ehud Helft of GK 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 second quarter 2017 results.

I'd like to thank Ituran management for hosting this conference call. With me today on the call are Eyal Sheratzky, the CEO; Mr. Eli Kamer, CFO; and Mr. Udi Mizrahi, VP Finance. 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. I'd like to remind everyone that the safe harbor in today's press release also covers the content of this conference call.

And now Eyal, would you like to begin please?

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

We are very pleased with our results of the second quarter. We present our results which are at record levels. We are especially pleased with the return to strong growth in our subscriber growth as well as our record revenue and operating profit.

We reported record second quarter revenues of $58.5 million, up 19% versus last year. Out of that, $42 million was our subscription fees which showed an increase of 18% over last year. This ongoing revenue increase is built on the back of our subscriber growth, which added 55,000 net subs in the first 6 months of 2017, mainly in Brazil and Israel.

Looking at the gross margin on subscription revenues, this was 66.9%, a 4 percentage point higher than last year at 65.8%. This is due to the inherent operating leverage built into our business model, which translates our top line growth into much stronger growth in profit as incremental cost to our business of adding 1 new subscriber on the existing Ituran infrastructure is minimum. We believe that as our subscriber base continues to grow over the coming years, our margins should be able to continue to trend upward.

The quarter's subscriber growth was 30,000. We are pleased that this is at the highest level in over a year and beyond the high end of our typical expected range. I would like to spend a few moments talking about an important strategic development at Ituran during the quarter.

We recently signed a joint venture agreement in India with a large automotive supplier called Lumax Auto Technologies. For Ituran, this is the first joint venture with a large automotive supplier and the first operations center that we will open in the Asian region. With a population of 1.3 billion people and over 200 million registered cars in the country, the market potential for Ituran is phenomenal.

Additionally, the telematics industry in India is in its infancy. Working through with Lumax, we believe that we can establish ourselves as market leaders. As we have shown in Brazil, we can successfully enter into new markets, leveraging our technology and building a long-term growth engine.

I'd like to now cover the trends we are seeing in our main geographies. In Israel, our business continue to perform well, and we are seeing subscriber growth mainly through our penetration of the lower segments of the market. In Brazil, there have been signs of economic improvements and the negative effect of this weak Brazilian economy of the past few years seem to be moving behind us. This trend support our business growth as well as our IRT joint venture, which is performing ahead of our expectations. IRT made a positive contribution to our bottom line in the second quarter. IRT has significant potential to bring us hundreds of thousand of additional sales using our services, positioning us as clear market leaders in Brazil.

In summary, we are pleased with our performance in the second quarter of 2017. Looking ahead, as always, Ituran's core business remains well-positioned and continues to benefit from an ongoing growth in subscribers. As always, we are working hard to continue our success and, most importantly, sharing that success with you over the long term, our shareholders, with a stable and growing dividend.

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

Thanks, Eyal. Revenues for the second quarter 2017 were $58.5 million, representing an increase of 19% from revenues of $49.3 million in the second quarter of 2016.

Revenue breakdown for the quarter was $41.7 million coming from subscription fees, an 18% year-on-year increase. Product revenues were $16.8 million, which were a 21% increase over the same quarter last year. The geographic breakdown of revenues in the second quarter was as follows: Israel, 53%; Brazil, 37%; Argentina, 7%; and United States, 3%.

Gross margin in the quarter was 51.6% compared with the gross margin of 51.7% in the second quarter of last year. As Eyal noted earlier, our gross margin on subscriber revenues increased compared with last year. The gross margin on the product revenue was lower this quarter compared with last year due to the mix of products sold.

Operating profit for the second quarter of 2017 was $14.2 million, an increase of 19% compared with an operating profit of $12 million in the second quarter of 2016.

EBITDA for the quarter was $17.4 million, an increase of 17% compared to an EBITDA of $14.8 million in the second quarter of 2016.

During the quarter, share in affiliates, net was an income of $0.5 million versus a loss of $0.6 million in the same quarter of last year. The increase was primarily due to the contribution from our JV in Brazil, IRT.

Net profit was $10.4 million in the quarter or fully diluted EPS of $0.50. This is compared with a net profit of $7.6 million or fully diluted EPS of $0.36 in the second quarter of 2016.

Cash flow from operations during the quarter was $14.1 million.

As of June 30, 2017, the company had net cash, including marketable securities of $28.6 million or $1.36 per share. This is compared with $31.5 million or $1.5 per share as at December 31, 2016.

For the second quarter, in line with the company's dividend policy, a dividend of $5 million was declared. The dividend's record date is September 19, 2017, and the dividend will be paid on October 3, 2017, net of taxes and levies at the rate of 25%.

And with that, I'd like to open the call for question-and-answer session. Operator?

(Operator Instructions) There are no questions at this time. Before I ask Mr. Sheratzky to go ahead with his closing statement -- one moment. We have a question from [Louis Moser] of [Mayfax Investors].

I just want to know if you have any basic indication of outlook for the rest of the year.

Actually, based on our policy, we are not providing guidelines or prediction.

What is it -- is the trend of business continuing as last quarter, as reported?

Yes. Actually, the business, as we just reported and as you can look backwards and see the Q2 results, is that the business is based in a good shape and in based on our expectation and business plans. Yes.

Are there any seasonal effects to your business in those that you had previous quarter was $0.62 and you're at $0.50 on this quarter? Does that have anything to do with seasonal effects? Or is it just the way the orders flow?

Basically, in the first quarter, we had a onetime capital gain of the company. You can see it in the equity line in the share of affiliated. And that would -- this is why, it went up.

What was that -- do you know what...

Approximately $1.5 million.

(Operator Instructions) There are no further questions at this time. Before I ask Mr. -- one moment. We have a question from (inaudible), [Fairfund].

Can you give us an update on the joint venture in Brazil in terms of some of the progression you're seeing, maybe, sort of installments, installations? And also maybe one word about the SAARs in Brazil in terms of the overall number of vehicles sold versus last year or sort of how is it trending going forward?

As you all know, we are not consolidating this joint venture. So actually, we are not providing a pure numbers, but I can give you generally a view. So actually, we are growing our joint venture, our OEM subscriber base as we are expecting. This is currently is the time when we are starting to see more and more renewals, and the numbers are now expecting to be tens of thousand per month. So most of our focus is increasing our capacity and capability in terms of operators, marketing peoples. So in order of providing those services, those quarters are having more -- we are having more cost, I would say. So we are in kind of flat profits, which we expect to start ramping up again in 1 or 2 quarters with higher number of renewals and with an operating leverage on the cost that we just added.

So just to make sure that I understood correctly, the renewal revenue that's going to basically flow to the bottom line is all incremental profits, right? I mean, there are no additional costs involved in terms of renewal revenues?

There is, but when we are talking about additional renewal cost, meaning that we will have more and more subscriber base, in order to support this, I would say, incremental subscriber base. And since when you are making the renewals, you are changing some of your mode from working through the car manufacturer to working directly with the car owners, so it's required additional divisions, which we already integrated in our business. But of course, this is the time that it's -- we have to add more and support it. But practically, you're right, that the model will allow us to increase the revenues more than the cost, of course. And the profitability will grow, and the profit, which we are show it in our bottom line, should be much more material in the next quarters.

The next question is from Elena Rogovina of Chardan Capital Markets.

My question is about the new Indian JV. Could you please provide a bit more details on the initiative? In particular, what exactly areas of telematics market you are playing to be in? And what the time line for, basically, launching services and revenue generation? And what the estimated CapEx from your side?

As we see together with our partner, which is a well, well-established player in the automotive market in India, nationwide, we realized that the entire telematics industry is very, very premature in India but on the other hand the potential is huge. So what we are focusing at the beginning is mainly all the fleet management application going through big fleets on in aftermarkets mode. And when I'm talking about fleet management, I'm talking not only pure and simple fleet management, I'm talking also for car diagnostic, driver diagnostic and fleet management at the first stage. Then during the next, I would say, quarters and maybe next few years, we also want to expand this aftermarket business to an OEM business together with our partners, which again are very, very integrating and are the main supplier in India for every local manufacturer, all for Indians' brands, such as Tata and Bajaj but for also Suzuki Maruti and other international brands that their main plants are in India. This is something which is a more challenge segment. And we understand, from our experience, that it's taking more time in order to create deals on an OEM basis, but this is why we're going step after step. But the most important issue is that we feel that like we came many years ago to Brazil and nobody really, I wouldn't say believe, but it was really at the same stage where it was a premature market. And we today, 20 years later, are market leaders with legs in the aftermarket and in the OEM. When we talk about country, which is not 200 million people and not 20 million cars, but we are talking about 200 and 1.3 billion people, and we are starting with a very good point in terms of who is our partner and what is our technology and expertise to assume that in the next years, we will -- or at least, we are aiming to be the market leaders of this huge market as well. It's not something that you will see this year or maybe not even at the beginning of next year, but we will start provide deals after deals, I hope in the next years.

And what about estimated CapEx?

I would say, generally, based on our short-term business plan, we are talking about something which is not material, we are actually just together with our partner recruited the main management of this joint venture. By the way, it's already integrated some portion of it in our P&L. I wouldn't say that it will be material at the beginning. We are not deploying infrastructure. We are going to use the Ituran GPS-based technology, which means there is no need for infrastructure. Most of the investments will be for operation, meaning, people and space and mainly marketing. And marketing will be depend on progressing with the business plan. There is no hard CapEx involved in this business.

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?

Yes. I would like to thank all our employees and my team for the strong performance in the second quarter. Udi Mizrahi, our VP Finance at Ituran, will be meeting investors in New York in September. If you wish to meet with him, please be in touch with our IR team. On behalf of management of Ituran, I would like to thank you, our shareholders, for your continued interest and long-term support of our business. I look forward to speaking with you next quarter. Have a good day.

Thank you. This concludes the Ituran's Second Quarter 2017 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.