Ituran Location and Control Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to the eTouran fourth quarter and full year 2023 results conference call. All participants are present in 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 eTouran's investor relations team at ek Global Investor Relations at 1-212-378-8040 or view it in the news section of the company's website, www.eturan.co.il. I will now hand over the call to Mr. Ehud Helft of EK Global Investor Relations. Mr. Helft, would you like to begin?

Thank you, Operator. Good day to all of you and welcome to ETURAN's conference call to discuss the fourth quarter and full year 2023 results. I would like to thank each of our management for hosting this call. With me today on the call are Mr. Eyal Sheratzky, CEO, Mr. Udi Mizrahi, Deputy CEO in VP Finance, and Mr. Eli Kamar, 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'd like to remind everyone that the safe harbor in the press release also covers the content of this conference call. And now, Eyal, would you like to begin, please? Thank you, Eyal.

I'd like to welcome all of you to our fourth quarter and full year 2023 call. I'd like to thank you for joining us today. We are pleased with our 2023 results, which was a record year for it to run. We are all the more pleased given that we achieved these strong results despite difficult fourth quarter in which our country faced a major terrorist attack at the start of the quarter, which resulted in a war which effectively paused the economy for a few weeks. This new challenge followed by many challenges that everyone has faced over the past few years, including the corona pandemic, supply chain issues, and recently a slowing global economy. As our strong financial results demonstrate, our business is in very good shape and resilient against challenges. I want to also highlight that part of the reason for our resilience is that Ituran is a global, diverse business based on a loyal subscriber base of more than 2.2 million customers, primarily in Israel and Brazil, but also in many other countries in Latin America, as well as elsewhere in the world. And therefore, any impact in one specific region will have a limit effect on its overall business. The initial impact of the war on new car sales in Israel, which drives our new subscribers in that country and aftermarket product sales, temporarily caused a complete pause in the local car market. However, this pause was relatively short-lived, and as of end of January 2024, new car sales in Israel continue at the former long-term trend, and new car sales were up 3% year over year. Our subscriber base continued to show strong growth, adding 42,000 subscribers in the quarter, well ahead of our expectations of between 30 and 35 thousands that we shared with you last quarter. This is still well in advance of the long-term rate we had in 2021 and earlier of between 20 and 25 thousands per quarter. Overall, as you can imagine, we are pleased with our relative strengths in Q4 and furthermore, the overall picture in 2023 is very strong. Looking at our balance sheet strengths, we ended the quarter with over $50 million in net cash with almost no debt. Given our ongoing growth, our solid profitability, our strong cash generation each quarter, and our strong net cash level for the second quarter in a row, we have decided to increase the dividend. Last quarter, we increased the ongoing dividend from $3 million to $5 million per quarter, and this quarter we are further increasing the quarterly dividend to $8 million per quarter. We are very pleased to share the fruits of our success and we see our dividend as well as our ongoing buyback program as a reward to our loyal shareholders for the long-term support of our company. Starting from 2024, given the stability of our business and our ability to continue performing even during challenging times, we have decided to provide EBITDA guidance ahead. For 2024, we currently expect to report full EBITDA of between $90 and $95 million and expect to cross the $100 million EBITDA landmark in 2025. We expect the subscriber growth to continue growing at around current rate of approximately 35,000 to 40,000 net new subscribers per quarter. I note that the expectations are as of today. Our EBITDA expectations are based on the relevant currency levels remaining at around current average rates and also assumes that current global macroeconomic situation globally and political situation specifically in Israel doesn't significantly worsen. In summary, 2023 was a solid year of performance for it to run in all respects. and we believe that 2024 will continue on this trend. I want to add that I am very proud of the courage and commitment of the Turan team, both in Israel and globally, especially in the challenging time we have had recently, and wish to personally thank them for their resilience and dedication during these times. As has been true throughout our long history and will continue to add over the long term, our constantly growing subscriber growth will continue to translate into increased revenues with faster growing profitability over the long term due to the operating leverage inherent to our business. And with that, I hand over to Eli. Eli, please go ahead.

Thanks, Eyal. I will provide a short summary of the financial results. You can find the more detailed results that we issue in the press release earlier today. Port water revenues were $77.8 million, a 4% increase compared with revenue of $74.9 million last year. Port water revenue was somewhat impacted by the outbreak of war in Israel on October 7th. Furthermore, the revenue, as demonstrated in denominated in US dollar terms was impacted by a significant devaluation of the Argentine peso as well as the temporary weakness in the Israeli shekel against the US dollar during the quarter. In local currency terms, fourth quarter revenues grew by 6% compared with that of the fourth quarter of last year. Revenues from subscription fees in the quarter were $59.4 million, an increase of 10% over the fourth quarter 2022 revenues. In local currency terms, the increase was 12% compared with that of the fourth quarter of last year. Product revenues in the quarter were $18.4 million, a decrease of 13% year over year, and in local currency terms, product revenues decreased by 9% year-over-year. The decline in product revenue was mainly due to the Palestinian hardware installation in Israel following the outbreak of war on October 7. Revenues for the full year 2023 were a record $320 million, 9% increase over the $2,093.1 million reported in 2022. Revenues from subscription fees were a record $2,034.5 million, representing an increase of 12% over 2022. Product revenues were 84%. $85.4 million, representing an increase of 2% compared with 2022. The subscriber base expanded to 2,252,000 by year-end, marketing an increase of 42,000 from the end of the previous quarter and 186,000 over 2023. During the fourth quarter, there was an increase of 38,000 net in the aftermarket subscriber base and an increase of 4,000 net in the OEM subscriber base. The geographic breakdown of revenues in the fourth quarter was as follows. Israel, 47%, Brazil, 28%, rest of the world, 25%. EBITDA For the quarter was $21.9 million or 28.2% of revenues, an increase of 7% compared with EBITDA of $20.6 million or 27.4% of revenues in the fourth quarter of last year. In local currency terms, fourth quarter EBITDA grew by 8% compared with that of the fourth quarter of last year. EBITDA for 2023 was a record $87 million or 27.2% of revenues, an increase of 10% compared to $78.9 million or 26.9% of revenues in 2022. Net income for the fourth quarter was $12 million or the earning per share of $0.60 an increase of 26% compared to $9.6 million of diluted earnings per share of $0.47 in the fourth quarter of last year. In local currency terms, fourth quarter net income grew by 28% year over year. Net income in 2023 was $48.1 million or fully diluted earnings per share of $2.40, an increase of 30% compared with net income of $37.1 million of fully diluted earnings per share of $1.82 in 2022. Cash flow from operation for the fourth quarter of 2023 was $21.8 million, and cash flow from operation for the year was $77.2 million. As of December 31st, 2023, the company had cash including multiple securities of $53.6 million and a debt of $0.6 million amounting to a net cash position of $53 million. This is compared with cash including multiple securities of $28.2 million and a debt of $12.2 million amounting to a net cash position of $16 million amounting as of the end of 2022. The Board of Directors announced another increase in the quarter in the dividend policy. This follows the company's continuing strong profitability, ongoing positive cash flow, and strong balance sheet. The company increased the quarterly dividend to $8 million from $5 million in the period quarter and from $3 million in the eight quarters period to that. This represents a 60% increase in the ongoing quarterly dividend payment compared with that of the period quarter and 167% increase over the dividend paid in the many quarters period to that. During 2023, it won both back $6.6 million shares as part of its buyback program. As of December 31, 2023, there is $6.7 million remaining under the buyback program. Share repurchases are funded by a valuable cash and repurchase only runs ordinary shares under SEC rules And with that, I'd like to open the call for the question and answer session. Operator?

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 Chris Reimer of Barclays. Please go ahead.

Hi. Thanks for taking my questions. I was wondering, first off, if you could talk about some of the drivers behind the subscriber guidance and maybe what are some of the dynamics you're seeing in the different geographies?

Sure. The main drivers today are coming from, I would say, different drivers in different segments. First of all, in Israel, the cost of freight is increasing. It started during 2023 and is continuing as we face it every night, I would say. And in that case, it means that more insurance companies and more car owners are looking for security systems. And since our solution, I think, is the most excellent one, so we get more and more requests for new subscribers. This is in Israel. And in other countries, we have, one, the things that we are more and more focused on are such as the financial institutions for having a solution when they provide the loans to new car buyers, as well as security needs, which also there is an increase in violence and car theft also in Latin America. So this is the main drivers.

Great, thanks. Just touching on the EBITDA guidance you gave forward for 2025 at about, well, surpassing 100 million, how many sub-ads would that be roughly based on?

What actually we show in the last two years and what we expect in 2024 is, generally speaking, is around 150,000. 10% more or less. And while we're considering this number of subscribers, we're assuming that the ARPU is not going to change dramatically because some of the services that we provide are generating lower ARPU, but on the other end, we increased a lot of upsells. For example, in Israel, when we sell SVR, which is, let's call it, this is the traditional and the bread and butter, still a very high percentage of those customers are adding, for example, application payments. And in that case, the ARPU in Israel is growing. So overall, we consider conservatively that the ARPU will stay and with this number of subscribers. And by the way, add to this the operating leverage assumptions. We are not expecting that the growth of our expenses will decrease, let's say, every year. The additional expenses will decrease every year so we can build this model to provide this guidance.

Got it. Thanks. That's very helpful. That's it for me.

The next question is from Boris Schneider of Moore. Please go ahead.

Hi, guys. Congratulations on strong execution. And we appreciate the guidance that you provided. I think that's a great help for long-term investors as well. A question in terms of expenses. Last quarter, you mentioned that you had some one-off expenses related to the events in Israel. So if you can quantify the number. I know you said it's not very significant, but just to understand what's the impact on the net income this quarter.

As you can see, we actually, when we talked last quarter about the war, actually we expected or we put in a frame a little bit more expenses and a little bit more, let's say, decreasing in sales in Israel. But generally speaking, without giving the specific number, because it's not material anyway, I'm talking about some hundreds of thousands of dollars in the expenses, which are directly for contribution to the needs in Israel for the war, which today, of course, most of it we don't have anymore.

Okay. And in terms of guidance, So your subscription guidance mentioned roughly 6%. I think that's at the lower end. And if I look at the EBITDA guidance, it's lower. So my question is obviously the model, your financial, your business model is based on operating leverage and quite significant one. So the guidance appears to be quite conservative. What do you think on this?

First of all, we have to understand that there is no zero cost because part of this, we talk here, when we say the number about 160,000, we're talking about the net. Don't forget that we have a total sale and then the churn. What we provide as a net is after the churn. This is first. to understand. So in terms of growth, is a very high growth, but there is a churn. We got the cost from two reasons. One is the conservative reason, and second is because in order to grow 160,000 net, still it's not zero cost. Some places we are financing the hardware which is part of the service, and it's appearing in the Amortization. And also, from time to time, we have to provide a direct solution to specific customers, so we have to add R&D. So practically, you write that it appears to be higher growth in the EBITDA which will be more correlative to the growth of subscribers. I believe that I want it to be higher, but when we provide guidance, we have to be conservative with the guidance. So this is the main reason.

Okay, I appreciate it. Thank you.

The next question is from Abba Borowitz. of OSP. Please go ahead.

Hi. Good afternoon. Congratulations on the very nice quarter and just all the all-around guidance. I just wanted to know if you could update us on Bring. It's been a while since we've heard about Bring. If you could maybe talk about if there's anything new to share.

Usually when we spoke about Bring, since it's kind of a financial holding, we have 17.1% from the shareholders, was when we did the rounds. We know that about two years ago, we made a very impressive round when the BRINC raised more than $100 million. Since then, the company doesn't need to do another round. So this is why we didn't inform anything. because from the operational point of view, we are not allowed since we have only 17%. But the company has its business plan, and it looks like it sticks to the business plan, and things are going as planned.

Okay, very good. Are you guys looking at any other investments outside of your own stock?

No, except Bring, which also in the last, I think, more than seven years, we didn't invest. We did only investment as an angel. Ituran is always investing only in companies which is in our field. And in the last five years, we are doing it or we did it. when we acquired road track or in the future when we go for a full acquisition again to create synergy and part of consolidation results. So bring is actually bring and save one of the only financial holdings that we have today.

Okay. Thanks very much.

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. Sharotsky 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.co.il. Mr. Sharotsky, would you like to make your concluding statement?

Yes, on behalf of management of Eturan, I would like to thank you, our shareholders, for your continued interest and long-term support at our business. We hope to be speaking with some of you over the coming quarter, and if you are interested in meeting or speaking with us, feel free to reach out to our investor relations team. And with that, we end our call. Thank you and have a good day.

Thank you. This concludes the Eturan fourth quarter. and full year 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.