Q1 2021 Ituran Location and Control Ltd Earnings Call

In the center please hold for an operator.

[music] Hello May I have your name please.

Hi, its Rachel Smith.

Okay. Thank you very much.

From our company.

Our euro.

Okay. Thank you very much of which is sort of the call.

And Oh, it's not the 1 time, but it's a it's a show little bit of seasonality in the hardware sales force, usually Q2, and Q3 of I'll read with the weaker than the acute.

1 in Q4, but as you remember still the.

A contribution of hardware sales to our overall profits.

Is it lower than of course of the service revenues, but still this is the reason for Q1, yes.

I appreciate the color. Thank you.

The next question is from David Kelley of Jefferies. Please go ahead.

Alright, Thanks for taking my questions 2 for me maybe to start the <unk>.

Step up in the U S aftermarket subscriber business, just hoping you could provide a bit more color.

The drivers of the contribution there and maybe remind us of of the size of your U S business and kind of how the the competitive landscape shapes up there would be great.

Okay. So.

Just to remind the.

Every ones that are our main segment in the in the United States market is.

What are they called the <unk>, which is the represent.

On sing.

People to buy the cause in the dealers.

Shops and.

In some events.

Those finance the dealers would like to.

The control payments of the of their customers and they are using the.

Systems, like our systems and others in order to control payments and.

During the last year.

<unk> debt.

After a while our solution showed the very very excellent application solution very reliable.

And we succeeded to increase our penetration to additional master dealers.

In the United States of trend, which I believe will continue we are now.

Putting more resources in marketing and sales because we found that we have.

Advantage of which we have 2.2 to 2.

Turn to sales.

So I think that we are gaining more market share I think we have a better solution.

In the.

Fortunately or unfortunately during the pandemic, we succeeded to increase our market share and grow the subscribers as they are now.

The American of the U S market is a very competitive so the price is.

Issue is.

Based on this competitive landscape is creating the lower margins. So this is why when you see other.

Annual results and we are providing some data the U S market profitability is low compared to the number of subscribers that we pivoted.

But this was always like this this is the mentality on the DNA of the U S are competitive markets.

But we will do we are growing we are gaining market share and in the end of the day, we are increasing our profits we growth our sales and if this trend will continue which we do our visit it will happen I believe that it will be more material year over it.

Okay got it. Thank you that's that's helpful and maybe just to clarify on that last point.

I mean, it sounds like you're expecting to continue to be selective in your U S business.

While while still trying to grow market share.

Where it makes sense from a profitability standpoint, so just making sure that we understand kind of the approach there.

Can you repeat on the interest and maybe I didnt understand clearly your issue.

Yes, yes, so just maybe another way of putting it or do you expect to remain selective.

With your approach to the U S. It kind of focused on the profitability.

You've noted it's a region with the.

Historically lower profit margin so should we.

<unk> kind of your approach to the market to remain.

As you've always approached it historically, meaning you're not willing to sacrifice margins for growth okay.

Sure.

So we our I would say our Uh huh.

Our strategy is to keep.

Keep profits.

Profits keep profitability.

Even giving up some growth because when we are.

The analyzing the market for more than 15 years we.

We sold it most if not all of our competitors, which are bigger than us always lost money most of them been crops and change ownership during the years.

We are always made money now Fortunately we succeed.

Think too.

Show that we have summer.

The advance we have some advantages and we succeed to increase our growth so maybe to create new growth without sacrificing our profitability still compared.

Compared to other regions that at 1 of operates like Israel, and Latin America. The U S business for each 1 has lower margins, but we always keep an everything for profit because you know to start giving of for example of units for free on growing in advertising for a $50 million and then.

Sales of <unk>.

1 hundreds of thousands of <unk>, it's very nice you know, but no 1.

<unk> debt even in the long term, it's turned to profits in the business in the end of the day is to serve shareholders by creating profit. So we will not sacrifice our profits we always try to balance between growing and profitability. Now we are in a trend I think which we start reaping the fruit also.

The growth, but results are giving up for our profits of course for.

For a short time, when I'm, saying that you really increased some some.

The marketing.

We saw sales of course.

Maybe will not grow our profits in the next 1 or 2 quarters in the U S. But we do it very very consciously and we always know that this will lead to increased profit. This is our wholly theme.

<unk> profits profits on profits.

Okay. That's helpful. Thank you and then last 1 for me and I'll pass it along.

Just curious to get your views on the set up in Brazil, I believe you noted stabilization in the aftermarket segment. There in the first quarter can you talk a bit about what you're seeing in Brazil Q2 to date.

At the first of all of when we compare the situation today to the situation. During 2020, we are in a much better solution because during 2020 until about October.

The says was very zero or very low non zero with very low on the same time. The churn is something thats not depend on the market there is a churn.

So we lost or we had the minus and the negative.

The.

Growth in our subscriber base, which typically it's the opposite of what we are aiming by the pandemic.

The hurt and change a little bit shaken the situation.

Since October or.

Up until today, we and we show it's also in the Q4.

We succeed to overcome the situation we back to at.

At the beginning.

The decline start shrinking and then we so we see now.

The the trend will lead us off very shortly to change to a growth of net subscribers. So looking.

The 2 the BEC.

Beck is not the idea, but when we look forward. We are very optimistic we see the the graph growing we are now close to the <unk>.

Full recovery and when we look on the market we have to understand that there is less car says which is.

Influence us people is less money some people with the second car decided to sell it and not to buy a new 1 because most of the people are in the current times for a longer period of time.

We see and we learned from Israel, and we see it now in Europe in the states and we know that it's now tend to be the situation also in Brazil, the Brazil vaccination start late but they are.

Now in a very strong trends with the very impressive goals of Vaccinating, the population, which for US is very important and the situation in Sao Paulo or so for them because it's the main commercial.

Area for Brazil, and I believe that the once it's will be more free from the pandemic and the.

And people will book to work et cetera.

It will allow us to grow because even today with Brazil exceeding the pandemic, we see that we are in a very good trend.

Of recovery, so when it turned to a free.

The market at all from.

From the pandemic I'm totally sure.

But we will back to the.

The best times and in terms of our market share we have to understand that the our position is very very strong in Brazil.

We are the strongest player during the pandemic we didn't see.

Even so that we.

We are gaining more and more market share of our competitors were also from the economic point of view with the worst situation. So overall looking forward I am very optimistic that the Brazil contribution will continue to be more and more on the positive results.

Yeah.

Okay.

Great. That's helpful. Thanks, so much.

The next question is from a soft boral of Oppenheimer. Please go ahead.

Hey, guys. Thanks for taking my questions and congrats on a very strong quarter.

Maybe we can just kind of revisit the.

The product segment, that's what really stood out to us.

In terms of surprise versus the estimate of NAV.

I think that's part of what drove the kind of sequentially.

Sequentially higher EBITDA generation.

How should we be thinking about of normalized product revenue run rate.

Should we go back to thinking about this is the 50 million dollar kind of quarter. The business. So should we be kind of adjusted that number up given maybe some newfound strength in our in the auto market globally and of course in the specific countries, where you operate like Brazil, Mexico, and Israel, obviously, so any color there.

It would be helpful.

Yeah.

As I said before the there is a specific issue which is the situation on the OEM during Q1.

And in Israel based on the high growth of new car sales, but.

Of course, when we look backwards to 2020.

Wasn't the rebuild of our irregular meaning.

When we I would say stock with you guys with the investors and shareholders.

The 3 months ago of 6 months ago.

In Israel. It was only the beginning of the vaccination. So we based on conservative reasons and based on the last year of data, which we had to count on we could then of course forecast.

The D C.

Change on the strength so fast so Ah first of all when we compare it to a year ago of course, it's a different times of different times. The Israelis the Israel free for everything I would say it very clearly no corona at all in Israel, We know it now when we go to the.

State and when we go to Latin America things are even the pandemic is there people get used to live like this and they also get out of it now.

Q1 was strong in terms of the car industry compared to the same times of year ago or the or beginning of Q2 end of end of Q1, which was dramatically low last year, which of course affected us.

Now looking forward as I said I don't think that we will back to the lowest on numbers of sales, but if we have been last year and about $17 million per quarter I believe that we will be somewhere between the <unk>.

The sales that we have been lost due to the says in Q1, we will not drop off dramatically now this is not what they mean, but Q1 was strong again don't forget the debt.

Different of about $2 million of sales, which to millions of dollars in revenues. It's a high number when you go to the margins of our to the margins of our.

Hardware is less than 20% between slow so.

Im less sensitive to change in sales of other the nice thing of selling other Indian its turn to subscribers few months later it will tend to subscribe to the MB swap nice and this is what's important in sales hardware not the sales of the Alba by itself. This is good but it's in the end it's not major portion of.

Our profits, but when you're talking about those numbers total subscribers going with a 678 is Dan you've talked about high numbers and this is what is optimistic in the sales of filed where during Q1.

And I am expecting debt, we will show always.

Growth in sales, but there is some volatility between the quarters, that's on what I want to see.

Okay, that's very clear very helpful.

You mentioned earlier about.

Sure.

The obviously, the the subscriber growth being strong above the peak of 20.

When he came run rate that we were at Pryor.

When you talk about operating leverage can you walk us through how that plays out between the services gross margin, which has stabilized at about 54 and a half for the last couple of quarters and then maybe just kind of walk us through the operating expenses because I think we're all asking what does it.

<unk> operating expense run rate looks like post Covid G&A is it's pretty modest debt the level, but we've seen R&D come up I know that there is some some currency effects, maybe playing in here, but what is the normalized spend rate look like in terms of Opex and then any color you can give us.

On the services gross margin overtime.

Last year and I mentioned it every every call we did a lot of.

Decreasing our cost for the period of the pandemic, because we want to be conservative and.

I was happy that the all our employees and managers, we're shoulder to shoulder with the interest of the company.

After we show that we overcome the pandemic. After we show that the company is still alive and kicking the gear.

<unk> meet the Q until Q1 and during Q1, we back to the core.

Cost before the pandemic, meaning.

The cost that we show in Q1.

Across the board, including operating including on our margins and everything I think that this is represents this is the normalized cost of the quarter at 1 now of course, if we will grow.

Our <unk>.

Profits are says we need to set of small so of course from time to time, we add some cost but again.

The operating leverage allow us to add cost less than the profits that we generate from our sales.

So looking for the short term I don't see growth in our I would call it budget our.

Cost we are now back to the almost the highest cost in every division every region.

So this I would say that Q1 is the very close to a normalized.

Situation of the group.

Okay. Okay. That's very clear can we get an update on the maybe the outlook for the Mexico.

The market.

And how that kind of play out maybe over the next year, because I think we all expect for it to maybe more meaningfully impact numbers in 2022, but kind of really start to take shape. This year. So any color there would be helpful.

Again do something of that.

Discuss the.

The less the shareholders' meeting and show the conference call and.

And as we said, we delayed a little bit our.

The launch of the Ics day to rank on single day to run insurance plan in Mexico, and we started only in the end of 2020 when.

When we fell together with our marketing advisors diseases of the right time to launch because the lounge. It when everything was in current time and Lockdowns and people were in a very bad mood is not the right down to 2 <unk>.

<unk> of new product into the <unk>.

And to do it so we did it in the end of 2020, and we see the rough the gruff growing we sell every day of more and more but we have to understand when when you have 1.8 million subscribers, adding few hundreds for the first months and then even for the next months et cetera.

In percentage on in the planet, it's even better than our plan, but it's has no meaning in terms of showing in our results in our <unk>.

Quarterly financials, I am not expecting debt it will effect in the coming quarters, but I think debt as it was in Brazil. When we started it's looking debt.

We entered the REIT market, we put our legs in the.

Right door and now we are again, adding more and more direct cost I mean.

More insurance companies and more.

More sales discussions et cetera.

The.

I don't think that it will be material in 2.

<unk> 2021.

And in 2022, I hope that somewhere in middle of the year, we can be in a position to start talking about thousands of new subscribers per month from the Ics.

Add to this debt in the Mexico, We also do.

What we call the Regal, our after market, which is not the.

It run insurance solution, but we selling now to more insurance companies, we're selling to leasing.

Companies we.

We know in the pilot with the large company all Fob.

Bayou, which day try to copy this I would call. It the scan of the startup, but they are of very large company today try to compare it deal financing dealership in the U S to Mexico. So we are there.

We are there are 2 also to monitoring there.

The prime customers and I must say the despite of going very well the very satisfied with what they see but.

Of course again, it will take time to educate.

The market.

The.

Overall, I am very satisfied with our penetration to the aftermarket the segment in Mexico, but it will take time to be more.

The major to other results no doubt.

Okay, great great, Yes, it's very clear thank you for the color.

We noticed that you have been dismissed this net that's not relevant but.

In case that gives us any insights into any of the kind of subsidiaries net income attributable to Noncontrolling interest was quite strong this quarter around $700000 anything you can comment there.

If anything it looks quite positive, but you can correct me if im misreading it.

And so.

As you mentioned, we of the minority rights, which of course contributed to the consolidated the to run the profit.

Of course of some quarters the contributes more on some quarters of contribute the list as of today I think it's very important for us to keep this the minority is.

Minorities also is acting as an active position in the company and its very very relevant so I think as of now as we see it.

It's a good position for us.

Okay, great other.

I'll just finish up with a with the technical question here can we get an update on what the what the effective tax rate should look like it hasnt been around 30% for a while.

I know it fluctuates from quarter to quarter in Theres, the very big difference of marginal on effective but given maybe some of the shift.

Revenues and profits can we get an update there on how we should be thinking about effective tax rate longer term or even from just the next few quarters. Yes, I think I think the you know more or less approximately 27% of the Max rate when it makes sense for us.

Okay, great great. Thank you for taking all my questions and again, congrats on the great quarter and.

Let me speak again soon.

So I'm thinking of I think you're welcome.

Is there any additional questions. Please press star 1 if you wish to cancel your request. Please press star 2 please standby, while we poll for more questions.

There are no further questions at this time before I ask Mr share Roski to go ahead with his closing statement I would like to remind participants that a replay of this call will be available tomorrow on <unk> to Ron's website Www Daddy to run dotcom, Mr. Hu of RASK.

Would you like to make your clothing closing statement.

Thank you on behalf of management of it to Ron I would like to thank you our shareholders for your continued interest and long term support of our business.

And I do look forward to speaking with you next quarter have a good day.

Alright, thank you.

This concludes the 2 Ron first quarter 2021 results conference call. Thank you for your participation you May go ahead and disconnect.

[music].