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Ituran Location and Control Ltd (NASDAQ:ITRN)

Q4 2013 Results Earnings Conference Call

February 19, 2014 9:00 a.m. ET

Executives

Eyal Sheratzky – co CEO

Udi Mizrahi – VP, Finance

Analyst

Nadav Zeller – Sphera Fund

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran fourth quarter and full year 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, February 19, 2014.

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'll now hand the call over to Ehud Helft, a GK investor and Public Relations. Mr. Helft, would you like to begin?

Ehud Helf

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

Eyal will begin the summary of this quarter's results, followed by Udi with a summary of the financials. We'll 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 with now Eyal, would you like to begin please?

Eyal Sheratzky

Thank you, Ehud. I'd now like to welcome all of you and thank you for joining us today. We are very pleased with our results ending a great quarter and fantastic year for Ituran.

Our subscriber growth was exceptionally strong in the quarter adding a net 20,000 subscribers, which is an all-time record for us. We also had our strongest year ever in subscriber growth adding 74,000 subscribers and we ended the year with 741,000 subscribers globally.

Further, this quarter we reported our strongest ever level of gross margin at 51.9% mainly due to our strong gross margins on product sales, as well as subscription fees. During the quarter, we rolled out some goodwill, tangible assets related to Mapa amounting to $3.5 million.

It is important to know that the right office noncash item and had no effects on cash or EBITDA generated during the quarter and no real doing on our performance going forward. The write-off is based on our internal estimates on the ongoing contribution of Mapa -- has always been positive, but fairly insignificant because of the recent changes in the way people use mitigation technology. We expect the ongoing contribution of Mapa to our business to diminish, both we do expect it to remain positive.

Our ongoing operating expenses excluding this one-time Mapa write-off was around the same level it has been for the past three years, which means all of the increase in our revenue 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 benefitting from the operating leverage in our model.

We generated a strong operating cash flow in the quarter of $12.6 million and for a year our cash flow amounted to $46.7 million, an all-time record --. As you know, we have a policy to share at least half of our net profit with our shareholders. Over 2013, we very much shared the rewards of our success with our shareholders and [indiscernible] million dollars in dividends of which $8 million is related to the fourth quarter.

This amounts to 76% of our net income for the. I’d like to provide you a brief update with regard to our performance in our two main regions Brazil and Israel. In Brazil, our business continued to grow strongly and Brazil remains a strong contributor to our overall subscriber growth. We continue to market our brand strongly and we see increased interest in the region from the private market allowing us to move away from dependency on the insurance company. Looking ahead as more and more cars in this major market incorporate telematics technology. We expect to continue growing and we look forward to further realizing our full potential in the region.

In Israel, our business grow strongly in 2013 and large portion of our subscriber came from this country where we are dominant player. In particular our fleet management solution and our budget [Ituran Safe Growth Program], saw strong traction and is enabling us to penetrate new segments in the market. In summary, we remain very pleased with our performance in the quarter and in 2013 as a whole.

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 while keeping our expenses flat. As we move into 2014, we look forward to further reaping the rewards of our past efforts, 2013 was a record year for Ituran in terms of subscriber growth, revenue, cash flow and ongoing profitability and we look forward to maintaining our growth trend as we move into 2014. I will now hand the call over to Udi for the financial review. Udi?

Udi Mizrahi

Thank you Eyal. Revenue for the fourth quarter of 2013 were $43.6 million representing the 14% growth from revenues of 38.2 million in the fourth quarter of 2012. Revenue breakdown for the quarter was $32.2 million coming from subscription fees and 11% increase year over year. Product revenues were $11.4 million, which were 26% increase over the same quarter last year.

The geographic breakdown of revenues in the fourth quarter was as follow, Israel 53%, Brazil 36%, Argentina 8% and U.S.A. 3%. Growth margin in the quarter was a record of 52.9% compared with the growth margin of 50.2% in the fourth quarter of last year. Operating profit for the fourth quarter of 2013 was $8 million, an increase of 0.3% compared with an operating profit of $8 million in the fourth quarter of 2012. There was a one-time operating expense of $3.5 million due to the rise of goodwill and intangible assets related to Mafa in the fourth quarter of 2013.

The write off is a noncash item with no effects on cash or EBITDA generating during the quarter. Excluding the one-time operating expense, operating income was $11.5 million representing 26.4% of revenue and representing an increase of 33% compared with the fourth quarter of last year. EBITDA for the quarter was $14.6 million or 33.5% of revenues, an increase of 20% compared to an EBITDA of $12.2 million or 31.8% of revenue in the fourth quarter of 2012. Net profit was $4 million in the quarter of fully diluted EPS of $0.19, excluding the one-time rise of in the quarter net profit was $7.5 million of fully diluted EPS of $0.36. This is compared with the net profit of $4.4 million of fully diluted EPS of $0.21 in the fourth quarter of 2012. Cash flow from operation during the quarter was $12.6 million.

In terms of the full year 2013 numbers, revenues for 2013 reached $170.2 million, an increase of 13% of the revenues of $150.3 million in 2012. The subscriber base grew by a record of 74,000 net subscribers during 2013. Revenue breakdown for the year was $127 million coming from subscription fees, an increase of 11% year over year, product revenue were $43.2 million, a 21% increase year over year. Growth margin in the year was at 52.5% compared with the 49.7% last year. Operating profit for 2013 was $38.3 million compared with an operating profit of $29.9 million in 2012.

Operating expenses in 2013 included one-time expenses of $4.4 million. Again I know that this is a – that this expense was a noncash item and there is no effect on cash or EBITDA during the 2013. If we were to exclude those one-time expenses operating income in 2013 would have been $42.7 million. EBITDA for the year was $54.3 million representing 31.9% of revenue compared to an EBITDA of $44.6 million representing 29.7% of revenue in 2012.

Net income in 2013 was $23.8 million of fully diluted earnings per share of $1.13, excluding the one-time expenses net income in 2013 worth $28.2 million of fully diluted earnings per share of $1.34. This is compared with the net income in 2012 of $24.9 million or fully diluted earnings per share of $1.19. During 2012, there was a net one-time income of $3.4 million excluding this one-time income net in 2012 net profit was $21.5 million, excluding all one-time effect net income on a non GAAP basis, in 2013 reached $28.2 million compared with the $21.5 million in 2012 representing growth year over year of 31%. Cash flow from operation for 2013 was a record, it was a record of $46.7 million.

As of December 31, 2013 the company had a net cash including deposits in Escrow of $46.6 million or $2.22 per share. This is compared with $34.2 million of $1.53 per share as of December 31, 2012. For the fourth quarter, a dividend of $8 million was declared. For the full year of 2013 the total dividend declared including that the fourth quarter of 2013 was $18 million representing 76% of the full year net income.

The dividends record date is March 26, 2014 and the dividend will be paid on April 10, 2014. Net of taxes and leave at the rate of 25% and with that…

Eyal Sheratzky

We continue to remain very well-positioned considering our main two markets Israel and Brazil. I want to stress that while our results are at record height we still see -- potential in both these markets and with that I will now be happy to take your questions. Operator.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen at this time we will begin the Question-and-Answer Session. (Operator’s instructions). Your first question is from Naya Ansang [ph] of Mingo [ph] Capital Markets. Please go ahead.

Unidentified Speaker

Hi guys. Can you provide some color on the insurance companies in Brazil if there are any new collaborations with the new insurance companies?

Eyal Sheratzky

Actually there is no something concrete or specific, from time to time we’re changing customers depend on request. Generally speaking, we continue to provide the services and sign contract with many companies as we can, but there is no something specifically that we are reporting.

Unidentified Speaker

So basically you are collaborating with the two companies.

Eyal Sheratzky

No.

Unidentified Speaker

No.

Eyal Sheratzky

I never said – how did you get it, hence accompanied.

Unidentified speaker

Okay.

Eyal Sheratzky

No, okay, I think that you have some misunderstanding, what we said in the past and I can repeat it is when we decided to focus and to enter new segments which is the [indiscernible] we launched a program which include selling only to run as a solution or we proposed a plan that provide the end-users it to run system plus insurance against only stealing the car, something which is not very normal in Brazil and two companies join us for these programs which is Mapfre and Cardiff, but they’re not our clients in this case, they’re only cooperating with us toward the customers.

So if that’s what you meant you’re right. We have this kind of a plan with two insurance companies. They’re not our customers. As customers which is a different segment, it’s a segment of insurance companies, we have many insurance companies that integrating our solution to their customers, this is different segment.

Unidentified speaker

Okay you made it clear, thank you, and another question is what is the pace of net ad subscribers that you expect going forward.

Eyal Sheratzky

As you maybe can analyze we had – this year we had very impressive gross quarter over quarter, so in order to try to be conservative you can take the Q4 and multiply it by four and then you get almost 80,000. I am not saying that this is an expectation, I am not saying that this is guidelines but– I hope that this can be some rough and general number, but of course it is very ambitious because this is the highest quarter ever.

Unidentified speaker

Yes, okay. Thank you.

Eyal Sheratzky

Welcome.

Operator

The next question is from Sasha Karim of Inflection Point Investments. Please go ahead.

Sasha Karim - Inflection Point Investments

Hi, I have four questions, but I’ll ask them in sets of two, first question would be what was your constant currency revenue growth in Q4 year on year and second question would be did you see any impact or have you seeing any impacts from Brazil being in recession which is what we’re hearing right now.

Udi Mizrahi

Regarding the currency you’re talking about from a topline point of view as the fourth quarter comparing to last year fourth quarter the effect was about let’s say $1 million. Talking about operational profit, we’re talking about something not significant gain to [hold out] $500,000, this is more or less than expected.

Sasha Karim - Inflection Point Investments

Okay.

Eyal Sheratzky

Regarding the issue of the recession in Brazil, I would say is follow, from a macro perspective Brazil is facing some recession right, but from more micro aspects from the industry the three are involving I would say that the results speaks for itself, this is – although we are not publishing specific numbers for Brazil, but it’s not a secret that Brazil is – represent – the growth in subscribers this year of course is also thanks to Brazil which mean that we succeed to grow higher than in the past, so it’s in the recession is not actually [throwing] our gross plans. I would explain why I think it’s not very – not much severe now.

The penetration of stolen vehicle recovery services in Brazil compared to the total market, the current car owners is very, very small compared to the potential. The correlation between the new cars that joined the roads and the SVR systems in the market is so – the spread is so high, so the correlation is very low, so even if instead of – - if of adding new 3 million cars. In 2013 there was only 2.5 million.

When you talk about 200,000 new SVR systems in the market in a year the correlation is very low. There is no sensitivity to the recession at this stage. For longer terms I cannot yet say, but the recession can be changed of course.

Sasha Karim - Inflection Point Investments

Sorry, can you repeat the numbers SVR additions this year.

Eyal Sheratzky

No I talked very generally. I’m talking about – first of all you have to understand there is a total number and there is a net subscribers because the churn rate Brazil is very high, so when I talk about total I am talking about few hundreds of thousands.

On the same time we have few hundreds of thousands of churning customers, so you see the total subscriber base because our business plan and our financial model is based on recurring revenues, but in terms of the – we have to look on the total and the penetration is less than 10%. So if the penetration is less than 10% the influence of a recession is not very high.

Sasha Karim - Inflection Point Investments

Okay, but as you know one of my concerns one on penetration – and having that SVR, but what’s the (inaudible) penetration in the market, maybe if by private versus insured segments would be even better.

Eyal Sheratzky

So let’s take what already established in our last one year which is 2012 okay then so if we had about 200,000 and – - less than 250,000 subscribers and we represents in the SVR about third or 40% of the market so we’re talking about almost half a million, we’re talking about 3 million new car every year and we’re talking about something like 20 – 25 million cars in the road so the penetration as you can see is less than a percent. So because this is the situation, the correlation is very low and on the other hand the potential to grow is still very big.

Sasha Karim - Inflection Point Investments

Great. And final question from me, are you seeing any beneficial impact from the early preparation for (inaudible) and just…

Eyal Sheratzky

First of all it was delayed again to May of 2014, this is the fourth or the fifth time that they delay the actual operation of this administration. If fully organized, we provide the service, we’re fully organized to support some of the common (inaudible) in Brazil.

As you know we reported almost three years ago about contract that we have with GM which will be enforced at the moment that the new legislation will be in force, so in one hand we’re ready, on the other hand we’re not counting on this legislation, is part of our business plan and as we grow organically today without this legislation we believe that we’re ready to do it as well next year.

The moment that 245 will be enforced as I always said it can be like a cherry on the cake, of course it will expand the potential of the market in – but we know how to grow it in result as you can see.

Sasha Karim - Inflection Point Investments

Yes, thank you.

Operator

The next question is on Syria Guruva [ph]. Go ahead.

Unidentified Speaker

Good afternoon and congratulations on great results. Can you break down the net subs between the different geographies, please?

Eyal Sheratzky

Actually as usual we reported only on the 20th. During the quarters, we provide data on consolidate the number of subscribers.

Unidentified Speaker

I am talking about the yearly numbers because -- should arrive in a few months, maybe can give us some color there?

Eyal Sheratzky

But, still I don’t want my lawyers to fire me.

Unidentified Speaker

Okay, okay.

Eyal Sheratzky

So…

Unidentified speaker

Okay maybe you can give us some color about the breakdown between insurance companies and the private market in Brazil, I mean not numbers, but percentage on the other indications.

Eyal Sheratzky

Okay, I would say some statement that most of our growth in Brazil on the net subscribers on the last year was based on the retail market. We’re growing in both segments, but the retail market is of course much more aggressively and again to be very general I would in our subscriber base, but our expectation within two or three years, the major portion of our subscriber base will be from the retail market.

We find it very important because of two major reasons, the first reason is that the – as the cash collection from this segment is higher or bigger than those that we are charging and collecting from insurance companies and second it’s better to be depends on the hundreds of thousands different households then 10 of 12 insurance companies. Of course we have both segments, but just to explain the difference and this is what we’re expecting to be.

Unidentified Speaker

Understood and maybe a word of private market, do you have enough data to know the churn rate versus the insurance companies?

Eyal Sheratzky

Yes, I would say that thanks to the kind of the contract that we have with a private customer compared with the insurance companies that churn or their motivation to churn when you are insured is higher than when you have our plan without being insured.

So the reason of churn from the insurance company is not insurance companies themselves, it’s because we don’t have any I would say commercial relationship, we don’t have any control over the car of the insured person, this is something that we are working with insurance companies and those customers when they churn from the insurance so we lose them.

When our direct customers and the contract is a little bit more – with more restrictions so we can keep – in one end we can keep them more and second the motivation to live is lower and also since we have a direct relationship we can always use our customer retainment papers to try and convince customer to stay make it shorter, the churn is lower in this segment. We’re expecting that the churn in the future will be lower than it was in the past.

Unidentified speaker

Great and that’s it from me. Do you have any thoughts about leveraging this user base for new services?

Eyal Sheratzky

This is something that we always do, always think, but always we are still want to be focused. I mean we will not going and use our customer base in order to offer things which are not in our focus like customer class for example.

We will not offer chocolates and newspapers, but what else is that we can offer some added value services as we did in the past and we are trying now to be more – focusing to be more – with more services like safety solutions, like providing the ability to car owner to see whether their – etcetera and also something that will relate it to some applications that can be used with our solutions through iPhones or Androids for example.

This is still really in the beginning, this is something that is not yet material for anything in our results, but of course we want to continue and find other services to offer and expanding the revenues per customer because as you know we have more than 700,000 – bunch of in assets I would say.

Unidentified Speaker

Okay, great and again great work.

Eyal Sheratzky

Thanks.

Operator

The next question is from Nadav Zeller of Sphera Fund. Please go ahead.

Nadav Zeller - Sphera Fund

Good afternoon, you mentioned earlier that the ARPU in the private market in Brazil is a bit higher than the outcome of the insurance markets, but as I model it I see some decline in the ARPU from Q1 to Q4, can you provide a bit of a color what’s been there, what is sitting on the ARPU going down?

Eyal Sheratzky

So first of all the answer is that this is not the case, the case is opposite, but I don’t know how you can measure it or what is your -- I would say mathematic tool to do it as long as we’re providing more consolidate numbers and there is some exchange rate influence. I am not sure that you can take it out specifically for Brazil, but just to be you know more clearly this is not the case in…

Unidentified speaker

No, what I meant is the ARPU for the general company not only for Brazil.

Eyal Sheratzky

You mean the ARPU in dollars versus general company so currently. Yes it’s basically custom currency. Currencies were declining compared for local currencies. But in local currencies the ARPUs in all the countries by the way are higher.

Operator

(Operator’s Instructions) No further questions at this time. So I ask Mr. Sheratzky to go ahead as his closing -- will be available tomorrow on Ituran’s website www.ituran.co.il. Mr. Sheratzky would you like to make your concluding statement.

Eyal Sheratzky

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 everybody, thanks.

Operator

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

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