Ituran Location and Control Ltd. (ITRN) Q2 2016 Earnings Report, Transcript and Summary

Welcome to the Ituran’s Second Quarter 2016 Results Conference Call. All participants are at 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. You should have all received by now the company’s press release, if you have not received it, please call GK Investor Relations at 1-646-201-9246. I will now hand the call over to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Thank you, operator. Good day to all of you and welcome to Ituran’s conference call to discuss the second quarter 2016 results. I would like to thank Ituran’s management for hosting this conference call. With me today on the call are Mr. Eyal Sheratzky, the Co-CEO; Mr. Eli Kamer, the 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’d like to remind everyone that the Safe Harbor statement in the press release also covers the contents of this conference call. And 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. We are very pleased with our results of the quarter. We showed very solid year-over-year growth and in particular we brought through a milestone of reaching 1 million subscribers. We present our results today showing year-over-year growth despite a continued currency headwinds so this has diminished compared with the last few quarters. While in U.S. dollar terms our second quarter revenues are 12% ahead of those last year, in local currencies our revenues grew overall by 23%. Demonstrating the operating leverage, our second quarter operating income grew 19% over those of last year and showed a very nice 36% growth over the last year in local currency terms. Our strong improvements in local currency terms are the fruits of our exceptionally strong subscriber growth over the past year in which we added 133,000. This growth was due to the extensive work we have done over the past few years to bring new products to market, which expanded our addressable markets by targeting the lower end of the market in Israel and in Brazil, the uninsured segment of the market. We do believe that our efforts have expanded our subscriber’s quarterly growth trend from the 15,000 to 20,000 trade we were seeing in 2014 to the 25,000 and above range now. This high level of subscriber growth proves that we are seeing tremendous traction in both Brazil and Israel for our new products and services. While every new subscriber add bring us additional revenue, we have an existing operating infrastructure in place to support them. As our subscriber base continues to grow, we believe the operating leverage inherent to our business model will allow us to bring much of new revenue growth down to the bottom line and therefore our margins should continue to expand. We generated operating cash flow in the quarter of $9.6 million and we continue to share the fruits of our success with our shareholder's, declaring the dividends of $3.8 million, approximately half of our next income. I’d now like to provide you with a brief update with regard to our performance in our various geographies. Brazil for us remains a strong growth engine. Our business is still at an early penetration stage in the Brazilian market and we remain with much potential to grow and expand our success there. Our Ituran SVR services with basic safety insurance is seeing significant traction in the market, driving our strong accelerated growth in the market. This service is sold direct to the end customer and significantly cheaper than the full insurance alternative in the market. With regard to our 50% joint venture IRT remains on track. If you remember, IRT has an agreement with one of the major global auto carmakers in Brazil and Argentina, providing their customers with telematic services on various new car models they sell for the second year. These services can include vehicle security, personal safety, remote diagnostic, web and app application and concierge. IRT is a core component of our strategy and very much straighten our position in our target markets, enabling us to bring to evolve into a player in the automotive industry after two decades of operating in the aftermarket segment only. It will bring us hundreds of thousands of additional subscribers positioning us as clear market leaders. Following Brazil and Argentina and given our strong relationship with this carmaker, we see potential to expand this business further in other countries in South America. Right now, there are some expenses and investments in infrastructure, which can be seen in our sharing affiliate's line, on our income statement, as well as investment activities in cash. As we mentioned last quarter, we expect the business to become cash flow positive in early 2017. In Israel as the major player, our main business continues to grow in line with new car sales. The first half of 2016 show record new cars deliveries in the country. At the same time, we are not anymore reliant on the growth in new car sales to grow. We have strongly penetrated the lower segment of the market where only a few years ago we were not active at all through our Ituran Safe Service, which has performed very well. Overall, we remain pleased with the strength and stability of the Israeli business and it is also supporting the overall growth in net subscribers. In summary, from a business perspective, the second quarter continue the growth and strength we saw in the first quarter with continued strong subscriber growth crossing the 1 million subscriber mark. We remain very well positioned to continue to benefit from our strong growth in subscribers and we are working hard to continue our success in the next quarter. I will now hand the call over to Eli for the financial review.

Thanks, Eyal. Revenues for the second quarter of 2016 were $49.3 million, up 12% when compared to revenues of $43.8 million in the second quarter of 2015. When excluding the currency impact of the strengthening U.S. dollar, our year-over-year growth in revenues would have been 23%. Revenue breakdown for the quarter was $35.4 million coming from subscription fees, a 10% year-on-year increase. In local currency, revenue increased by 24% over the second quarter of last year. Product revenues were $13.9 million, which were a 19% increase over the same quarter last year. Currencies did not have a significant impact on our product revenues. The geographic breakdown of revenues in the second was as follows: Israel, 52%; Brazil, 26%; Argentina, 8%; and United States, 4%. Gross margin in the quarter was 51.7% compared with the gross margin of 50.8% in the second quarter of last year. The gross margin on subscription fees was 55.8% and the gross margin on product was 16%. The operating leverage built into our business model whereby we can add each new subscriber at a much higher incremental margin enabled us to increase our gross margin despite the fact that the lower margin product revenues was a higher portion on the revenue mix in the quarter. In addition, the weakening of the Brazilian real and the Argentinean peso versus the U.S. dollar had a negative impact on the gross margin. Operating profit for the second quarter of 2016 was $12 million, an increase of 19% compared with an operating of $10 million in the second quarter of 2015. Excluding the impact of the change in exchange rate over the period, the operating profits would have increased 36% over the second quarter of last year. EBITDA for the quarter was $14.8 million or 30.1% of revenues, an increase of 17% compared to an EBITDA of $12.7 million or 29% of revenues in the second quarter of 2015. Excluding the impact of the change in exchange rate over the period, the EBITDA would have increased 24% over the second quarter of last year. Net profit was $7.6 million in the quarter, growing 31% over the last year, which represents fully diluted EPS of $0.36. This is compared with a net profit of $5.8 million or fully diluted EPS of $0.28 in the second quarter of 2015. Excluding the impact of the change in exchange rate over the period, the net profits would have increased 52% over the second quarter of last year. Cash flow from operation during the quarter was $9.6 million. As of June 30, 2016, the company had net cash of $25.8 million, or $1.23 per share. This is compared with $27.2 million, or $1.30 per share as at March 31, 2016. For the second quarter a dividend of $3.8 million was declared amount to 51% of the net income. The dividend record date is September 21, 2016 and the dividend would be paid on October 6, 2016 net of taxes and levies at the rate of 25%. And with that, I’d like to open the call for the question-and-answer session. Operator?

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question is from Sasha Karim of IPI. Please go ahead.

Hi, guys. Congratulations on yet another quarter. I’ve got a couple of questions. First the – how well funded is IRT from the – going forward, can we expect more cash outflow in the cash flow statement before that JV turns to cash flow positive? Actually, if you can answer that, I will come back with the second one.

Hi. Regarding IRT investments, as I said, we are currently having revenues and we are also gathering more and more cash. And as I said, we believe that in Q1 2017, we will be cash positive in this business and currently we are really in the end of the investment in this infrastructure.

Great, thanks. Another question would just be specifically with respect to that JV in Brazil, which seems to be the most significant region for you. Could you help us in terms of modelling assumptions there on – in terms of what is the ARPU you expect once – at the year one, when somebody have chosen to become a fully paying subscriber and also how much do you receive from your OEM partner in year one even though the service is technically being offered for free, I believe, for the customer?

So, first of all, what we said is that this JV is a contract with a national car manufacturer to install our solution and services in 100% of the cars models from now for the next five years. Based on the current [indiscernible] as we know the Brazilian economy is not in the best shape, we are talking about something between 1.5 million to 2 million cars using our solution in the next five years. We are not consolidating those numbers. So I have to be very careful about information that I share with you. You will see the results as part of our profit for affiliates and regarding ARPU, we're not providing data, although this ARPU is not part of the average that we showed in our middle and more subscribers.

Okay. I appreciate you don't want to give too many details in the granular stuff, but can you at least give us some kind of top down indication of what’s kind of contribution this JV could make to your operating profit, if you reach that point where it is 1.5, 2 million cars?

It won't be in the operating. As I said, we're not having, we're having only 50%. So according to accountant policy, we can provide only profit or loss from this joint venture, it will not be part of our other fundamental such as revenue, such as operating income. Regarding the total contribution, first of all we believe that this is going to be material, of course this is going to be ramping up towards 2018, 2019 in the head and then we believe it can be a material. We don't have yet data about renewals of the customers. As we say, this car manufacturer paying us for the first year, for the hardware and for the service. So, the first year is, we have a commitment and we have promising for the revenues and for the profits, but for the renewal, from the second year of this car owners we will have together with this car manufacturer to push in marketing because then the customer will have to pay it by himself. We have our own business plans, but of course we still don't have any real data, and we are not in a position to share with you yet.

Okay, thank you.

[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 look forward to speaking with you next quarter. Have a good day, thank you.

Thank you. This concludes the Ituran’s second quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.