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Edited Transcript of OTIV earnings conference call or presentation 23-Mar-20 1:00pm GMT

Q4 2019 On Track Innovations Ltd Earnings Call

Rosh Pina Mar 28, 2020 (Thomson StreetEvents) -- Edited Transcript of On Track Innovations Ltd earnings conference call or presentation Monday, March 23, 2020 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. - CFO

* Yehuda Holtzman

On Track Innovations Ltd. - CEO

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Conference Call Participants

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* Kenny Green;GK Investor Relations

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Presentation

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Operator [1]

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Good day and welcome to the On Track Innovations' Q4 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Kenny Green. Please go ahead.

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Kenny Green;GK Investor Relations, [2]

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Thank you, operator. Welcome to On Track Innovations' Fourth Quarter and Full Year Conference Call. I would like to also thank management for hosting this call.

With us on the call from OTI is Yehuda Holtzman, company's CEO; and Assaf Cohen, company's CFO. Yehuda will use this forum to provide some of the recent key highlights, and Assaf will review OTI's financial performance for the fourth quarter and full year of 2019.

As we have done for the past 2 quarters, following the prepared remarks, we'll go through investors-submitted questions, and management will provide the answers to those questions. Please be advised that this conference call may 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, for example. And in addition to these forward-looking statements, mentioned in the company's results press release last week, OTI is using forward-looking statements when it discusses, among other things, OTI's belief that its unique technology in the growing market of cashless payments means that OTI is positioned for long-term success; OTI's expectation to continue to increase sales and deployments around the world in 2020; OTI's belief and plan to bring the company back to growth in 2020, while improving both top and bottom line results to fully realize its inherent potential and ultimately profitability; OTI's belief that it will deliver high numbers of advanced systems for the ticketing self-checkout system for the Russian market during 2020; OTI's expectation to raise an additional $1.2 million under the private placement; OTI's hope to see an increase in sales in the payment and mass transit segment in certain markets; OTI's belief that it will present growth in its revenues in the petroleum segment compared to 2019; OTI's belief that it will continue to increase the number of its OTI systems operational in the Japanese market during 2020; OTI's plans to improve its penetration in the U.S. market, including engagement with past and new strategic partners; OTI's belief that it will present growth in its fueling revenues compared to 2019 as part of its strategic plan, which will come mainly from the Americas and EMEA; and OTI's expectation for a positive impact of launching new products on its revenues in the coming quarters.

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 known and unknown 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 speak as of their respective dates. The full safe harbor provisions are set forth in the press release we issued last Wednesday and which is available on OTI's website at investors.otiglobal.com.

And with that, I would now like to hand over the call to the company's CEO, Yehuda Holtzman. Yehuda, please go ahead.

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Yehuda Holtzman, On Track Innovations Ltd. - CEO [3]

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Thank you, Kenny. Welcome, all, and thank you for joining us today. As you all know, OTI has been positioning over the past few quarters. And in December, I joined OTI as the incoming CEO. Since December, I've been bringing myself up to speed and getting fully acquainted with the company and its people. I can share with you that I have been impressed with much of what I see, and in particular, the quality and professionalism of the employees.

In the past few weeks and few months, I have already been working with my management team on new strategy to bring the company back to growth and profitability and to the next level. I firmly believe that OTI unique technology and the growing market of cashless payments means that we are positioned for long-term success.

We are well positioned in a number of important markets. A key growth area for the company in the automated retail space is smart ATMs. In 2019, we delivered more than 25,000 advanced contactless readers, this is up 55% year-over-year. And we expect to continue to increase sales and deployments around the world in 2020.

Due to our MIR certification, Russia continue to be an important market for us. In 2019, we delivered over 14,000 advanced payment systems for use in the Russian retail self-service market. Those orders were, one, based on our leading technological capabilities, and it is an ongoing proof of how our product meet the highest level of security.

Japan also represent a key market for us. In mid-June, we received a purchase order for 1,000 cashless payment systems, and we have more than 11,000 OTI systems operational in the Japanese market. A key part of my role will be to improve our execution in our core markets while expanding our sales potential to additional markets with the goal to ultimately fully realize our inherent potential.

In that regard, we have already begun restructuring our sales and marketing team, and we have brought on some new key employees, most of which are for the payment business activity, including a head of U.S. sales, a head of our Western European sales, located in the U.K. and a new VP of marketing.

In the coming quarters, I hope to further elaborate on my long-term vision, strategy and plans for improving our execution at OTI, with a goal towards bringing the company back to growth and ultimately profitability.

At the end of last year, we raised $1.1 million from a current shareholder, Mr. Ivy, and from 2 of our Board members in a private placement. Additionally, we raised $0.2 million in January 2020 under same private placement. In certain conditions -- if certain conditions are met, including the approval of our shareholders, we will raise additional $1.2 million under same private placement by the end of April 2020. This cash will provide us with additional working capital to support our growth strategy. Furthermore, we are pleased with the vote of confidence in our potential that this represent Mr. Ivy and those Board members.

Before we move on to Assaf, I want to briefly touch on the impact we are seeing from the global coronavirus pandemic. To date, we have seen no significant financial impact. We are complying with local instruction in all the regions in which we operate and taking every step possible to protect our employees, including, where possible, shiftwork and working from home. We do wish all those who are unwell due to the virus a speedy recovery, and we hope that this episode will soon be behind us.

And with that, I'd like to hand over to Assaf, our CFO, to summarize the financial results. Assaf, please go ahead.

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

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Thank you, Yehuda. As usual, I will be covering some non-GAAP metrics, including adjusted EBITDA from continued operations. We believe this provides a good understanding of our ongoing performance. Please see the earnings release on our website for further details about these non-GAAP metrics, including 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 periods information have been reclassified to conform with the current period's presentation.

Our revenues in the fourth quarter amounted to $3.8 million compared to $4.5 million in the fourth quarter of last year and only slightly below those of the prior quarter at $3.9 million. In terms of the breakdown from where revenues were derived in the fourth quarter of 2019, retail and mass transit ticketing revenues were $2.9 million or 77% of total revenues and petroleum revenues were $0.9 million or 23% of total revenues.

Looking at the geographic breakdown in the fourth quarter of 2019, the Americas accounted for $0.7 million or 18%, Europe was $2.3 million or 62%, Africa was $0.6 million or 15% and APAC was $0.2 million or 5%. 28% of our revenues were of a recurring nature. This was at a lower level to that of last quarter at 32% and up compared with 26% of revenues in the fourth quarter of last year.

Gross margin in the fourth quarter was 42% compared to the 40 -- sorry, compared to the 48% reported in the fourth quarter of last year and 44% in the prior quarter. The reason for the lower level of gross margin was due to the product mix sold in the quarter.

In the fourth quarter, operating expenses were $3.1 million, this is compared to $3 million in the fourth quarter of last year and $2.8 million in the prior quarter, which includes a gain of $0.3 million related to the sale of building by OTI's South African subsidiary. Net loss in the quarter was $2 million, this is compared to a $533,000 net income in the fourth quarter of last year and a $1.2 million net loss in the prior quarter.

Now turning to our non-GAAP results. Adjusted EBITDA in the fourth quarter of 2019 was a loss of $1.1 million compared to an adjusted EBITDA loss of $474,000 in the fourth quarter of last year and adjusted EBITDA loss of $1.1 million in the prior quarter.

Looking at our balance sheet. As of December 31, 2019, cash, cash equivalents and short-term investments totaled $4.8 million, short- and long-term loans was $2.5 million. At year-end 2018, we had $5.9 million in cash, cash equivalents and short-term investments and $0.3 million in short- and long-term loans.

And now we will respond to your questions. Please go ahead.

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Questions and Answers

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Kenny Green;GK Investor Relations, [1]

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Thank you. Our first question is from Mike Latimore of Northland Capital. Does the concern around the coronavirus reduce customers' willingness to use vending machines, given the need to touch the screens or the machine buttons and also slow installations of card readers on machines?

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Yehuda Holtzman, On Track Innovations Ltd. - CEO [2]

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At this moment, it is still hard to assess the influence and to predict the impact of the coronavirus on the vending machines and on the company in general.

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Kenny Green;GK Investor Relations, [3]

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Our next question is from [Aria Lipschitz], private investor. Why have revenues not increased in the last 1 to 2 years?

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

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Until 2018 and including, the company presented year-over-year growth in the revenues for several years. During 2019, the company faced a few challenges, such as an impact of U.S. tariff on imports from China, where our products were manufactured and then a management change. Excluding any impact that may occur due to the coronavirus, we believe that in 2020, the company will return to the growth trend of improving top and bottom line results.

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Kenny Green;GK Investor Relations, [5]

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Please describe the competition pressures or any other reasons for reduced sales? Please address each market segment you're active in, both vertically and geographically?

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Yehuda Holtzman, On Track Innovations Ltd. - CEO [6]

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As I stated before, during 2019, we faced several challenges that had a negative impact on the company, which was less specifically due to competition. Regarding 2020 onwards, I will say the following: regarding payment and mass transit segment, we are focusing on our strategic markets, which are U.S., Europe and Japan, where we are investing, and I believe we will see growth compared to 2019. During 2020, we hope to see an increase in sales in those markets with primary focus on the U.S., a market which is definitely a key growth engine. In our petroleum segment, we are increasing our global presence and believe we will present growth in our revenues compared to 2019, which will come mainly from the Americas and EMEA.

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Kenny Green;GK Investor Relations, [7]

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Please describe the status of partnerships you have, especially with the partners in Japan, the U.S. and in Russia?

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Yehuda Holtzman, On Track Innovations Ltd. - CEO [8]

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We are working in the Japanese market via our partner, Billing System Corporation, a leading regional payment service provider. We continue to broaden our footprint in the vast Japanese unattended retail market. We already have more than 11,000 OTI systems operational in the Japanese market, and we believe that we will continue to increase this number during 2020.

With regard to the U.S. market, as you know, we can't give specific guidance on our customers, but I can say that we are working continuously to improve our penetration in this key market, including engagement with past and new strategic partners.

Finally, on Russia, it remains an important growth market for us. With our MIR certification, during 2019, we have delivered more than 14,000 advanced systems to the ticketing self-checkout systems for the Russian market. And we believe we will present higher numbers in this region during 2020.

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Kenny Green;GK Investor Relations, [9]

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Please also describe the current business activity in Poland and in Central Eastern Europe as well as the fueling vertical segments?

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Yehuda Holtzman, On Track Innovations Ltd. - CEO [10]

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Our revenues in Poland are derived mainly from the mass transit activity, where we manage the e-ticket sales network for several cities, including Warsaw, which generates recurring revenue for the company. As for the fueling vertical segment, we offer a complete solution for fuel management and payment, which eliminate fraud and cash handling issues while improving billing and information management.

As I stated, we are increasing our fueling vertical global presence and believe we will present growth in our revenue compared to 2019, which will come mainly from the Americas and EMEA.

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Kenny Green;GK Investor Relations, [11]

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Please provide your thinking of how to grow the sales as detailed as you can without risk to your strategic and/or competitive situation.

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Yehuda Holtzman, On Track Innovations Ltd. - CEO [12]

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We have been working for the past few -- sorry, we have been working for the past few months on updating our strategy for the coming years, which we believe will enable us to realize that potential and resume our growth and ultimately create shareholder value. I'd like to use this opportunity and mention that during Q1, we have recruited a key new employee to lead OTI business in North America. In addition, we just added an additional employee located in the U.K. to establish our presence there.

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Kenny Green;GK Investor Relations, [13]

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Please describe the cash reserves needed to execute your turnaround plans?

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

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As of December 31, 2019, our cash stands on $4.8 million, including $1.1 million that we raised from a current shareholder, Mr. Ivy, and from 2 of our Board members in private placement. Additionally, we raised a further $0.2 million in January 2020 under this private placement. If certain conditions are met, including the approval of our shareholders, we will raise additional $1.2 million under this private placement by the end of April 2020. That being said, we believe it will be sufficient to execute our strategy for the coming years, including support OTI's growth.

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Kenny Green;GK Investor Relations, [15]

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Do you consider the sale of some OTI assets, inclusive of technology and patents, or the entire sale of the company, should you receive an attractive offer?

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Yehuda Holtzman, On Track Innovations Ltd. - CEO [16]

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I can say, in general, that we will always look to maximize our shareholder value in any decision. If an opportunity may arise in the future, OTI Board and management will consider it.

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Kenny Green;GK Investor Relations, [17]

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Please talk about the shares ownership situation, shedding some light on the position of Mr. Ivy and associates in the ownership and strategic direction of the company?

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Yehuda Holtzman, On Track Innovations Ltd. - CEO [18]

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As I stated before, we entered into a share purchase agreement of up to $2.5 million, which Mr. Ivy together with 2 of our directors. We see this investment as a vote of confidence in OTI.

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Kenny Green;GK Investor Relations, [19]

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Our next question is from [Thomas Part], a private investor. No sales were reported from Japan. What is the problem with FinGo that was created especially for that? Why don't the Japanese buy?

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Yehuda Holtzman, On Track Innovations Ltd. - CEO [20]

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As stated, to this date, we already have more than 11,000 OTI systems operational in Japanese market, out of which 1,000 systems were sold during 2019. And we believe that during 2020, we will present growth in this market, which is significant for us.

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Kenny Green;GK Investor Relations, [21]

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IMI built a production line just for OTI products for $1 million, what is the load?

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Yehuda Holtzman, On Track Innovations Ltd. - CEO [22]

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The load is designed to support our capacity needs in the coming years. As you know, we relocated our production site outside of China to the IMI facility in the Philippines. We believe that this transition assists us in minimizing our exposure to the U.S. tariff on goods delivered from China to the U.S. market.

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Kenny Green;GK Investor Relations, [23]

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The North American market should be taken by storm with 365 Retail Market. Is the PicoCooler and PicoVend an OTI product?

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Yehuda Holtzman, On Track Innovations Ltd. - CEO [24]

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I can say that we are working consistently to expand our holding in the micromarket technology. I can't be specific on our products and customers, but I can say that we see the U.S. market as a key market.

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Kenny Green;GK Investor Relations, [25]

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The TRIO-IQ was the sensation at NAMA 2019. Why has no IQ-TRIO been sold to date?

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Yehuda Holtzman, On Track Innovations Ltd. - CEO [26]

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The TRIO-IQ is planned to be launched in Q2 2020. We expect that it will have positive impact on our revenue in the coming quarters.

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Kenny Green;GK Investor Relations, [27]

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Dover Fueling systems, DFS, massively advertised its automatic vehicle identification, or AVI. What is the status there? What is PetroSmart currently contributing to sales in the future?

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Yehuda Holtzman, On Track Innovations Ltd. - CEO [28]

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As you know, we have a global strategic supply agreement with DFS, a leading provider of advanced fuel dispensing equipment and automation solutions. In general, we believe we will present growth in this segment during 2020 compared to 2019 as part of our strategic plan for 2020 via expansion of channel partnerships around the globe.

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Kenny Green;GK Investor Relations, [29]

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And that ends the question-and-answer session. Yehuda, do you have a concluding statement?

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Yehuda Holtzman, On Track Innovations Ltd. - CEO [30]

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On behalf of OTI, 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 and updating you on our progress and in more detail on our strategic plan for the company.

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Kenny Green;GK Investor Relations, [31]

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Thank you. You may disconnect.