Q2 2020 Ituran Location and Control Ltd Earnings Call
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I will likely go for it to go to location and control.
Hello, I can't hear your what's your name.
First name David Alas NIM around.
Okay, just a lot of please.
Okay and connecting a David.
Thanks.
Well from coming behind US, we had the platform for long term.
Sustainable and profitable accruals.
Our subscriber base remains strong with close to 1.8, we know subscribers whereby the majority of them are paying us on an ongoing basis and monthly fees.
So starting point each maus is already on the back office.
This enabled us to remain profitability cash flow positive during this current unprecendented global crisis.
However, new car says drives growth in new subscriber base and the lack of new car sales, especially during equity in might in many of our geographies impacted our ability to recruit new customers and grow our business in the OEM business.
As well as in the aftermarket business.
I will spend the next few minutes diving into the details of bolster Corona impact first on the OEM business and then on the aftermarket business.
I will start result, our OEM business in Brazil, and Argentina.
As you all know these business suffered lusty prior to the Corona because of the weak economies situation in Brazil, and Argentina as well as the change of model using their own hardware and also reducing the OEM paid dental service down to one months on.
In Twentytwenty the core on a pandemic has taken a further toll on their economies and ultimately on our OEM business there.
During the second quarter, we saw in net decline of 27000 subscribers in the OEM segment as award.
Because of the weak economic situation in Brazil throughout Latin America during the second quarter.
Countries in the region have increased in the second quarter.
The iron country risk has increased the SEC the discount rate there walk use when calculating the value of road truck on our balance sheet.
This means we had to reduce the value in which rotruck written on our balance sheet, and therefore, right and impairment on these business during the quarter.
I stressed the impairment is a noncash first and second doesnt reflect a specific.
Worsening of lowering of long term forecast for the road truck business.
The net amount was 13.5 million dollar of reached 14.2 million dollar was on the operating line an income of zero point $7 million financial income.
Related to de lay ability to purchase the non controlling interest.
Despite the impact of the pandemic and the weak economy situation in Latin America on the business more broadly we do feel that drove truck has brought you to and strong synergies, giving it run access to new markets as well as an ability to cross sell addition products and services.
Into existing ones.
Looking at the aftermarket business, we saw in net decline of 16000 subscribers.
The causes in Q2, Twentytwenty was there and presented complete Economix shutdown, primarily in Latin America for large portion of the second quarter because of the pandemic in Israel the shutdown impacted at present mine, while new car sales record.
In June two levels similar almost dose of June 2019.
The subscriber base in Israel was more or less stable over the quarter.
In Brazil, our other large aftermarket geography, new car registration in June we are up from the lows of at Brazil, but still down 40% versus June last year.
Our results in Brazil has been further compounded by the significant weakness in the rather currency versus the dollar which had the second quarter peak last half of tweets values versus the dollar in only one year.
Elsewhere in Mexico, We continue planning and building out infrastructure for our new each one comes school program.
Using our overall success in Brazil, and adjusting it for the Mexican market.
This is an example of the synergies we are exploding from Roger.
We hope to lounge and start selling the product toward the end of DC.
As our market sell to open up again I do expect the new car sales to recover and we are confident at our aftermarket business will resume growth as well as eventually food the viewers behind us.
Due to the it run today as other started you for penetrating additional segments.
Our you'll be I offering.
Whereby we can offer insurance companies a solution to build the customer per usage and driver behavior continues to gain traction.
We have now signed on five insurance companies in Israel. The subscriber numbers are growing quickly but are still small we believe this will already have a pause positive impact on next year results.
Now that we have proven to success in Israel, We recently signed a you'll be I agreement in Argentina, and negotiating potentially you'd be a project in Brazil, I expect this business to become significant to our long term subscriber growth in future.
In summary, the second quarter of this year was unprecedented with complete economic shutdown in our markets significantly impacting our business. However, we are pleased with their resilience of our business model built on a revenue base of 1.8 million subscribers.
Furthermore, we prepared ourselves in advance to weather the storm and we are constantly ensuring that our expense level is matched while revenue levels, even during such unusual times and the most severe global crisis in 100 years, we're able to remain profitable and generate cash and new.
We expect that this will continue to be the case in the coming quarters. While the condemning is the results we've made improvements throughout our business to improve efficiency and as well as we emerge from the core on a pandemic I believe.
We are well positioned to resume growth and increased profitability I will now end the call over too early for them a financial review Alley.
Thanks.
You can also referred day press release, we published today with our results.
Revenue for the second quarter 2020 were $53.3 million, a decrease of 25% compared with revenues of $71.2 million in the second quarter 2019.
Revenues from subscription fees were $43.7 million. This represents a decrease of 15.
The sand over second quarter 2019 revenue.
Excluding the currency effect revenues from the description fees would have shown and a decrease of 7% versus that period quarter.
The subscriber base amounted to 1 million.
1550, 751000 as of June 32020.
They are very present, a decrease of 53000 net over that of the end.
Of the period quarter.
During the quarter there was a decline of 16000 in the aftermarket subtype subscriber.
Base and a decline of 27000 in the only an OEM subscriber base.
Product revenues were $9.6 million, a decrease of 51% compared with that of the second quarter 2019.
The geographic breakdown of revenue in the second quarter was this fall Israel, 51%, Brazil, 25% rent upward.
4%.
During the second quarter. It runs operate operating expenses were $32.5 million. The operating expenses include an impairment loss of $14.2 million relate to the acquisition of growth rate.
As Al mentioned this was due to an increase in country late rate in Latin America do they due to the Corbett 19 pending.
Which negatively impacted the evaluation of growth.
Excluding the impairment loss operating expense.
Amounted to $18.3 million this is compared with $19.9 million.
In operating expenses in the second quarter 2019.
Operating loss for the quarter was $4.9 million, excluding the impairment check chart in the operating expense the operating income was $9.3 million.
17.5 that 8% of revenue this is compared with $13.6 million or 19.1% of revenue in the second quarter last year.
This is a decline of 31% year over year.
In local currency terms, excluding the impairment.
The impairment the operating income decline would have been 25% year over year.
EBITDA for the quarter was a loss all.
300000 mid $8.
Excluding the their valves mansion impairment charge EBITDA was $13.9 million, 26.1% of revenue a decrease of 28% compared with $19.4 million 27.2 Percentof revenue.
In the second quarter last year in local currency decline would have been 20% year over year.
It is noted that versus the period water the decline in EBITDA was 9% and in local currency to this decline was only 2%, which was ahead of management expectation of air 10 between Dan or a tilt that 20%.
Well a decline in EBITDA versus the first quarter.
Looking ahead, we expected similar level of EBITDA in our third quarter results.
During the second quarter, one of our held company favor one raised 26 million shekels.
And as a result of of our holding in the company was diluted as a result, we had a capital gain of around $1.5 million, which is recorded as part of our financial income in the quarter.
Net loss for the second quarter of 2020 was $6.3 million or loss per share of 30 cents.
Excluding the above mentioned impairment charge and excluding a $1.7 million financial gain due to they reduce minority liability related to the impairment of worldwide net income for the quarter was $7.2 million 13.4% of.
Revenue or fully diluted earning per share of 34 cents.
Net income excluding the impairment charge represents a decrease of 7%.
Compared with $7.7 million.
10.8, Percentof revenue for fully diluted earnings per share of 37 cents in the second quarter of velocity.
In local currency term the game would have been 1% year over year.
Cash flow from operation for the second quarter of 2020 was $19.3 million.
As of June 32020, the company had cash, including marketable securities of $57.2 million and a depth of $68.8 million amounting to a net debt of 3.6 million dollar.
This is compared with a cash including marketable securities of $54.3 million and depth of $67.9 million amounting to a net debt of 13.6 million dollar as of December 30, there is a first 2019 and with that I'd like to.
To open the call for a question and answer session operator.
Thank you ladies and gentlemen at this time will begin the question answer session. If your question. Please press star one if you wish to answer your question. Please press Star Tim If you are using speaker equipment pending with the handset before passing the numbers.
Question fully pulled in the order there Steve Please stand by Molly Paul for your question.
First question is by David Kelley of Jefferies. David. Please go ahead.
Hi, everyone. This is Gavin Kennedy on for David Kelley.
You guys mentioned and expected return the aftermarket subscriber growth as a pandemic subscribes can you just describe how you're thinking about OEM positioning going into second half of the year.
Okay.
Our first of all.
I'd OEM.
Businesses, we have to mentioned that the plants are in that productions lines.
Just reopened around.
End of Q2, specifically the geography is that we're operates and we absolutely expecting that.
We will sell restart selling.
Our new product and services today.
Plants, we have to understand that we recognize as subscribers at the moment that they actually shipped it and install it in the end user cars, which is a create some.
Timing difference between start selling and realize it as subscribers. So I would expect it more toward our Q4 and beginning of next year, but something that we absolutely see happening is that.
Our customers our car manufacturers.
Yeah.
A increasing their inventories and buying.
Products from us.
Great and then just to the changing gears a little bit of follow up really solid gross margin performance. This quarter. Despite the dip in aftermarket subscriptions grew just talk a little bit about the gross margin drivers this quarter and how we should think about modeling margins going forward. The rest of the year I know there's lot of moving parts.
Pandemic.
It's important to mention that are at this time one of the major AUR.
Things that we did and we mentioned it even through the end of Q1 is that we we got to prepare to the pandemic and the crisis and we are lowering our costs starting from a salaries compensations all around.
Our.
Geographies of course also.
Lowering payments and changing.
Changing condition, we suppliers so by doing this debt, we lowered our cost of the beginning.
Probably we were conservative enough and we still succeed to retain some better revenues than we expected or less churn that we expected. So did slabs to may be a higher rate growth in it.
In addition, the mixture between the service revenue and that product revenues due to the fact that the product.
Revenues were lower due to late in the lower failed and in the gross margin in the service revenue much higher it's also contribute to a higher gross margin for the all in a group.
Got it and then if I could just sneak one quick one just quick housekeeping question. You mentioned similar levels of performance. In Q3 is Q2 I think in the to follow ups about the financials, you mentioned that maybe EBITDA would be at similar levels, but just.
With that comment of similar levels of performance in Q3 can you describe what you're talking about there and that's it for me. Thanks.
We set a general last general.
I would say.
Expectation.
Which is across the board between.
We can we expect to have same our profitability same or numbers in.
Mainly EBIT and EBITDA of course, when we have to move to be conscious. So we think some.
Short range, but we really expect.
That.
We will repeat meaning we will.
During this recovery recovered time, we will offset to succeed to too.
Again to overcome the crisis and keep the same results in Q3.
Great. Thanks, everyone.
Next question is biased Sachin value of Oppenheimer. Sir Please go ahead.
Hi, Thanks, taking my question Linda Congrats on solid results.
I guess just following up on the gross margin specifically in the servicing business, obviously very strong and a nice reversal from steady declines.
We discussed in recent quarters, specifically cost cutting measures number one relating to commit and then just generally relating to kind of the shift away from OEM.
You have being lower costs related to supporting the business.
To what extent can we kind of model. These elevated levels of you know.
Subscriber or services gross margin moving forward.
Okay.
We believe that once the pandemic.
Overcome owned that will impact ended the margins should be more or less that them. It was before that pandemic.
Okay understood. So at the 56 ish percent levels that's correct.
Okay cool.
And so given the fact that we're now two thirds of the way through the quarter any sequential momentum that you guys want to kind of point out whether it be.
Israel coming back stronger.
You said you know how do you see Brazil, and Mexico overall in terms of.
The business you guys are seeing.
We have tool we have two I think we have to be.
Clearly, we know that even so after the lockdowns.
I'll start being released.
In a more car sales as a more car dealers and car plans are.
Starting selling again still we expect looking forward to Twentytwenty won that car sales.
Along the world by the way will not to be the same as back like 2019, it's will recover compared to Q2 and maybe the beginning of Q3, but we know that.
Car sales is very depend on economic situation.
And.
We all know the macro economy is not going to be as it was before the condemning at least not in.
Short term, let's say 2021, 2020 too and people are buying cars depend on there.
Well this situation there.
Compensation et cetera, so I'm not expecting that the growth can be as it was before their pandemic, but.
Deaths led us to be more efficient to save cost probably some of the cost that we saved we will continue to save so if we succeed to get to higher levels than Q2 in Q3 and the color. Our production lines will start turning again and if we succeed to show profits and profitability.
During the Locdown I'm quite sure that we will succeed to show.
Hopefully next year better results, but it will be very difficult to.
To grow a two hour double digit numbers that it as it was in the past because overall our business is depend on the car industry.
We have two things, which we created.
During the last.
I would say the last quarters, and something which we will.
A lounge and hopefully and that's our plan before the end of DC. One is the you'll be I, which is in Israel is ramping up and.
Although each subscribers is represent something like a half typical subscriber, but still the numbers that we expect to having 2021 2020 to going to be more and more material. So this can create some growth engine for wheat Diwan, although all day history.
So recalled business it will be less growing will be more stable and the second they think which we are at least they vary a.
Exciting on and have expectations is the ice CS which is our business that we created and became the number one in Brazil to do it also in there in Mexico and again this is something which will allow us to overcome a less.
This car says, but still going to more segments, and India and growing our subscribers and growing our profits. This is not something that we will be able to show yet in our our financial results in the coming.
Two or three quarters Bart.
Going more to mid 21 and 222.
To be fair and a little bit optimistic it's good to doing those days.
We really seeing that.
For more me the long term, we really steel can think about coming back to growing subscribers and growing also the results across the board.
Okay. Thank you for the cover color on just one last point for me any commentary you guys want to offer on capital allocation, specifically relating to the dividends share buyback I know, it's off the table until things get back to normal, especially with some of the cost cutting measures.
You guys are taking but any any way you guys are seeing it maybe longer term.
Historically, I think 30 to one.
DNA is not to hold.
I would say access cash we always.
Holds the cash that we need to operate the business and in some point of time in order to be able to whether it's a smaller or me the acquisition or partnerships, it's Ron I must say.
And be honest using a very good.
Position in terms of balance sheet I know that these times. Many companies that are leveraged our I think struggling a lot I also think that in the future. The capital market is going to be more difficult. So I think that.
We feel very confident and very safe, but on the other end I.
I think the things that are part of it to one is to be a conservative to be conscious and.
And there take two or three more brace before we are we are.
Releasing demanding and as I said as long as our employees are cutting salaries as long as our long term suppliers are cutting.
Prices as long as the pandemic create uncertainty.
We decided to be conservative and still let's say, even so as you saw we in the company's generating.
It is satisfied cash in reference to satisfy caspase position, we will still hold it for the on known.
Showed future but of course once the uncertainty will they will change we will feel more confidence and the market will end award we create more certainty and we back to two to work at the level that we expected as our business trends are and no doubt.
The from dips moment, we recommend to the board of directors.
Do our goal in a take a decision whether paying the dividend whether bikes starting again to by our own shares may be duties, two things no doubt that it run strategically.
No needs to have.
Access cash.
But at this time it'll be different I hope that I don't know nobody knows about 234 quarters will now we will be more smile to know where the world macro situation is going and how its infancy to one when it's happened I will be the first to recommend to share with our shareholders.
Profits.
Okay. Thanks for taking my questions and just again you know congrats on the solid execution. Despite the challenges. Thank you.
Next question, Jim Sacha Krien I play Sasha. Please go ahead.
Hi, guys.
My questions are taken there's one more in line, which is on the affiliates, which you mentioned how to funding rounds and you got dilution could you give us your.
Your stake post dilution and I think you said the company was called Sabre, one could you talk a bit more about what it doesn't work invested in it. Thanks.
This company by the way that you mentioned cost save at one eight it it's a startup that took a decision to make.
Pure wind a Tel Aviv stock exchange.
We are powerful for group of shareholders, we present at some of the Israeli.
Car or car industry players, which is car importers and we were part of the I would call. It's like the Angels investors it's interesting.
It was interesting for us to invest because they have a unique solution, which is not the application like we can find undercutting. The war. It has some hardware and software solution to a eliminate the ability of the driver, but only to driver by the way the rest of the People's can use any text application and message in these iPhone.
We know today in the wall that are too.
Our main reasons for a severe accidents, one is alcohol and second or even the first is people texting and using the formed during their are driving and since we are having a strong.
Relationship with insurance companies.
The industry that we are major player in.
Interesting new solution and we can't we thought that we for us to connect to DC.
Investment is important now for the financial aspect the company raised 26 menial shekels.
Dilute the shareholders now we said publicly company in Tel Aviv.
And we have about 11.
11 at present, we hold 14% before the IPO.
IPO after the dilution we hold 11%, it's not there may draw investment it's not major our.
Portion in our BNL and balance sheet, but since the IPO was up Q2 of course, we are providing formation.
Yes.
Thank you very much.
Okay.
If there any additional questions. Please press star one if you Mr. Cantor Your question. Please press star.
Please standby lollipop for my question.
Alan The also far management are free to run I would like to thank you our shareholders for your continued interest and long term support of our business.
I do look forward to speaking with you next quarter and hope that we will all see better times by didn't have a good day.
Thank you. This concludes the children second quarter 2020 results conference call. Thank you for your participation you May go ahead and disconnect.
Okay.
Yes.
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