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Edited Transcript of OTIV earnings conference call or presentation 12-Aug-19 1:00pm GMT

Q2 2019 On Track Innovations Ltd Earnings Call

Rosh Pina Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of On Track Innovations Ltd earnings conference call or presentation Monday, August 12, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Assaf Cohen

On Track Innovations Ltd. - Interim CEO & CFO

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Conference Call Participants

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* Ehud Helft;GK Investor Relations

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Presentation

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Operator [1]

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Welcome, everyone, to the On Track Innovations' Second Quarter 2019 Corporate Update Call. (Operator Instructions) As a reminder, this conference is being recorded. You should have all received by now the company's results press release. If you have not received it, please contact On Track Innovations' Investor Relations team at GK Investor & Public Relations at 1 (646) 688-3559 or view it in the news section of the company's website.

I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations.

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Ehud Helft;GK Investor Relations, [2]

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Thank you, operator. Welcome to On Track Innovations 2019 Second Quarter Conference Call. I would like also to thank management for hosting this call. With us on the call today from OTI is Mr. Assaf Cohen, Interim CEO and company's CFO. Assaf will provide some of the recent key highlights and review OTI financial performance for the 2019 second quarter. Following the prepared remarks, we will go to investors' submitted questions, and Assaf will provide the answers for those questions.

Please be advised that certain information discussed on this call will contain forward-looking statements. They can be identified by the use of terms such as may, will, expect, believe, intend, plan and other comparable terms. While forward-looking statements reflect good faith, belief and best judgment based upon current information, they are not guarantees of future performance. They are subject to unknown and known uncertainties and risk factors, including those detailed from time to time in the company's filings with the SEC. OTI assumes no obligation to update any forward-looking statements or information, which speaks as for their respective dates. The full safe harbor provision are set forth in the press release we issued earlier.

And with that, I would now like to hand over the call to the company's interim CEO and continuing CFO, Assaf Cohen. Assaf, go ahead, please.

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [3]

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Thank you, Ehud. Welcome all and thank you for joining us today. As you know -- as you all know, OTI is currently undergoing leadership transition. While the Board is working to bring on a new CEO, I'm appointed the interim CEO.

We have temporarily changed the format of the conference call during this interim period, whereby my prepared remarks have been prerecorded, and we took questions from investors via email. Following my prepared remark, I will provide the answer to your submitted questions. This is a temporary situation. Once we have permanent CEO, we will go back to our normal format of the live conference call.

I would like to start by summarizing some of the key events of the quarter. Overall, we are pleased with the strong improvement in our results in the second quarter. Our strong growth in revenues amounting to $4.1 million, up 37% over the prior quarter, give us confidence that the issue we face in the U.S. from the impact of the U.S. tariffs on Chinese-manufactured products is now behind us, and we have begun to regain our positive momentum in the region.

Another positive aspect in our results and in line with our long-term strategy is that the recurring portion of our revenues continue the growth trend, and this has allow us to see a solid improvement in our gross margin over 700 basis points above where it was in Q2 last year. Looking ahead, we expect to continue our sequential revenue growth in the coming quarters. And given the positive trend, I expect surplus breakeven in 2020 and return to profitability.

On the sales front, we are also making progress. In early June, we announced an order for 2,000 advanced payment system for use in the Russian ticketing. We won this order based on our leading technological capabilities, and this is a demonstration of the highest level of security. This important customer has become another key reference for us in Russia. This additional order builds on our previous success in significant Russian market having delivered to date almost 20,000 cashless payment system. Russia remain a long-term growth market for us.

In middle June, we received a purchase order for 1,000 cashless payment systems from Japan via our partner Billing System Corporation, a leading regional payment service provider. This new order give us a substantial runway to continue our growth together with our strategic partner. We continue to broaden our footprint in the vast Japanese unattended retail market, and we already have more than 10,000 OTI systems operational in the Japanese market. With the potential of 6 million units countrywide, the total size of Japanese electronic vending machine market is very significant for us, and we look forward to further growth in this market.

Last week, we announced an order for 10,000 of OTI's Uno-8 advanced secure contactless NFC readers for the global smart ATM markets to be delivered before the end of 2019. With this new order, we have already received order for over $50,000 -- I'm sorry, over 50,000 advanced readers system, which are being used throughout the world to provide smart ATMs with contactless NFC capabilities.

Now I would like to cover the financial results. Last Wednesday, we issued the results of the second quarter of 2019 in a press release. A copy of the release is available in the Investor Relations section of our website.

As usual, I'll be covering some non-GAAP metrics, including adjusted EBITDA from continuing operations. We believe this provide a good understanding of our ongoing performance. Please see the earnings release on our website for further details about this non-GAAP metric, including a reconciliation of adjusted EBITDA to our comparable GAAP results.

In addition, as you know, we announced the sale of MediSmart in December 2018. The results of MediSmart are therefore included as discontinued operations, and all the prior period information has been reclassified to conform with the current period's presentation.

Revenues in the second quarter of 2019 were $4.1 million. This is compared with $5.7 million in the second quarter of last year and $3 million in the prior quarter. In terms of breaking down of where revenues were derived in the second quarter of 2019, retail and mass transit ticketing revenues were $3.5 million or 84% of sales and petroleum revenues were $0.6 million or 16% of sales.

Looking at geographic breakdown in the second quarter of 2019. The Americas accounted for $0.8 million or 21%. Europe was $2.3 million or 55%. Africa was $0.5 million or 12%, and APAC was $0.5 million or 12%.

Recurring revenues in the second quarter of the year were $1.2 million or 29% of revenue versus 24% last year. Gross margin in the second quarter was 58%, a solid improvement over the 50% reported in Q2 last year and 55% in the prior quarter.

In the second quarter, operating expenses were $3.2 million versus $3.3 million in the second quarter of last year and $3.1 million in the prior quarter. Net loss in the quarter was $0.9 million. This is compared to a $278,000 loss in the second quarter of last year and $1.7 million loss in the prior quarter.

Now turning to our non-GAAP results. Adjusted EBITDA in the second quarter of 2019 was a loss of $442,000 compared with an adjusted EBITDA of $32,000 in the second quarter of last year and adjusted EBITDA loss of $1.1 million in the prior quarter.

Looking at our balance sheet, OTI remains in a good position. At June 30, 2019, cash, cash equivalents and short-term investment was $5.7 million and short- and long-term debt was $2.8 million. At year-end 2018, we had $5.9 million in cash and equivalents and $0.3 million in debt.

Before concluding, I would like to take a moment to thank Shlomi Cohen, our former CEO, and wish him the best of luck in future with all his endeavors. On behalf of the employees, management and the Board, I would like to thank him for the years invested in OTI in stabilizing the business and advancing his strategy. As I mentioned earlier, the Board is working to find a suitable replacement, which we hope will concluded in the coming months.

In summary, over the past few quarters, OTI has gone through a difficult period. But as the improvement in our results this quarter shows from the financial perspective, we believe the issue we've faced are now behind us. Apart from the strong sequential revenue growth, we have made strong progress in building recurring revenues as well as improvement to the gross margin better position us going forward.

And now, we'll respond to your questions. Ehud, please go ahead.

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Questions and Answers

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Ehud Helft;GK Investor Relations, [1]

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Our first question is from [Norbert Helft], private investor. He asked the following questions. The new TRIO-IQ was already presented in detail in June 2018. At the same time since then, global orders except for Russia and ATM have fallen. Is there a connection? Do customer prefer to wait for a similar production of the IQ instead of ordering the old TRIO? When will the TRIO-IQ come onto the market?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [2]

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We presented our latest cashless automatic payments solution, the TRIO-IQ, in the second quarter at the NAMA Show in Las Vegas. In the past few months, we did find that some of our customer has held those purchases until the new release was launched, and this was especially true in Japanese market where our customers want to use the latest and best technology. We believe that from the end of this year and beginning of 2020, we will start to see purchase order are coming in. Japan and U.S. market will be our major market for the TRIO-IQ in the coming year.

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Ehud Helft;GK Investor Relations, [3]

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Second question from Norbert. Please discuss OTI Petrosmart. And when do you expect to see more of these?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [4]

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As you know, OTI Petrosmart is our solution for integrated fuel and fleet management, vehicle identification. Escalating cost of managing fleet is the driver for the customer to introduce more stringent control when refueling. We do see demand and interest. In the first half of 2019, our revenue in this business was $1.4 million, down about 45% versus the first half of last year, primarily due to lower revenues in the Americas, which in part was due to import tariffs placed on Chinese-manufactured product into United States. I do expect our revenues in the second half of the year in this business will be better than that of the first half. Longer term, bringing OTI Petrosmart to the next stage of its potential will be something the new CEO will work on.

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Ehud Helft;GK Investor Relations, [5]

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Another question from Nobert. Cubic successfully implemented a new fare payment technology for New York MTA's rollout of their OMNY system. Cubic is an old partner for OTI. Is OTI involved here?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [6]

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No. OTI is not involved here.

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Ehud Helft;GK Investor Relations, [7]

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Follow-on question from Nobert. Billing System Japan wanted to expand its relationship with OTI. A subsidiary [Shingo] company was founded especially for this purpose in September 2018. However, the orders at OTI to Japan has disappeared. Was there a dispute?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [8]

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No. As I mentioned earlier, the Japanese market like to use the latest and best technologies. When we started discussing our new release of the TRIO-IQ, they held off new orders. We presented the TRIO-IQ at the end of April, and the interest from the Japanese market is quite significant.

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Ehud Helft;GK Investor Relations, [9]

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And the last question from Nobert. Finally, what do you expect in terms of sales and all the development through year-end?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [10]

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As I said earlier, we do expect to see linear sales growth from this point until year-end 2019.

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Ehud Helft;GK Investor Relations, [11]

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Okay. Our next question is from [George Beverly], private investor. It might be time that OTI should cease as an independent company and look to merge to create a company of scale that has better chances of success. Is this in the plan?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [12]

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The Board and management are indeed always looking how shareholders' value can best be achieved through the short-term goal is to grow sales and surplus breakeven in the coming quarters. A new CEO, when he joins, will consider the longer-term strategy of OTI together with the Board.

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Ehud Helft;GK Investor Relations, [13]

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Our next question is from [Aaron Gushkin from AZG Tangible Assets Front]. First question is as follows. What are the differences in Shlomi's strategies and the Board?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [14]

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Unfortunately, I can't go into the specific point of disagreement other than what we already publicly announced to the markets. We announced publicly that this related to a different -- differences in opinion between Shlomi and the Board with regard to the current strategy and operation of the company.

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Ehud Helft;GK Investor Relations, [15]

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Another question from Aaron. Is there a reason the Board does not just hire a banker to sell the company and salvage some of the value?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [16]

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The Board consider OTI to be very undervalued in the market. Therefore, our immediate goal with the most direct impact on our valuation and creation of shareholder value is growing sales which will lead to return of profitability. When the new CEO arrive, we will evaluate together with the Board the longer-term strategy for maximizing shareholder value.

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Ehud Helft;GK Investor Relations, [17]

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Follow-on question, is there a strategy in place to keep expenses under control to avoid another capital raise that dilutes the current shareholder base?

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [18]

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Our expenses are under full control. It will continue to be like that. I would like to point out a few things. We have guided that we expect revenues for the remainder of the year will continue to grow consistently. Our operating expenses in the first half of this year were $6.3 million versus $6.7 million in the first half of last year. So we are doing a good job on keeping cap on lowering expenses.

Our gross margin has increased 500 basis points from 51.3% in the first half of last year to 56.3% in the first half of this year, which effectively has lowered our revenue breakeven point.

With regard to the second point about raising capital, I don't know what the growth strategy will be for CEO, which has not yet arrived. What I can say is that the immediate term we have a $5.7 million in cash on the balance sheet, which is enough for short-term working capital needs.

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Ehud Helft;GK Investor Relations, [19]

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Thank you. That concludes the question-and-answer session. Assaf, please make your concluding statements.

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Assaf Cohen, On Track Innovations Ltd. - Interim CEO & CFO [20]

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On behalf of OTI, I would like to thank you for your continued interest and long-term support of our businesses. I look forward to speaking with you next quarter and updating you on our progress. Thank you for your attendance. Have a good day.

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Operator [21]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.