Koor Industries
Conference Call, Q2 2008
13 August, 2008
Mediator: Shalom and welcome to the Koor Industries conference call. I would like to inform you that all the participants are in listening mode only. After the presentation, you can ask questions. Instructions for asking questions will be given at the appropriate time. For assistance during the conference call, please press "star" then "zero". This call is being recorded, Wednesday, 13 August, 2008. Before I hand over to Mr. Manu Kahana, of Gelbert Kahana, I want to say that except for historical data you will hear, all the data and/or results mentioned in this call are future projections that include risks and uncertainties. The Company's results might differ significantly due to various factors, as described in the Company's prospectus and its reports to the authorities. I will now hand over to Mr. Kahana. Mr. Kahana, please go ahead.
Manu Kahana: Thank you very much. Sigalit. Good morning everyone, and welcome to the Koor Industries conference call for presentation of the results of the second quarter of 2008. Koor has published its financial statements and we forwarded to you the notices to investors and the condensed financial statements. Participants in this call and others who did not receive the notices and/or the condensed financial statements, are invited to call the investor relations department at Gelbert Kahana. Today we have with us Mr. Oren Hillinger, the CFO of Koor Industries, and Ms. Avishag Peretz, the Company's comptroller. I now cede to Mr. Hillinger. Oren, go ahead.
Oren Hillinger: Thank you, Manu. Good morning everyone and welcome to our second quarter conference call. Yesterday afternoon we issued a report on the results of the second quarter of 2008. The results were influenced mainly by high financing expenses amounting to approximately 187 million shekels, incurred mainly because of the sharp decline in the dollar exchange rate against the shekel (during the quarter, the dollar fell by about 5.66% against the shekel), and a sharp rise in the CPI during the same period (the CPI rose by about 2.5%). The loss we posted for the quarter amounted to approximately 120 million shekels. For the first half of the year the loss is 116 million shekels. On 30 June, 2008, our cash balances and short-term investments, together with wholly owned subsidiaries, is approximately 2.3 billion shekels, which does not include two elements reflected in equity. The first element is receipt of 46 million shekels after the balance sheet date from Elbit Systems, the controlling shareholder in Elisra, after the receipt of an insurance payout following a fire that occurred in 2001 at the plants of Elisra's subsidiaries. The other element not reflected in the amount I noted earlier, is a payment of 210 million shekels for shares of Credit Suisse a short time prior to the balance sheet date, and paying for them a day or two after the balance sheet date. The gross balance of debt to banks and our debenture-holders at that date is 2.07 billion shekels, and the gross debt after setoff of the cash balances is a net debt of 740 million shekels.
Concerning our principal holdings – Makhteshim Agan, in which our holding is about 40% and recorded by the equity method. Makhteshim Agan posted excellent results for the quarter: sales in the quarter were 682 million dollars, an increase of 26% compared with Q2 2007, when sales were 543 million. Gross profit between the quarters increased by 26%, from 189 million dollars to 239 million dollars in this quarter. The margin also increased, from 34.8% to 35.1%, and net profit increased by 28% compared with Q2 2007, amounting to 68.8 million dollars compared with 53.6 million in Q2 2007. Looking at the half year, Makhteshim Agan's results are also excellent. Sales increased from almost 1.1 billion dollars last year to 1.4 billion this year, an increase of 28%. The same growth rate can be seen in net profit for the period, which increased from 125 million dollars to 160 million this half. The growth in sales at Makhteshim Agan in all the geographical regions in which it operates, was mainly the result of the high prices of agricultural commodities, which in turn is the result of the ongoing rise in the standard of living in east Asia and the increase in demand for alternative fuels from crops such as corn, etc. as well as the ongoing rise in the selling price of plant protection products.
Moving on to a review of other events at Koor during the second quarter. First of all is the purchase of Credit Suisse shares. During the quarter, our Board of Directors approved an investment in the shares of certain financial institutions up to a total of 1.5 billion shekels. After the end of the quarter, the Board of Directors decided to increase the amount of the investment in Credit Suisse to 3 billion shekels. It is important to note that the Board of Directors also determined that the investment must be made taking buy and sell opportunities, with due attention to the situation in the markets and the Company's own assessments from time to time.
Another event during the quarter is our ongoing investment in the Indivision fund. In May we invested about 2.5 million dollars in Indivision, a private fund that invests in the retail sector in India. We have undertaken to invest 15 million dollars in this fund, and to date we have invested about 10.8 million dollars.
A third significant event is a rights offering for raising capital. In May we published a rights offering prospectus from which we were able to raise 384 million shekels gross. 99.7% of the rights offered were taken, which is about 14.25% of the Company's issued capital prior to the issuance.
Other important events that occurred after the balance sheet date, are these:
First, we published a shelf offering report to raise capital. In July we published another rights offering, based on the same shelf prospectus from May. In the offering we offer Koor's shareholders ordinary shares of the Company by way of rights, so that whoever holds four ordinary shares is entitled to buy one share for 143 shekels. In this offering we also excluded US resident shareholders, in accordance with regulations. The last day for exercising the rights is set for 26 August, 2008, which is two weeks from today.
Another important event after the balance sheet date is the realization of some of our holdings in Credit Suisse. In July and in August we announced that we would record profits from partial realization of our holdings in Credit Suisse. The cumulative profit from these is 208 million shekels, which will be recorded in the third quarter of this year. Today, after transactions in the shares of Credit Suisse, we hold approximately 3.62 million of its shares, which represents about 0.35% of its share capital net of treasury shares. The cost of our investment in respect of the shares we still hold, is 531 million shekels.
And finally, I would like to remind you that our financial results, press releases and other information can be found on our website, at www.koor.com. I would also like to mention that there are accounting differences between the results of the companies and the results included in our consolidated results.
I will now take questions.
Manu Kahana: Sigalit?
Mediator: Thank you. We are now moving to the questions and answers stage. In order to ask a question, please press "star" then "1". To cancel a question, press "star" then "2". If you are not on speakerphone, you must pick up the handset before pressing the keys. Please wait while we collect the questions. The first question is from Yaniv Cohen of Clal Insurance. Yaniv, go ahead.
Yaniv Cohen: Good morning everyone.
Manu Kahana and Oren Hillinger: Good morning Yaniv.
Yaniv Cohen: Perhaps you can put things in order for us, or at least for me, and tell us, today, what is the – how much cash the Company has, and how much debt, and tell us by currency, today, after the sale of Credit Suisse, so that we can make a clean valuation.
Oren Hillinger: I can help you, lead you in the net debt calculation based on our publications from 30 June until today. The net debt, as we said, on 30 June is approximately 740 million shekels. Add to that the things we published, which is receipt of 46 million shekels from Elbit, against a clearing for Credit Suisse shares purchased before the end of the quarter, of minus 210 million shekels, i.e. the receipt reduced the net debt, payment to Credit Suisse increased the net debt. And now three main actions during the quarter and on which we reported. One is additional purchases of Credit Suisse shares so that the balance of our shares in Credit Suisse increased during the quarter by 202 million shekels. We reported at the end of the quarter on a cost of shares of 330 million shekels, today we reported on 531 million shekels, so approximately 202 million shekels of additional purchases of Credit Suisse shares, against which we realized profits of 208 million shekels, which increases our cash balance.
Yaniv Cohen: By how much? In profit you say –
Oren Hillinger: No, we realized. We received 208 million shekels in our pocket.
Yaniv Cohen: 208 million shekels?
Oren Hillinger: The realization gave us 208 million shekels over and above –
Yaniv Cohen: The cost. I asked if you can give me, correct for today's date, instead – just say, once you used to give both net debt at the date of publication of –
Oren Hillinger: No, we didn’t. But I'm coming to the bottom line. We add the 208 million shekels, deduct our accumulated foreign currency losses at the beginning of the quarter, which is 26 million shekels. If you add up the amounts I've mentioned so far, you get a net amount of minus 924 million shekels, which is approximately our situation today.
Yaniv Cohen: OK.
Manu Kahana: Yaniv, is that satisfactory? It works for you?
Yaniv Cohen: Again, you're talking about, your notice was about realization of a profit of 208 million shekels. That's not cash.
Oren Hillinger: It's not the total receipt in cash but it's cash, because it's been sitting in my cash box since 30 June, 2008.
Yaniv Cohen: Your notice was that you had recorded a profit of 208 million. But you sold more than 208 million of shares.
Oren Hillinger: That's right, but those were shares we bought also during the third quarter.
Yaniv Cohen: Ok. You bought for 202, you realized – again –
Oren Hillinger: No, no, no, we reported on the number. So I can't say it specifically, but if you go according to my calculation now, which is based on our notices, and see the bottom line I arrived at, that is very approximately the number –
Yaniv Cohen: You sold about 2 million shares. According to your reports. Two million shares at this share price is in the area of 350 million shekels. OK, so it brought you cash – not 208, which is the last profit you record, but you’re talking here about cash, that's – I'm looking here now – apart from that, I want the details of how much of your cash, today, is sitting in a Swiss bank, how much debt if you can give details between Israeli CPI linked and dollar, if you can just give a bit of detail.
Oren Hillinger: On the differences between purchases and sales, there is a very small difference of purchases and sales during the quarter. This calculation is correct. Now, about the currencies. We announced that we had converted almost all out dollar holdings to Swiss francs. Today we have 113 million shekels linked to the dollar, and we also have 1 billion and 83 million shekels linked to the Swiss franc, which is the proceeds from our sales.
Yaniv Cohen: OK.
Oren Hillinger: Again from our cash, 113 million shekels linked to the US dollar, one billion and 83 million shekels linked to the Swiss franc, and the balance is in shekels.
Manu Kahana: Are you OK with that?
Yaniv Cohen: Er…
Manu Kahana: Good. Sigalit, next question.
Mediator: Thank you. The next question is from Meidad Dvash of Dragon Hedge Fund. Meidad, go ahead.
Meidad Dvash: Shalom Oren, shalom Manu, how are you.
Manu Kahana: Still good.
Meidad Dvash: Still good. I'm relieved. I'm joking. Listen, I'm going back to the net debt, following the previous question. For me, cash and cash equivalents is also the shares of Credit Suisse. The delta for profit and loss I put into the calculation afterwards, and that's how I get to the results. That's why I think there's some confusion here.
Oren Hillinger: For us, the Credit Suisse shares are not stated as cash but as an asset available for sale.
Meidad Dvash: OK, so let's put things in order in the net financial debt. The net financial debt is minus 740 at the beginning of the quarter, plus a receipt of 46, right? Minus 210 of a new investment in Credit Suisse shares, prior, that came out after the quarter, yes? Good. After that we have realization of a receipt of how much?
Oren Hillinger: That's a number we didn't publish. Out of our total realizations.
Meidad Dvash: OK. So let's say something else. OK. What is the balance now of Credit Suisse shares?
Oren Hillinger: The balance of Credit Suisse shares now is 531 million shekels. In cost terms.
Meidad Dvash: 531 million shekels in cost terms.
Manu Kahana: Meidad, is there a question here?
Meidad Dvash: No, I want to get to –
Oren Hillinger: Well I think I have already led you, we arrived at a number which is very close, very small deviations from the situation today.
Meidad Dvash: OK. Now another question. About Telrad. If you could tell us a bit more. About the value of the investment in the books, how it's recorded in the books, and a bit more about the business results of that company in the past half.
Oren Hillinger: It's a private company so we don’t volunteer too much information. But I can tell you about how its written in the books, you can take the data we published on 31 December, 2007 and deduct our equity in its losses during the half. Our equity in its losses is 20 million shekels, so during the half you arrive at a number that is – if you start with the book value of Telrad that we reported in the annual report and take off the 20 million that is our equity in Telrad's losses during the half, you will get to a number that is just a few millions of shekels.
Meidad Dvash: I see. Now about the 10 million dollar investment in the fund in India. Is that the amount invested during the second quarter?
Oren Hillinger: In the second quarter we invested 2.5 million dollars, out of the 10.8 million dollars.
Meidad Dvash: I see.
Oren Hillinger: The fund made back-to-back investments with our investment. In the meantime it isn’t revaluing any investment because it invests mainly in investments in private retail chains. It hasn’t made any revaluation of its investments, neither up nor down.
Meidad Dvash: I see. Now about the strategic plan and the business focus. Telrad and the other communications holdings, is that something you intend to sell? To continue with? What are the plans for this segment?
Oren Hillinger: As far as we're concerned, they are not part of the business focus. However, we are not under any pressure to sell. We're waiting for the right opportunities. As a holding company, in general, we will sell most of our holdings when the right opportunities arise, at the right prices. Today there is nothing on the agenda. Usually, when there is something on the agenda we are quick to report it.
Meidad Dvash: OK, thank you. Good luck.
Manu Kahana: Thank you very much Meidad.
Mediator: Thank you. The next question is from Yariv Yurista of Rothschild, Yariv, go ahead.
Yariv Yurista: Hi Oren. Again like my two colleagues, again, there's a bit of a mess with the net debt. You reported that you bought Credit Suisse shares for 1.28 billion. And because the cost today is 531, let's say that more or less you've sold about 700 million of shares. If you add to that the capital gain, that means that you have realized something like 900 million shekels. Is that correct?
Oren Hillinger: Your number is not accurate because we didn't report every purchase and every sale at the end of each day. We issued timely reports in coordination with the Israeli Securities Authority. We didn’t report every purchase and we didn’t report every sale. Our reports do not reflect the peak holding we reached and the reports are correct at the their dates. Of course, the report today is completely accurate and reliable, but during the period we made other purchases and other sales. If you go back to the number you mentioned earlier –
Yariv Yurista: Let's make it simpler – your true debt today is something like 920 million shekels?
Oren Hillinger: More or less. I'm not saying the exact figure, but if you look at our publications you get to something like that. I said 924 million shekels.
Yariv Yurista: OK. Now another question, again about the strategy. The first rights issue was intended for the acquisition of financial institutions in Europe, notably Credit Suisse. After you sold a large part of the holding in Credit Suisse, and we can see that from the reports, what was the second rights offering for?
Oren Hillinger: The second rights offering is made for the same reason. Our direction, from the aspect of our investment in Credit Suisse, and this is supported by the decision of the Board of Directors to increase the total investment to 3 billion shekels, is an investment direction. Nevertheless, the Board of Directors also instructed us to exploit the recent sharp rise for processes of sales and realizations and for making profits as we do so, at management's discretion. We exploited the sharp rises, as we told you, for realizations and profit. We see nothing wrong with making a profit, but the investment strategy hasn’t changed.
Yariv Yurista: It's not clear. I don’t want to be offensive, but it looks more like the action of a portfolio manager. You raise money from the public in a rights offering so as not to dilute it, and then you go and sell shares instead of buying shares. Or spread the purchases among several entities. Do you understand the question?
Oren Hillinger: Again, our direction is to invest, and to increase our holdings in Credit Suisse. And it's true that as we did so we undertook a realization process and made a very respectable profit. You're almost making me apologise for making a profit.
Yariv Yurista: You don’t need to apologise.
Oren Hillinger: Yes. I hope you will continue to be happy that we succeed along the way in making good profits. But the intention is still the same. We will continue to invest and to enlarge our holdings.
Yariv Yurista: The rights issue, what size is it, more or less?
Oren Hillinger: This issue is 679 million shekels, assuming full exercise.
Yariv Yurista: It will be fully exercised because the parent company will stream most of the money. The question is whether the last profit you made, 208 million shekels, is enough to finance additional purchases and for that you have to dilute.
Oren Hillinger: As we announced, we have a framework agreement with Goldman Sachs that gives us credit backing of a billion and a half dollars. A billion and a half dollars gives us an investment of 2.7 billion dollars. The Board has approved, for the time being, an investment of 3 billion shekels, because the Board also operates cautiously, with moderation, it stops and checks itself at each stage. It's not inconceivable that the Board will approve an increase in the amount of the investment, and get close to the credit facility allocated to us by Goldman and then continue the investment going forward.
Yariv Yurista: Are we talking only about Credit Suisse right now, or Barclays as well?
Oren Hillinger: Right now it’s only Credit Suisse. We have a short list that includes other banks, but the approval right now is for Credit Suisse only.
Yariv Yurista: OK. Thank you very much.
Oren Hillinger: You're welcome.
Mediator: The next question is from Shai Langental of Remco. Shai, go ahead.
Shai Langental: Shalom everyone. My question is also strategic. What is the point of holding Epsilon if the managers upstairs hold Clal Finance? Is this also something where the time will come and you'll sell at a good price?
Oren Hillinger: We reported in the previous quarter that we are looking into the possibility of selling Epsilon to Clal Finance. It's not yet imminent but it's not off the agenda.
Shai Langental: I see. But why not sell – do you have an interest in merging it and not selling it outside?
Oren Hillinger: We have an interest in merging and in exploiting synergies as we do so, but it's not happening yet. Obviously, if there's any progress, we’ll report.
Shai Langental: Good. Thank you.
Mediator: I repeat the instructions. To ask a question, press "star" then "1". Please wait as I collect your questions. Another question from Meimad Dvash of Dragon Hedge Fund. Meidad, go ahead.
Manu Kahana: We missed you, I see.
Meidad Dvash: Yes. But Manu, let me ask the question because you can see that four people are asking about the same issue and don’t understand. There's apparently a problem of comprehension here, and it's a pity. Everyone is making the same valuation, everyone wants to find out how much the discount is on the holdings, and if we don’t get to that number of the net debt, it's exactly the delta we're missing for doing it. So I'm asking for the last time, please be patient, it will help us all.
Oren Hillinger: We're with you.
Meidad Dvash: We know there's a big discount here, we're trying to put our finger in the right place, and as soon as we solve this it will be easier for everyone. So let's take a second to put things in order. Net financial debt is 920. How much in market value terms today is the asset value of Credit Suisse? Today.
Oren Hillinger: 3.62 million shares –
Meidad Dvash: 3.62, yes –
Oren Hillinger: Multiply them by the closing price of the share yesterday, which was around 55.
Meidad Dvash: OK, about 55.
Oren Hillinger: 54.80. Swiss francs. Now multiply by the exchange rate of the Swiss franc, which yesterday was about 3.29, then check exactly.
Meidad Dvash: Fine. What's the exact number of shares again?
Oren Hillinger: 3.62 million shares.
Meidad Dvash: I see. Now about the realization made. It was made after the balance sheet date during the third quarter, so this amount is cash as far as I'm concerned, and I am eliminating it from this 920.
Oren Hillinger: No. The number 924 that I gave you includes all the cash in the till. The minus 924 includes everything,
Meidad Dvash: Includes everything, includes the profits for the part that was realized.
Oren Hillinger: That's correct. And it doesn’t include the value of our holding in Credit Suisse.
Meidad Dvash: Good. So as far as I'm concerned. I have Makhteshim Agan a principal asset, another asset that's called Credit Suisse shares. So today I have another few assets to which I have to attribute some kind of value, and from that I take off the net financial debt, that's all. What we have left is actually the market value of the Credit Suisse shares, as you said, and that's also, in fact more or less the exposure to the Swiss franc –
Oren Hillinger: No. The exposure to the Swiss franc is the shares in Credit Suisse, and in addition one billion and 83 million shekels. In addition.
Meidad Dvash: Ah, I see. 83.
Oren Hillinger: One billion and 83 million shekels.
Meidad Dvash: I see. Now about – I just want to refer back to the previous question. Of one of the analysts who said that in rights offering the investors are diluted. No-one is diluted if it exercises its part.
Oren Hillinger: I think that's what he said.
Meidad Dvash: No-one will be diluted if it exercises. The thing is that people aren't exercising, and it's convenient for him to exploit this matter for increasing his holdings, and rightly so. Thank you very much.
Oren Hillinger: Thank you and have a good day.
Mediator: There are no more questions. Before I hand over to Mr. Oren Hillinger to sum up, I wish to say that a recording of the conference call can be heard at telephone number 03-9255921, starting about two hours from now. Mr. Hillinger, go ahead.
Oren Hillinger: Thank you, and to sum up I want to thank you for participating in our second quarter conference call. If anyone has any other questions or was unable to understand something from the conversations, I'm here and at your service, and will be happy to answer you. Feel free to call. I hope to meet you again at the third quarter conference call. Good day to you all.
Mediator: That ends the conference call of Koor Industries. Thank you for participating and have a nice day.
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