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spk05: Ladies and gentlemen, thank you for standing by. Welcome to the Ituran first quarter 2021 results conference call. All participants are present in a listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. For operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please contact Ituran's investor relations team at GK Investor and Public Relations at 1-646-688-3559 or view it in the news section of the company's website www.eturan.com. Now, I would like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?
spk01: Thank you, Operator. Good day to all of you and welcome to Eturan's conference call to discuss the first quarter of 2021 results. I would like to thank you to our management for hosting this conference call. With me today on the call are Mr. Eyal Sharadsky, the Co-CEO, Mr. Udi Mizrahi, Deputy CEO and VP Finance, and Mr. Eli Kamar, the CFO. Eyal will begin with a summary of the quarter results, followed by Eli with a summary of the financials. We will then open the call for the questions and answers session. I would like to remind everyone that the safe harbor in the press release also covers the contents of this conference call. Ena, OER, would you like to begin, please? Thank you, Ehud.
spk02: I'd like to welcome all of you and thank you for joining us today. We are very pleased with the results of the first quarter, which outperformed our expectations. It demonstrated that Iran is well on the way to full recovery and renewed growth. This is despite ongoing impact from the pandemic, which still affects many of the geographies in South America in which we operate. Not only have we maintained our profitability and strengths, we grew our subscriber base at the highest rate we have seen for many quarters, at 20,000 net ads. While the OEM segment is stabilizing, the strength was driven by the aftermarket segment, which grew at a remarkable 25,000 net. This is a rate which is nicely ahead of our typical range of between 15,000 and 20,000s. We are very happy with this strong increase, and it is a promising sign for potential growth in the subscription revenues over the many quarters ahead. For the first quarter of 2021, revenues were at $67 million, 6% ahead of those of the fourth quarter and just 1% behind the $68 million reported in the first quarter of last year, pre-pandemic. All this demonstrates that Ituran has now recovered to its former strength and is primed for new growth in the quarter's head. On the profitability side, as you know, over the past year, we carefully managed the business which allowed us to maintain our cash generation and profit. As we return to the growth trend in the coming quarter, we expect that the operating leverage inherent in our business model, which enable us to add subscribers on a more or less fixed operating base, will allow us to see the top-line revenue growth from the increase in subscribers drop down to the bottom line. From the profitability standpoint, for the quarter, we reported EBITDA of $17 million, our highest level since before the pandemic. Again, it is a strong statement to the overall resilience and stability of our business model. On the cash side, we had first-quarter cash flow from operating activities at $9.2 million, bringing our cash and marketable securities position to $70 million. I'd like to go into more details on the various parts of our business. During the quarter, as I said, our aftermarket business returned to above its normal growth rate of 25,000 new net subs. The regions that were particularly strong were Israel and the U.S. It is worth mentioning that in Brazil, even though the situation with the pandemic still remains tough, We are pleased with the stabilization in the aftermarket subscriber base. I note that in Q1, Israel had its highest level of new car sales in history, an increase of 18% year-over-year increase. This is another sign that 2021 has started well in our key geographies. Many countries in South America are still highly impacted by the virus, and the economies remain weak there. but we are seeing improving trends in Brazil and in Mexico. During the quarter, we saw an overall decline of 5,000 OEM customers. This decline has slowed from last year and it's moving in the right direction. One of the major goals of the acquisition of the OEM business was to harvest synergies across our entire business and in all the various geographies, cross-selling and really taking successful business models and sales from one region to another. We are very much in the process of doing this now and tapping our large subscriber base of almost 1.8 million, regularly paying customers to bring them new and valuable telematics and related services by which we can organically grow our sales. And in summary, overall, we are pleased with our start to 2021 Ituan has resumed its growth trend, and the strong increase in subscriber base sets adds up well for the coming quarters. And I will now hand the call over to Eli for a financial review. Eli? Thanks, Eyal.
spk04: I know that the results I present will all be on a gap basis, including adjusted EBITDA, which excludes revenues and costs related to the purchase price allocations. We believe this will provide a better understanding of our ongoing performance. Revenues for the first quarter of 2021 were $67.4 million, a decrease of 1% compared with revenues of $68.4 million in the first quarter of 2020. In local currency terms, first quarter revenues were at the same level as those of the first quarter of last year. Revenues from subscription fees were $45.6 million, a decrease of 7% over Q1 2020 revenues. In local currency terms, Q1 subscription fees decreased by 4% year-over-year. The subscriber base amounted to 1,788,000 as of March 31, 2021. This represents an increase of 20,000 net over that of the end of the period quarter. During the quarter, there was an increase of 25,000 in the aftermarket subscriber base and a decline of 5,000 in the OEM subscriber base. Product revenues were $21.7 million, an increase of 12% compared with that of the first quarter of 2020. The geographic breakdown of revenues in the first quarter was as follows. Israel 52%, Brazil 22%, rest of the world 26%. Operating income for the quarter was $12.8 million, or 19% of revenues, an increase of 27% compared with an operating income of $10.1 million, or 14.7% of revenues in the first quarter of last year. EBITDA for the quarter was $17.1 million or 25.4% of revenues, an increase of 12% compared with an EBITDA of $15.3 million or 22.4% of revenues in the first quarter of last year. Financial expenses for the quarter was $1 million compared with the financial expenses of $700,000 in the first quarter of last year. Net income for the first quarter of 2021 was $8.3 million or 12.3% of revenues or earning per share of $0.40. This is an increase of 30% compared to a net income of $6.4 million and an earning per share of $0.31 per share in the first quarter of 2020. Cash flow from operation for the first quarter of 2021 was $9.2 million. As of March 31, 2021, the company had cash including marketable securities of $70.1 million and debt of $41.8 million, amounting to a net cash of $28.3 million. This is compared with cash including multiple securities of $78.8 million and debt of $54.5 million amounting to a net cash of $24.3 million as of December 31, 2020. For the first quarter of 2021, a dividend of $3 million was declared. This is in line with the Board's current policy of issuing at least $3 million on a quarterly basis. And with that, I'd like to open the call for the question and answer session. Operator?
spk05: Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press star 1. If you wish to cancel your request, please press star 2. If you're using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we poll for your questions. The first question is from Tavi Rosner of Barclays. Please go ahead.
spk00: Hi, this is Peter Zdebski on for Tavi. Thanks for taking my question and congratulations on the quarter. You had another very strong quarter in hardware, both on sales and margins. I recall last quarter that was related to some inventory restocking. Could you give some color on whether that continued in Q1? And then as a follow-up, have you or your customers been impacted by any supply chain shortages this year that we should consider for the outlook?
spk02: Thank you. Yes. Usually Q1 is very strong in terms of the OEM purchasing process since in Latin America the OEM plants are It's the last quarter of the year. This is how they consider it. So they are increasing their volumes and their inventory. So this is typically, I would say, the highest season from the OEM purchase point. Also in Israel, as I mentioned, Q1 was the highest ever of sales of new cars in Israel, which of course create correlation between purchasing the hardware and install it. So it was strong and it's not a one time, but it shows a little bit of seasonality in hardware sales for us. Usually Q2 and Q3 are a little bit weaker than Q1 and Q4. But as you remember, still the contribution of hardware sales to our overall profits is lower than, of course, the service revenues. But still, this is the reason for Q1, yes.
spk00: I appreciate the call. Thank you.
spk05: The next question is from David Kelly of Jefferies. Please go ahead.
spk06: All right, thanks for taking my questions. Two for me, maybe to start, step up in the U.S. aftermarket subscriber business. Just hoping you could provide a bit more color, you know, the drivers of the contribution there and maybe remind us of the size of your U.S. business and kind of how the competitive landscape shapes up there. It'd be great.
spk02: Okay, so... Just to remind everyone that our main segment in the United States market is what they call the buy here, pay here, which represents financing people to buy their cars in the dealers' shops. And in some events, those finance dealers would like to control payments of their customers and using the systems like our systems and others in order to control payments. And during last year, I think that after a while, our solution showed a very, very excellent application, solution, very reliable and we succeed to increase our penetration to additional master dealers in the United States, a trend which I believe will continue. We are now putting more resources in marketing and sales because we found that we have an advantage which we have to turn to sales. So I think that we are gaining more market share. I think we have a better solution. And fortunately or unfortunately, during the pandemic, we succeeded to increase our market share and grow the subscribers there now. The American or the U.S. market is very competitive. So the price issue is based on this competitive landscape is creating low margins. So this is why when you see our annual results and we are providing some data, the U.S. market profitability is low compared to the number of subscribers that we have there. But this was always like this. This is the mentality and the DNA of the U.S. competitive markets. But we are there. We are growing. We're gaining market share. And in the end of the day, we are increasing our profits, we grow ourselves, and if this trend will continue, which we do our best that it will happen, I believe that it will be more material year over year.
spk06: Okay, got it. Thank you. That's helpful. 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. Is that you know, 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.
spk02: Can you repeat? I didn't understand. Maybe I didn't understand clearly your issue. Yeah, yeah.
spk06: So just... Maybe another way of putting it, do you expect to remain selective with your approach to the U.S. and kind of focused on the profitability? You noted it's a region with historically lower profit margins. So should we expect 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.
spk02: So I would say our strategy is to keep profits, keep profitability, even giving up some growth. Because when we are analyzing the market for more than 15 years, we saw that most, if not all of our competitors, which are bigger than us, always lost money, most of them bankrupt and changed ownership during the years. We are always made money. Now, fortunately, we succeed, I think, to show that we have some advance, we have some advantages, and we succeed to increase our growth or maybe to create new growth without sacrificing our profitability. Still, compared to other regions that it one operates like Israel and Latin America the US a business for it one has lower margins, but still we always keep and Everything for profits because you know to start giving for example units for free on going and advertising for 50 million dollars and then sells Hundreds of thousands a year. It's very nice, you know, but no one approved a that even in a long term, it's turned to profits. And a business, in the end of the day, has to serve shareholders by creating profits. 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 fruits. Also grow, but without giving up for our profits. Of course, for a short term, when I'm saying that we will increase profits, Some marketing resources, of course, maybe will not grow our profits in the next one or two quarters in the U.S., but we do it very, very consciously, and we always know that this will lead to increased profits. This is our holy thing, profits, profits, and profits.
spk06: Okay, that's helpful. Thank you. And then last one from me, and I'll pass it along. Just curious to get your views on the setup 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 today?
spk02: First of all, 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 sales was very low, not zero, but very low. On the same time, the churn is something that's not dependent on the market. There is a churn. So we lost or we had a minus and a negative growth in our subscriber base, which typically it's the opposite of what we are aiming. But the pandemic hurt and changed a little bit, changed the situation. since October or up until today, and we show it's also in the Q4, we succeed to overcome the situation. We're back to, at the beginning, the decline start shrinking, and then we see now that the trend will lead us very shortly to change to a growth of net subscribers, So looking back is not the idea, but when we look forward, we are very optimistic. We see the graph growing. We are now close to the full recovery. And when we look on the market, we have to understand that there is less car sales, which influences us. People have less money. Some people with a second car decide to sell it and not buy a new one because most of the people are in quarantines for a longer period of time. We see and we learn it from Israel and we see it now in Europe, in the States, and we know that it's now turned to be the situation also in Brazil. The Brazil vaccinations start late. but they are now in a very strong trend with very impressive goals of vaccinating the population, which for us is very important, the situation in Sao Paulo, also for them, because it's the main commercial area for Brazil. And I believe that once it will be more free from the pandemic and people will be back to work, etc., It will allow us to grow because even today with Brazil still in a pandemic, we see that we are in a very good trend of recovery. So when it's turned to a free market at all from the pandemic, I'm totally sure that we will be back to the best times. And in terms of market share, we have to understand that our position is very, very strong in Brazil. We are the strongest player during the pandemic. We didn't see or we even saw that we are gaining more and more market share. Our competitors were also from the economic point of view is a worse situation. So overall, looking forward, I'm very optimistic that Brazil contribution will continue to be more and more on the positive results.
spk06: Great. That's helpful. Thanks so much.
spk05: The next question is from Asaf Bar-El of Oppenheimer. Please go ahead.
spk07: Hey, guys. Thanks for taking my questions, and congrats on a very strong quarter. Maybe we can just kind of revisit the product segment, because that's what really stood out to us in terms of surprise versus estimate, and obviously I think that's part of what drove the kind of you know, sequentially higher EBITDA generation. How should we be thinking about a normalized products revenue run rate? Should we go back to thinking about this as a $15 million kind of quarterly business or should we be kind of adjusting that number up given maybe some newfound strength 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 would be helpful.
spk02: As I said before, 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, it wasn't a regular situation. a regular year, meaning when we, I would say, talk with you guys, with the investors and shareholders three months ago or six months ago, don't forget that we've been in the middle of a pandemic. Even in Israel, it was only the beginning of the vaccination. So we, based on conservative reasons and based on the last year data, which we had to count on, We couldn't, of course, forecast this change on this trend so fast. So, first of all, when we compare it to a year ago, of course, it's different times. Israel is free for everything. I would say it very clearly. No corona at all in Israel. We know it. Now, when we go to the States 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. So Q1 was strong in terms of the car industry compared to the same times a year ago or beginning of Q2 and 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 numbers of sales, but if we've been last year in about $17 million per quarter, I believe that we will be somewhere between the sales that we have been last year to the sales in Q1. We will not drop dramatically now. That's not what I mean. But Q1 was strong. Again, don't forget that Different of about $2 million of sales, which $2 million in revenues, it's a high number. When you go to the margins of our hardware, it's less than 20%, which means it's low. So I'm less sensitive to change in sales of hardware. The nice thing of selling hardware, in the end, it turns to subscribers. A few months later, it will turn to subscribers. And this is what's nice about it. And this is what's important in sales hardware. Not the sales of the hardware by itself. This is good, but it's in the end, it's not major portion of our profits. But when you talk about those numbers, tell to subscribers, going without six, seven, eight years, then you talk about high numbers. And this is what is optimistic in the sales of hardware during Q1. And I am expecting that we will show always a growth in sales, but there is some volatility between the quarters. That's all what I want to say.
spk07: Okay. Okay. That's very clear. Very helpful. You mentioned earlier about, um, the, obviously the, the, the subscriber growth being strong above the, uh, the 20 K run rate that we were at prior. Um, 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 54.5 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 a normalized operating expense run rate look like post-COVID? G&A is pretty modest at these levels, but we've seen R&D come up. I know that there's some currency effects maybe playing in here, but what does a normalized spend rate look like in terms of OPEX and then any color you can give us on the services gross margin over time?
spk02: Last year, and I mention it every call, we did a lot of decreasing in our costs for the period of the pandemic because we want to be conservative and And I was happy that all our employees and managers were shoulder to shoulder with the interest of the company. After we showed that we overcome the pandemic, after we showed that the company is still alive and kicking, during mid Q, until Q1, and during Q1, we're back to the cost before the pandemic, meaning the cost that we show in Q1 across the board, including operating, including margins and everything. I think that this is a normalized cost of a quarter in E2R now. Of course, if we will grow our profits, our sales, we need to sell more. So, of course, from time to time, we add some costs. But again, the operating leverage allows us to add costs less than the profits that we generate from ourselves. 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 almost the highest cost in every division, every region. So this, I would say that Q1 is very close to a normalized cost situation of the group.
spk07: Okay, okay, that's very clear. Can we get an update on maybe the outlook for the Mexico aftermarket business and how that's going to 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.
spk02: Again, this is something that I discussed last shareholder conference call. And as we said, we delayed a little bit our launch of the ICS day to run Consiguro, the day to run insurance plan in Mexico. And we started only in the end of 2020 when when we felt together with our marketing advisors that this is the right time to launch because to launch it when everything was in quarantine and lockdowns and people were in a very bad mood is not the right time to launch a new product and to do it. So we did it in the end of 2020 and we see the graph growing We sell every day more and more, but we have to understand when you have 1.8 million subscribers, adding a few hundreds for the first month and then even thousands for the next month, etc., in percentage and in the plan, it's even better than our plan, but it has no meaning in terms of showing now results in our quarterly financials. I'm not expecting that it will affect in the coming quarters. But I think that, as it was in Brazil when we started, it's looking that we entered the right market, we put our legs in the right door, and now we are again adding more and more direct costs. I mean, more insurance companies and more sales discussions, etc., I don't think that it will be material in 2021. And in 2022, I hope that somewhere in the 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 that in Mexico, we also do what we call a regular aftermarket, which is not the e-to-run insurance solution. But we're selling now to more insurance companies. We're selling to leasing companies. We're now in a pilot with a large company of pay-your-buy here, which they try to copy. This, I would call it, is kind of a startup, but they are a very large company today. try to compare finance and dealership in the U.S. to Mexico. So we are their tool also to monitoring their subprime customers. And I must say that this pilot is going very well. They are very satisfied with what they see. But, of course, again, it will take time to educate market after. Overall, I'm very satisfied with our penetration to the aftermarket segment in Mexico, but it will take time to be more major to our results, no doubt.
spk07: Okay, great, great. Yeah, it's very clear. Thank you for the color. We noticed that You can dismiss this if it's not relevant, but in case it gives us any insight into any other kind of subsidiaries, net income attributable to non-controlling interests was quite strong this quarter, around, I think, $700,000. Anything you can comment there? I mean, if anything, it looks quite positive, but you can correct me if I'm misreading it.
spk03: It's okay. You know, as you mentioned, we have the minority rights, which, of course, contributed to the consolidated Iran profit this quarter. Of course, some quarters they contribute more, some quarters they contribute less. As of today, I think it's very important for us to keep this minority as this minority is also acting as an active position in the company, and it's very relevant. So I think as of now, as we see it, is a good position for us.
spk07: Okay, great. I'll just finish up with a technical question here. Can we get an update on what the effective tax rate should look like? It hasn't been around 30% for a while. I know it fluctuates from quarter to quarter, and there's a very big difference between marginal and effective, but given maybe some of the shift in... revenues and profits can we get an update there on how we should be thinking about effective tax rate longer term or even for just the next few quarters yeah i think i think that you know more or less approximately 27 percent as the tax rate may make sense for us okay great great thank you for taking all my questions and uh again congrats on the great quarter and uh hope to speak again soon thank you thank you very much thank you you're welcome
spk05: If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by while we poll for more questions. There are no further questions at this time. Before I ask Mr. Sharofsky to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available tomorrow on Eturan's website, www.eturan.com. Mr. Shavrotsky, would you like to make your closing statement?
spk02: Thank you. On behalf of management of Ituran, 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. Bye.
spk05: Thank you. This concludes the Ituran First Quarter 2021 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.
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