Ituran Location and Control Ltd. (ITRN) Q2 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran's Second Quarter 2017 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. 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 will now like to hand the call over to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Yeah. Thank you. Good day to all of you and welcome to Ituran’s conference call to discuss the second quarter 2017 results. I would like to thank Ituran management for hosting this conference call. With me today on the call are Mr. Eyal Sheratzky, the CEO; Mr. Eli Kamer, the 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 would like to remind everyone that the Safe Harbor and the press release also cover 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 second quarter. We present our results which are at record levels. We're 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 six months of 2017, mainly in Brazil and Israel. Looking at the gross margin on subscription revenues, these were 66.9%, a full 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 topline growth into much stronger growth in profit as the incremental cost to our business of adding one 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 upwards. The quarter 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 operation center that we'll 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 it's infancy. Working through with Lumax, we believe that we can establish ourselves as market leaders. As we've shown in Brazil, we can successfully enter into new markets, leveraging our technology and building a long-term growth engine. I would like to now cover the trends we're seeing in our main geographies. In Israel, our business continues to perform well and we're seeing subscriber growth mainly through our penetration of the lower segments of the market. In Brazil, there have been scenes of economic improvements and the negative effect of this weak Brazilian economy of the past few years seems to be moving behind us. Thus, trends support our business growth there as well about 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 thousands 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 this success with you over the long-term, our shareholders with a stable and growing dividend. I'll 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 revenue 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 a 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 product 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 with 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 per share in the second quarter of 2016. Cash flow from operation during the quarter was $14.1 million. As of June 30, 2017, the company had net cash including multiple securities of $28.6 million or $1.36 per share. This is compared with $31.5 million or $1.50 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 03, 2017, 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'll begin the question-and-answer session. [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 [Loius Moser of Mainfax Investors]. Please go ahead.

Good morning. I just wanted to know if you have any basic indication of outlook for the rest of the year?

Actually, based on our policy, we're not providing any guidelines or prediction.

What is the -- is the trend of business continuing as it has in your past quarter as reported?

Yeah 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 new shape and based on our expectation and [business plans].

Are there any seasonal effects to your business, I know the previous quarter was $0.62 and you are at $0.50 on this quarter. Is that happening since you do a seasonal effects or is just the way the [overall]?

Basically, the first quarter, we had one-time capital gain of the company. You can see it in the equity line in the [affiliated] and that would be that's why it went up.

What was that, that you know…

Up $72.5 million.

Okay. Thank you.

[Operator instructions] There are no further questions at this time. Before I ask -- one moment, we have a question from [Ron Senator at Fairfund]. Please go ahead.

Hi. Can you give us an update on the joint venture in Brazil in terms of some of the progress that you're seeing and maybe sort of installments, installations and also maybe one word about the [starts] in Brazil in terms of the overall number of vehicles sold versus last year or sort of how is it trending going forward?

Hi Ron. As you all know we are not consolidating these joint ventures. So actually, we're not providing pure numbers, but I can give you general view. So actually, we're 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 thousands per month. So most of our focus is increasing our capacity and capability in terms of operators, marketing people. So, in order of providing those services, those quarters are having more -- we're adding more cost I would say. So, we are in kind of flat profit, which we expect to start ramping up again in one or two 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 profit, right? There are no additional costs involved in terms of renewal revenues?

The reason -- but when we're talking about additional renewal of course, 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 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.

Thanks.

The next question is from Lena Rogovin of Chardan Capital Markets. Please go ahead.

Good afternoon. Congratulations on great results. My question is about new engine really. Could you please provide a bit more detail on the initiative, in particular what exact areas of telematics market you're planning to be in and what the timeline for basically launching services and remuneration and what the estimated CapEx from your side? Thank you.

As we see together with our partner, which is well established player in the automotive market in India nationwide, we realize 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 fleet on the aftermarkets mode and when I'm talking about fleet management, I am talking not only pure and simple fleet management. I am 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 are 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 also for Suzuki Maruti and other international brands that their main plants are in India. This is something which is a more challenged 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're 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're 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 this after this I hope in the next years.

Thank you. And what about estimated CapEx?

I will say generally based on our short-term business plan, we're talking about something which is not material. We're 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 depend on progressing with the business plan. There is no hard CapEx involved with this business.

Okay. Thank you. This is very helpful.

Thank you.

There are no further questions at this time. Before I ask Mr. Sheratzky to go ahead with the closing statements, 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 their 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.