Q3 2020 Ituran Location and Control Ltd Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the Toronto.
Ron third quarter 2020 results conference call all participants are at present in listen only mode.
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I'll now hand, the call over to Mr. at Hutto of GK Investor Relations at home would you like to begin please.
Thank you on the day to all of you on when countries are on conference call to discuss the headquarters on on 20 or so.
I would like to thank you drunk management for hosting this call.
With me today on the call it average debt, yes, you're asking it costs you wouldn't exactly.
This year on DC fans and state income our CFO.
Yeah, I will begin with a summary of the quarter results followed by anybody in summary on differentials we.
Well then open the call for the questions on secession.
I would like to remind everyone on the safe Harbor in the press.
He's also covers the content on these calls.
And now he added would you like to begin.
Thank you weigh on I'd like to work on all of you and thank you for joining us today.
I hope you on your families on continuing to stay healthy and I wish all those with being impacted by the viewers fast recovery.
That was day recent progress stores are succeeding we consumed four or force called me the wall.
We are happy with the improvement in our results in the third quarter.
And this is down to our book to overcome difficulties in many of our geographies due to the ongoing funding.
We're also pleased that when looking at our revenues in local currencies on a subscription fee revenues were assuming all levers to goals on the quarter last year debt.
On straining the stability you need to run business moment.
On the profitability side the steps we took in L.D.C. as the effect on depending became apparent enabled us to each segment operating profit any be dilutive as compared with last year when excluding force.
We reported an EBITDA of $50 million I remind you that we had expected sales fall to EBITDA will be similar to debt on the previous call day, which was something 0.9 on though so I'm happy with debt, we are being successful in mitigating the impact on depending on our profitability.
On the cash side, we generated cash flow from operating activities on a certain point $6 million does bring our business back to a net cash position for the first time since our acquisition of World truck two years ago.
Our ability to remain profit to the cash flow positive throughout these global crisis demonstrates the overall resilience and stability on our business momentum.
Our stability is based on our subscriber base, which remains strong with close to 1.8 million subscribers, whereby the majority of them on paying us on an ongoing basis monthly fee always stopping point each month. She is already on the debt companies.
During the quarter, our aftermarket business returned to growth for the first time seems the pandemics on it and we added 13000, new subscribers in the quarter.
The regions this work, but equally strong or Israel and the U.S. in Brazil. The trend is also improving and we sold it to use net decrease of subscribers in the quarter compared with the previous one.
We do all to maintain this trend going forward, however, making predictions is difficult at the moment in the current environment and then your way will flow, but don't taking effect globally.
The lower level of new car sales in many of our geographies. During this debt Walter impacted our OEM partners ability to recruit new customers and growth the OEM side of the business and we therefore saw a decline of 12000 OEM subscribers. However, the fall was not as sharp as debt to off last call.
Which if you remember it was a decline of 27000 in the OEM base.
Despite the impact on the condemning and there we get caught on me situation in Brazil, and Latin America on our OEM business, we are working hard to harvest the synergies across our business and our various geographies. We believe that once we exit into force Colby to walk you through on is very well positioned for girls in.
In summary on.
Overall, we are very pleased with our sales quarter financial results, which we presented on his lives so far business momentum.
We have to use this period to make improvements throughout our business to improve efficiencies and harvest synergies.
As we emerged from the core on up on them and I believe we are well positioned to resume growth and increased profitability I will now hand, the call over to Andy for the financial review and me.
Thank you yes.
And also requested price release, we published a day, we now resolved.
Revenues for the third quarter 2020 were $60.3 million, a decrease of 13% on bed with revenue of $69 million.
What are 2019.
In local currency terms third quarter <unk> revenues declined by 6% you on a year.
I also note that revenue increased by 13% over the period.
Revenue growth.
Subscription fees were $44.5 million, an increase of 12% over third quarter 2019 revenues.
Local currency to subscription fees declined by only 2% year over year.
The subscriber base amounted to 1 million net of Congress to tell them as Ed.
As of September 32020.
This represents an increase of 8000 subscriber net over that all day and over that period quarter.
During the quarter.
It was an increase of 13000, <unk> aftermarket subscriber base and that decline on well sell them in the OEM side of things.
Product revenues were 16.9 million go on and decrease on 15% compared with net on the third quarter of 2019.
The geographic breakdown on revenues in the third quarter was as follows Israel, 52% resins, 24% rest of work 24%.
Operating income for the quarter was 10 and a half million dollar 17.5 per cent of revenue.
Bed with 11 point.
$9 million or 17.2% on revenue in the third quarter sales last year.
This is a decline of 11% year over year.
Local currency the operating income would have been similar to that on the debt.
What does 2019.
EBITDA for the quarter was $15 million, 24.9% on revenue and decrease of 14% was $17.5 million was 25.4% on revenue in the.
Third quarter of last year.
In local currency terms.
Clients would have been 3% year over year.
Financial income for the quarter was $2.8 million compared with net financial expense on.
$4.8 million in the third quarter of last year.
Affiliated company sales a while in weeks you do on hold 11%.
Oh, it's public share.
Tel Aviv lifted and our investment is based on the market value at the end of day water saving one had increasing in value versus the previous quarter and anyone recorded financial income of $3.3 million from these holdings.
Net income for the third quarter of 2000, it's Wendy was $9.3 million, 15.4% on revenue or earnings per share or 45 cents.
45% increase compared with $6.4 million or 9.3% of revenue on a fully diluted earnings per share of 30 cents in the third quarter of last year.
Okay got it.
The net income would have increased by 58% year over year.
Cash flow cash flow from operations for the third quarter of 2020 was $13.6 million.
As of September 32020, the company had cash including marketable securities sales.
61.
Point $9 million and a debt of $66.8 million amounting to a net cash of $5.1 million <unk> GAAP bed with a cash including marketable securities all $54.3 million in a debt of $67.9 million and.
Shifting to a net debt of $13.6 million as of December 31st 2019 and with that.
I'd like to open the call for the question and answer session operator.
Ladies and gentlemen.
At this time, we will begin the question and answer session. If you have a question. Please press star one if you wish to cancel your request. Please press star two if you're using speak on equipment on the lift the handset before pressing the numbers.
Questions will be pulled in the order. They are received please stand by while we poll for your questions.
The first question is from.
David Kelley of Jefferies. Please go ahead.
Hi, good morning, and thanks for taking my my questions.
I, maybe wanted to start with your cost savings on some of the initiatives you noted in the second quarter I think you'd have actions included salary reduction.
Payment conditions with suppliers can you talk about the impact to the third quarter I'm just curious given your nice profit recovery.
On a sequential basis here.
Hi, yes, so its important to mention that during Q3.
India, all geographies, we start increasing back.
Salaries.
And on trucks, because we so as you could see a debt we grow our sales whilst we has a market open again.
Of course, the numbers on not the same EPS before the pandemic, but our.
Growing compared to Q2, when most of the countries that we are operating was under a.
Very tough Lockdowns and since this was the situation after the long dolls, we had for example to bring back on more installers.
Our service because it has to work on the present on the times so.
Practically during Q3, we are we are increased back.
A major portion on the savings fares.
But add to these debt or during Q2, we did kind of firing GAAP plan specifically.
Specifically in Latin America, specifically in the countries, where we have the OEM business, assuming that a car manufacturers.
During the next quarter.
Quartiles, if not even a one or two years, we did not sell the same cars all day car industry would shrink so we decided to do some are firing on.
This means a plan.
On the.
Most of the cost to do it.
It was during Q2 and some of them in Q3, but these costs will no longer we will have to EPS back so.
Q3 is still with the low income.
On a low lower costs than we were before the pandemic and the little bit lower than for example, we believe we live in Q4 and Q1.
Next year, but the differences become very loans most of the difference is game because of more revenues more subscription fees more sales.
So this is the reason on growing to profit of course some of the a.
Some of the cost reduction still day still contribute to the results in Q3.
Okay. That's that's super helpful. Yet really appreciate the color there maybe.
Maybe asking a one to follow up on that kind of the conversation around the ongoing.
Do you use that you noted into Q4.
Just curious as it relates to two day after market trajectory and the visibility there I saw a nice return to growth for that business in the third quarter.
The the ongoing uncertainty comment is that largely tied to the OEM business. Just curious if you're having some better visibility at this point to sustainable aftermarket growth in that historic.
Kind of historic levels that you generally seen over the years.
Okay. So the reason we first of all we have a we have visibility that day business model allow us to have visibility but.
In order to be conservative, we know the densities ability a day.
This time have some I would say more on a risky to provide guidance on to provide a potential specific range on numbers.
So this is the main reason east and just to give you some on examples on.
Lockdowns in countries are stopping sales of cost, which is ER EPS and you'd see an important driver for our sales. So those loans down as you know two months ago, everybody said it in Europe. For example, we are not operating euro, but just as an example, the lead US said we have been there.
Go to another local downs, because it's not and it's not everything but you know I don't know if it's politically I don't know if it's because people obviously.
Major countries in Europe are involved on this is the situation now in Latin America. For example, down on luck Knockdowns knocked off locked on then it was in that in that April and May, but I wouldn't bet debt. Once you know come again, so to come to day on be on me happy with the result.
Excuse me, telling you that this is going to be ahead for the next ear.
I want to believe we have our internal assumptions, but I prefer on this.
On a time, specifically be more conservative not rush was guidance not always expectation I can they only say that as we said in Q2, I believe debt or the next quarter will be a.
Almost similar on a plus minus 2% in a hour up.
Operation on profits on EBITDA close or similar to this quarter, but regardless.
Customer base, I said, one muscle flow guns in Israel, and we are on dropping some us some strike us because we are not sitting for example.
So this is the reason.
Okay, great. Thank you I really appreciate you taking my questions.
The next question is from a ton etzioni of Etzioni portfolio management. Please go ahead.
Yes.
Happy to see the improvement looking at the World pass the vaccine.
It's fair to assume that.
This this improvement trend will continue that's one question. The second question is yeah.
We're seeing other software companies going through a model of recurring revenues as a for as opposed to a onetime revenues or are you also doing them.
Oh you're on.
First question I think that we rushed to ask ER docs on not just getting bumped up.
Nobody really knows what the book seen when the vaccine will be what will be the influence on the vaccine. If you if all of us want to be optimistic as the prime minister of piece of their binge on imminent on you know so no doubt that the core on a you saw them behind us all of us.
Just want to eat he is a very large crisis. So.
I don't have downstream loans, there will be no more on the effect and the economy will recover themselves I don't know somehow in the short and mid term of course, we revealed a I believe that the assets on fleet one.
The business more than in the market that we are operating in our brand and marketing will allow us to.
Continued from the point that we were able to go let's now again, we have to be very defensive and conscious about the situation regardless second question, if I understand this correctly.
You too on main assets and every morning dishes. The on yes, if you want to keep it.
On recurring revenue momentum.
This allow us to create operating leverage model does allow us to have a very very secure revenue portion every quarter. As you can see of course do some volatility during this time, but.
All around this volatility influence is very low it's mainly expense on our gross but on our basic numbers basic EPS as basic revenues basic profit as you can see we I think we keep it quiet impressive compared to other industries and other business models in these times.
Okay and one last question they are holding in several one is that the in market that appears in marketable securities or cash equivalents or.
Where do we see.
You can see it in a divestment east and in the Americas in day interest fielding the bulk of the effect of meetings on bidding on day is appearing on the finance and asset sales investments intensity said there is a separate line investments in my pocket book appeal it.
But we have to mother's day is that at market value or is that it costs at market value and this is part of the things that I would mention here that do something to add.
May create volatility this this quarter it was on our benefits, but again some other quarters can be.
Hi.
We said it was a bad influence, but this is not our our hands.
Okay. Thank you.
The next question is from a soft bar al on Oppenheimer Israel. Please go ahead.
Hey, guys congrats on a very solid quarter.
You had mentioned on top of the call on strength in the U.S. subscribers I don't we don't.
Talk about the top they pop into Austin. So is there any kind of color you can give us any worse.
On a plane us.
I think that.
One of the things that we've been surprised by the U.S.A. operation is that compared to the other geographies, including Israel and in Brazil.
And of course, the other markets is debt.
Debt or do.
Core on a and condemning effect.
In the U.S. and specifically in our business was.
Very low if at all and this allow us to show interest stays the same numbers of subscribers on the same gross on subscribers as we did.
Last year. So while overall is contributing positive net growing subscribers and a main if there is any debt or our.
Ill, where our segments that we are operating the U.S. is what you say why they call or buy here pay here.
Those are our dealers which share support.
Support all have their own financing company.
On a subprime customers taking loans from the dealers or lease the cost stronger deals and one of the conditions that they will have units.
To recover to recover the car.
During these periods.
We assume and we see debt the need for these kind of finance companies and the needs for this guidance and the demand for do site all swap population is growing.
And that each sales support our gross in the U.S.
Okay. That's very interesting okay I appreciate all the on the detail.
Maybe more on a modeling question on R&D was markedly lower this year, we assume there's obviously some of that impact here, but even much knowledge and then to Q.
Anything one time in nature here, how should we think about that line item on a go forward basis.
Actually the main reason for the decrease in the R&D is coming from a reclassification at.
Based on the recommendation of our all of the stores between a R&D and depreciation and between day operational costs are basically eight.
If we were to measure read the same as before down on deem would would've been more or less the same as the second quarter. Okay.
Okay, now where did you say that cost was being funneled is that the DNA.
No no no.
It's coming from day to day Telematic services.
You are saying that in the cost of revenues Uptown managed services, Yeah, correct, Okay, and then maybe yeah. Okay.
Okay any any way then that we should be modeling a little bit differently should I be just be thinking about whatever contribution was in R&D just moving on to the cost of revenues, meaning it's going to look like there is a bit of a.
Kind of pressure on that margin when it's not really the case.
I think it's going to be more or less than standard in the third quarter will be a a more or less share representative met may be a little bit day higher as it was that it doesnt mean that some of these was the retroactive for the second quarter, but more or less the same level.
Okay. Okay. That's helpful.
Okay. So I guess I know you haven't made budget and everybody on you know are you taking on the clear concrete answer on when you can't so color would be more helpful. On how should we be thinking about operating expense and spent 2021, then mentioned a longer term debt cost reductions on restructuring that you took in the second.
Corridor, I, just kind of want to understand how when some of the the salary reductions kind of let off by the end of the year, how what what what costs really look like on a normalized basis.
As I said, our Q3's quiet there at present.
Uh huh.
Oh.
<unk> costs, which are very close to D.A. highest point, because we raise salaries. We raised cost as I said, we start paying for example on says for all the.
Sales department there on the wall to because we are selling the markets are open still of course, we keep some costs I would say some cost reduction on compensation for management teams, which I believe that if the situation that we are facing now meaning the markets are open.
I assume that viewing.
Q1, Twentytwenty, one we rely on back to almost a similar cost.
Or we will increase some portion of the cost, but as I said.
Uh huh.
The cost reduction divided four too.
Uh huh.
Firing costs, which just will not come back and we fired some man.
Hundreds of people that are on the walls that debt.
These costs are we not mix will mean, we will continue to save it but the other side on the cost reduction, which is reducing salaries. This probably as much as we would continues this trend on far continues sales continued growth subscribers continue.
Installing gain more and more OEM cars will be back and we should expect.
Very few pre sense by the way very few presenter for cost increasing average.
It was a correlation to growing day revenues of course.
Okay, Great that's helpful.
As the company on kind of shifted back into a net cash position, which is great to see although for the expected the financing cost line I know that it's obviously been made it kind of.
You know a little bit difficult to read by some loans. The recent on impairments on games, but how should we be thinking about that in about five basis. I know you have some hedging costs involved.
We expect that.
It will not change.
And moving to not have to do on.
Yeah.
Got it.
In the future but.
But as it looks now seen confidence that this is the case and because of this we didn't do it again I believe that we will not do it again.
Regarding the financial regarding the financial cost the again, we have.
As you can see on the balance sheet, we have the loans and the loans as opposed to we are paying them on feel that 2020 floor. So until then of course the company will continue to add the financial the expense it relates to the debt.
Okay. Okay Fine last question on my end.
There hasn't been any final decision made yet, but just given all the signs of stabilization, we're seeing across the business.
Whether it be you know.
We need a profit levels on the subscriber levels, which are finally on on that basis quarter on quarter.
How are you guys thinking at least at this point about shareholder return in dividend because the yield even if you do this reinsurance and maybe the $20 million level that you had historically would be pretty significant so I do think it's pretty important for investors.
How they should be thinking about it.
Yes, there is no we can see our first of all our cash.
Cash on cash positive and that we don't fall Q2, Q3, hopefully this will continue I think that we need a little bit more time to feel more confident as I said, we are very conservative and the volume is very conservative maybe.
Acquire the movies more outpatient for from a investable bought as we did.
More than 15 years, when we add on making positive cash and when the company is confidence and.
Don't see and we don't see a specific goal to keep excess cash we always.
A dividend I think debt as a management, we see that is something that in the close for your channel we will.
On the board to do it of course, it depends on the growth, but I assume that as soon as the beginning of next year.
We will push to devote to vote for on.
They can pay dividend and or going for a buyback and simple and I must add again that one off the values that we are.
Holding hearings to us.
Is that since there is a.
Right.
Still a large portion on management team conduit loans that are well.
Hold on daily together with the company and support the company has these days by a decreasing their salaries.
And we have suppliers on menus, which now also we find it a little bit.
And we find the correlation between decent paying dividend to shareholders. Once we feel confidence and we will bear all.
All the employees on the suppliers to be in a position that accompanies it is easy confidence is in good shape to growth to the next level or we feel that we overcome the pandemic FX on the business.
It will come together and.
Moving to its.
Okay, great to hear thank you for all the all the detail.
The next question is from Sasha cover end of Ipi. Please go ahead.
[laughter].
Thanks for taking my questions I, just got two last assessment.
First one can you just clarify so in the third quarter net you had a one on cost for redundancies on restructuring on you Didnt back this out from the EBITDA on number you gave so can you give us the fees on how big it was.
Yeah, yes.
Youre correct.
And can you give us a feeling was million on half a million on something like that.
No. It's not first of all it's not something material on they said, we're not talking about the millions of dollars on say a firing cost on the third quarter.
But.
Uh huh.
As what we presented we didn't excluded the.
Yeah for the item on my next question.
Thank you and then my next question would be.
Moving <unk>.
We're seeing some companies now.
Doing ipos in the U.S. that essentially you'd be <unk> insurance based companies getting very high valuations.
And obviously, there's a possibility around which has a similarity to that you'd be division, which is still small but growing fast could you maybe just give us a bit more detail about exactly what the IP that you'd be on.
Division has and by that I mean are you mainly providing just information on telematics to the insurance companies. Although you also heavily involved in the algorithm, which price is the drivers risk level.
So first of all I don't know what companies you're talking about there are companies that are providing insurance into stage that.
Mix was.
Some algorithm to know to measure the risk of the customer. This is not flow through into we provide a telematics unique and software and algorithms that.
Two day insurance companies.
To provide a real time.
A.
Driving behavior on.
Daring tourism.
Based on these they know how to how to price.
The premium we are not involved with the with the pricing of the insurance we are not involved on the insurance portion watts.
What we give for example, if this is a fleet.
Fleets for example that I want to know how the driver behavior. We introduced we something we do many years.
It's almost the same technology the same IP into same software by the insurance companies now we integrate it into their system day gets kind of resides on how the driver is driving and they choose their algorithm what.
Price. These should do so you've seen EBIT different I believed that say on what you mentioned.
Yes, it's definitely a bit different I'm. Just wondering are you are you actually providing the insurance companies with some kind of a school just destroyed through its safe to unsafe or are you just providing real data.
No no we provide the score we provide a score but they must day in say again to be a to be clear on the system that we provide.
Provide to score but currently since this is the first year and the insurance companies in Israel when do we.
Started as you remember lives in a year ago. They want now only one a credit criteria of the entire data which is mileage how.
How many mileage the driver he's driving that the system or the unique into software can allow them to get score and much more information, but they want it for the first a stage for educating the market to or to integrate it with the market being gay income same day.
Use only the mileage usage by discussing on them.
Okay full hold these stages.
Yeah, and just thinking about you have a question on the U.S. give.
Given that this type of product is seeing take off in the U.S. and given that you have technology for it why would you not try and sell this product into the U.S. market.
So first.
First of all we are in the U.S. many years.
On the business on the.
Segments that we approach on.
Professional force stolen vehicle recovery sort on vacated recovery.
For the mass market in the U.S. based on insurance and cost of debt rate as that as we so there's no market share was company called logical and all day or.
The opportunity there were sold to count on but it's not I would say smoking business anymore, because insurance companies in the U.S. on not suffering from costs and so on recovery, it's not a marketing the wise for us as we see again compared to our more violence markets like Latin America, Israel et cetera.
Second as you sleep management lead management, we provide services a fleet.
Management in the U.S. and a.
The competitive landscape is very very tough regardless of you'd be on in regard to you'll be on.
We started to show each day to some insurance companies.
As long as I remember from some discussions that we had I must say it was there.
A more than a year ago.
Insurance companies are not use not open to use you'll be on again, they you'll be on.
A I would say something we cheap local purpose to be on the companies, which are digital insurance companies something very new those companies provide insurance and they provide all day algorithm, including the a usage basis is a algorithm to debt customers maybe to use some.
Up on trucks tools, it's not to us, but we try to offer the UBI, our UBI I solution in the U.S. and we didn't see it open and net interest from the insurance companies in the U.S.
From the traditional thank you very much. So on this addition on interest.
Thank you.
The next question is from Tabby Rosner of Barclays. Please go ahead.
Hi. This is Peter is actually on for Todd Congratulations on a strong quarter Oh, great to see that as a sequential subscriber growth.
I'm trying to think about the sustainability of the product revenues.
Maybe dig down a little on the sequential growth in product.
I was just having a little trouble reconciling the drivers of that given that the new car sales challenges that they still stays in Brazil on debt more modest subscriber growth number.
Mainly watch you see of Q3, we have to maybe put more color on though.
We sell a hardware mainly in India, OEM, our country's let's call it and also an easement.
Okay.
The Israeli market during Q3.
Three.
Where.
Soon after the locked down so the sales of cars in Israel, and a aggressive marketing campaigns.
Companions Andy.
Driving the car importers into called he doesn't use live the salt.
Ending stalled many cars there was the volume of two months you have to understand what's happening in Israel in merchant ethylene. They didn't installed equipment opened their garage as Bob They had to give cars to people that voted before the funding. So soon after we had in Q3 almost too.
Quarter of Pos sales of hardware to the car importers in Israel, So I wouldn't say to shift but its practically it's like machine. So I. This number is a easy and it was high for Q2 Q3.
A Q3, sorry, and I assume that it will go down but not as it was in Q2, because there is no loans anymore also doing the loans on in Q3, you in easily by the way the car dealer garages or installation points, where often towards a little bit different look at all so.
So the volume is not the same so I believe that.
The average between Q2 and Q3 of says this is the right number of sales.
You said per quarter.
That's very helpful color. Thank you.
And then and then maybe.
Wanted to ask about the about Brazil.
Earlier this year you had on overhauled the markets are the go to market strategy there.
Is that that's still helping.
To to boost the.
On the retail figures on sequel.
[laughter].
You.
Look now is that first of all yes, I'd say, it's helped US then you know there was a reshuffle of everything because of the funding.
The one thing that I can say now is and I've said it during my speech at the beginning is that we add to a.
Very high negative.
Net new subscribers in Q2 and in the end of Q3, we come to a point, which day, it's almost no negative I mean, oh on the trend is very very strong very very positive strong.
So this is the situation as long as again as Brazil will be at the same situation is now I believe that we will or change change from a negative to a positive net subscribers in Brazil very very soon halt it will happen in Q4.
Great. Thanks, Scott.
Taking my questions.
If there are any additional questions. Please press star one if you wish to cancel your request. Please press star two please stand by while we poll for more questions.
There are 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 each ron's web site that we use debt.
W. Dot each were on dotcom Mr. Sheratzky would you like to make your concluding statement.
Yeah on behalf of management to fit to run and we'd like to think you are shown on this for your continued interest on long term supposed to flow business I do look forward to speaking with you next quarter and hope that we will see better time, but you have a good day.
Thank you. This concludes that you too on third quarter 2020 results conference call. Thank you for your participation you May go ahead and disconnect.
[music].
Yeah.