Ehud Helft - CCG Investor Relations Eyal Sheratzky - Co-Chief Executive Officer Udi Mizrahi - Vice President, Finance

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran Second Quarter 2013 Results Conference Call. All participants are 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, August 5, 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. Ehud Helft of CCG Investor Relations. Mr. Helft, you may begin?

Thank you, operator. Good day to all of you, and welcome to Ituran’s conference call to discuss the second quarter 2013 results. I would like to thank Ituran’s management for hosting this conference call. With me on the line today are Mr. Eyal Sheratzky, the co-CEO; Mr. Udi Mizrahi, VP, Finance. Eyal will begin with a summary of the quarter’s results, followed by Udi with a summary of the financials. We will then open the call for the question-and-answer session. Before we continue, I would like to remind everyone that the Safe Harbor in the press release also covers the contents of this conference call. 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 this quarter, which are very much a record for Ituran in many parameters. Our subscriber growth was strong in the quarter adding a net 18,000 subscribers and passing the milestone of 700,000 subscribers for the first time. Very clear, this quarter is our strong growth and operating margins with gross margins reaching at 51% mainly due to the strong margin on subscription fees, which reached 63.4%. At the same time, our ongoing operating expenses increased at the much lower 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. Product revenues also grow strongly to $11.2 million, up 18% over last year. We generated a strong operating cash flow in the quarter of $11.9 million and our net income was $6.7 million. As you know, we have a policy to share at least half of our net profit result to shareholders, and we distributed $3.5 million or 52% of our net income in dividends this quarter. I’d like to provide you an update with regard to our performance in our two main regions, Brazil and Israel. In Brazil, our business is continuing to grow strongly and Brazil is the one of the main contributors to our subscriber growth. We are marketing our brands strongly, and this has led to increased interest in the region from the private market. Looking ahead, there is more and more cars in these major markets incorporate telematic technology, we expect to continue growing and we look forward to further realizing our full potential in this region. In Israel, our business remains strong and growing. In particular, our budget to Ituran’s Save program is seeing strong traction enabling us to benefit new segments in the market. Our subscriber base continued to grow in Israel and business remained robust and cash generating. In summary, in the second quarter of 2013, our business performance has been very robust. We are showing record results in most parameters. We believe that we have not yet achieved our full potential and has much to look forward to over the coming year. And we see 2013 being the strongest year in our history. I will now hand the call over to Udi for the financial review. Udi?

Thanks Eyal. Revenues for the second quarter of 2013 reached $43.2 million, representing a 15% increase compared to the revenues of $37.6 million in the second quarter of 2012. Revenue breakdown for the quarter was $32 million coming from subscription fees, a 14% year-on-year increase. Product revenues were $11.2 million, which was 18% increase over the same quarter last year. The geographic breakdown of the revenues in the second quarter was as follows: Israel 50%, Brazil 38%, Argentina 9%, USA 3%. Gross margin in the quarter was 50.9% compared with the gross margin of 49.1% in the second quarter of last year. Operating profit for the second quarter of 2013 was $10.2 million, or 23.5% of revenues, an increase of 43% compared with an operating profit of $7.1 million, or 18.9% of revenues in the second quarter of 2012. EBITDA for the quarter was $13.7 million, or 31.7% of revenues, an increase of 30% compared to an EBITDA of $10.5. million, or 28.1% of revenues in the second quarter of 2012. Net profit was $6.7 million in the second quarter of 2013, or 15.6% of the revenues compared with the net profit of $10.1 million, or 27% of revenues in the second quarter of 2012. During the second quarter of 2012, a legal settlement with Leonardo contributed approximately $5 million to the net income in that quarter. Fully diluted EPS in the second quarter of 2013 was $0.32 compared with fully diluted EPS of $0.48 in the second quarter of 2012. Cash flow generated from operations during this quarter was $11.9 million. As of June 30, 2013, the company had net cash including long-term deposits of $38.5 million, or $1.84 per share. This is compared with $34.2 million, or $1.63 per share as of December 31, 2012. For the second quarter, a dividend of $3.5 million was declared in line with the company’s stated policy of issuing at least 50% of the net profit in dividend on a quarterly basis. The dividend’s record date is September 17, 2013 and the dividend will be paid on October 3, 2013 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, Udi. We continued 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?

Thank you. (Operator Instructions) The first question is from (indiscernible). Please go ahead.

Hi, guys. Good morning. Can you please elaborate on the sources of the increase in subscribers and the acceleration of subscribing adding in the previous quarters? Is the main growth originating from Brazil or Israeli market?

Actually, as you know since we made a large change in the Brazilian market focusing on the retail segments started almost a year and a half ago, we succeed to raising more and more subscribers in these markets and not being depend only on the insurance segments. And we actually doing the last two or three last quarters, we start reaping these – the fruits of these segments. While on the same time in Brazil, thanks to our strong brands, to our good relationship, our good results in recovering cars and also approaching also new segments which is the low and mid value cars with the Ituran Save, which is a little bit lower priced solution. These two reasons allow us to add much more subscribers than a year ago and even two years ago. I think that 18,000 per quarter is one of the highest ever.

Okay. So, the new subscription, it doesn’t have something to do with the regulation of 245 in Brazil, I mean it’s something for the private market not the insurance market?

No, first of all, the regulation 245 unfortunately a regulation that we are talking about, I would say even few years already, it’s something that not yet enforced although the program is more and more in place, but there is large delay determined that it will start in the beginning of 2014 which means that nothing of our new or current growth depend on this regulation. When this regulation will be enforced probably it will add more potential to our growth.

Okay. Can you give us some color regarding the competitive environment in Brazil?

The competitive environment in Brazil actually didn’t change dramatically since the last two, three years ago. The main players are still in place. Some of them are more focusing on fleet management or in some risk management, but all of them are still working in – also in the stolen vehicle recovery market, but I would not be not realistic by saying that we are the larger player in terms of stolen vehicle recovery, and in terms of our incremental subscribers base, we are – I believe we are adding more than 50% of the new subscribers in this industry.

Okay, great. Thank you very much. That’s helpful. Regarding EBITDA margin in Brazil or general profitability in this market as I see it from your reports, your previous report, the growth is coming from Brazil and the EBITDA margins is on its way up. Is the specific markets much more profitable from other markets or do you still continuing this trend?

First of all, based on our operating leverage model, the market that will have as much as new subscribers I would say based on the potential of Brazil by having more than 250 million peoples compared to Israel when we have about 8 million. When we look a little bit mid or long-term for the future, no doubt that the Brazilian market will contribute higher subscriber base for Ituran, and by using the same model as in Israel, the operating leverage model, no doubt, the margins in Brazil expects to be higher. The current situation, when you can see that the revenues, and as Udi stated the ratio between Israel and Brazil is almost similar. So, also the EBIT margins are almost similar. By changing the strategy in Brazil and by focusing on the retail market, we allow ourselves to increase our cash flow from operation in Brazil and allow us to help a little bit higher ARPU. And this also lead to higher margins but the current situation is that Israel and Brazil are contributing plus or minus the same ratios, the same (emerging) ratios.

Can you provide me with the breakdown between the private and the insurance segments, specifically in Brazil?

Okay. So, I would say something which is more general, the current subscriber base is still based more on the insurance customers, because historically this was the segment that we were focused almost 10 years, but if you look for the trend since we are more focusing today on the retail market, and this is something new when we are just start penetrating this segment. So, I would say that the trend of the incremental is the major growth is coming from the retail. I cannot divide it to specific numbers, but I would say that the major portion, whether it’s 55 or 60 something around this is – grows with the retail. If you look two or three years to the future, probably this will be the ratio between the insurance and the retail.

Okay, thank you very much. One last question and can you provide us with a bit of color regarding the Ituran fleet service, I see it’s starting to pickup whether the margin is a little bit accretive, where do you view it go from here?

You are talking about the fleet?

Yes.

Okay. During the last few years, Ituran invested I would say material amounts in developing state-of-the-art solution, which includes safety, include traffic and driver diagnostic and services diagnostic, and this is something that we are offering today to our commercial customers. We started it in Israel with two major tenders that was published by the idea by the Israeli Defense Forces and by the Israeli police a few months later, and in both tenders, we won. Together, it’s last with about 8,000 to 9,000 cars to give to two separate organizations or two separate. And this means I would say that they also accept our solution as I would say the best. After this class, our current commercial customers in Israel that are now changing more and more to our new solutions, we start to operate overseas, but this is something that it’s not yet material at all, but we believe that we have a very, very good solution, unique solution, yet to this day to un-brand the very solid company. So, we can work toward the offer to our commercial players with the big fleets around the world. The current situation is that it’s not yet adding material numbers, but I believe that with the assets that we have in this solution. In the future, we really count on growth on this applications win.

And do you view this service as do you believe that eventually the service will have higher margin than current group margins?

Potentially, yes, of course, it depend on the size of the customer, because it’s not like with the stolen vehicle recovery, which car owner of one or two cars is buying and paying the monthly fees. If this is a company with 10,000 trucks for example, and at this case, the cost for those 10,000, I am not talking about the hardware, but the software and maintaining and things like this are also enjoying from the operating leverage. So, basically, it has a higher margin, but it depends what is the customer and it depends on the sales cycle and it depends on the competitive landscape for a specific bill, because some customers need specific tailor-made solutions. Some of them have additional costs, some of them have mess costs. So, it’s more – it’s much general than the stolen vehicle recovery solution, but to make the long story short, we believe that it can contribute higher margins, yes.

Okay, great. Thank you very much. That’s it for now.

The next question is from (indiscernible). Please go ahead.

Hi, there. I have two questions. You guys have great results in Brazil, but we see that the Brazil economy is really slowing down don’t you see a slowdown in your sales there?

No. Actually, we are in Brazil since the late 90s. And as an emerging market, we faced, I would say, a very high volatility in the economy there. And if I try to look on the history and think how if we look today, it’s not influence us very badly. Of course, there is only one issue, which can be translated in our report is the currency exchange rate, but again, this is something that everybody know that when they are looking on Ituran, they are exposing to the local currency, because our cost and our revenues in Brazil are in reals, like in Israel they are in shekels. And for example, the current situation is that the real is weakening, but talking about the operational part, we are not feeling it in our business. And first of all, when the economy is bad, there are more crime rate and car theft rate. On the other end, don’t forget that Brazil we are talking about tens of millions of cars, where the total industry of stolen vehicle recovery is less than million, so the penetration is still very, very low and we believe that the potential is still very, very high. We are less sensitive to the economy based on our experience there.

Okay. And my second question is how much more room to grow your revenue in Israel, (particularly) the market is a little bit saturated, do you – can you grow on the mid-level?

Okay. First of all, if we would talk four, five years ago, no one would believe that Ituran will be in a stage of growing in 2011, 2010, 2012 and probably or not probably in 2013. Look in Israel we are adding subscribers since 1995 or ‘96. The markets as you know is not Brazil, it’s not United States, it’s not Mexico, we have about 150,000 to 200,000 new cars only I believe in the roles. What we succeed to do is to think more creative about three years ago we designed the Ituran Save, which is low-cost Ituran solution. And by doing this and by succeeding to reducing the cost of the hardware as well as the cost of giving the service and we are charging much less for this solution. We can offer it or we could offer it to low values of cars, cars like 100,000 shekels, 80,000 shekels, 120,000 shekels within the past. They only were obliged to put some alarm system or immobilizer. Today, we are offering something with almost the same price with a much better solution, so more and more insurance companies are understanding the benefits by installing it as well as the car importers. And by doing this, we actually opened the market. No doubt, that the ARPU is lower, but on the other end, revenues or the total growth in revenues still has the potential. And based on the same cost, the total profitability will grow. In terms of percentage fair customers came lowering, but we are talking about in the end of the day about profits, cash flow, and dividends. So, I believe that in Israel, we can continue to grow. In Israel, by the way there is an influence of the economy, because we are more sensitive to this. Why? We have more or much debt penetration compared to the total industry. For example today, cars with SBR when we have, let’s say, close to 300,000, I am just giving you rough number, and our competitors additional 70,000 or 80,000, so we are talking about penetration of 25% to 30% of the insured car. So, when the economy is in distress, it influenced our solution, our situation. The current situation, some people said we are in distress, but what we say is it’s a very good and stable market for us today.

Okay great. Thank you

(Operator Instructions) There 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. On behalf of the management of Ituran, I would like to thank you for your continued interest and long-term support of our business. And I do look forward to speaking with you and updating you again next quarter. Thanks.

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