Ituran Location and Control Ltd (ITRN) 2022 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran First Quarter 2020 Results Conference Call. (Operator Instructions)

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 (212) 378-8012-378-8040 or viewed in the News section of the company's website, www.ituran.co.il. I will now hand over the call to Mr. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin?

Thank you. Good day to all of you, and welcome to Ituran's conference call to discuss the first quarter 2022 results. I'd like to thank Ituran's management for hosting this conference call. .

With me today on the line are Mr. Eyal Sheratzky, CEO; Mr. Udi Mizrahi, Deputy CEO and VP Finance; and Mr. Eddie Kumar, CFO, Arbitron.

Eyal will begin with a summary of the quarter's results followed by Eli with a summary of the financials. we'll then open the call for the question-and-answer session.

I'd like to remind everyone that the safe harbor statement in today's press release also covers the contents of this conference call.

Now Eyal, would you like to begin, please?

Thank you, Kenny. I'd like to welcome all of you, and thank you for joining us today. We are very pleased with our financial results, kicking off 2022 with very strong subscriber growth in the first quarter. which is the clearest indication of our success. This is also reflected in the current quarter subscription revenues, which surplus $50 million, growing at 10% year-over-year. We grew our overall subscriber base at 43,000 net adds, bringing the total to over 1.9 million subscribers. The aftermarket segment added a record 59,000 subscribers during this quarter. This increase in subscribers came from both the growth in our traditional aftermarket business but was also boosted by the various growth engines that we have seeded over the past few quarters.

This included the increased traction from our usage best insurance, UBI business in Israel, working with car financing companies in Brazil and Mexico, new activities with rental companies in South America as well as continued growth performance from our U.S. business.

As I discussed last quarter, we expect this type of subscriber growth to continue throughout this year with expectation of between 140,000 to 160,000 net subscriber adds.

In the first quarter sub-adds is clearly indicating that we are on the right trend. As you can see, Ituran is a very strong and growing business, and I'm very proud of our recent achievements, and this is despite the background of what are many macro challenges.

The most notable macro issue, which impact us are the supply chain constraints. First, as you know, this is an issue that has already impacted us for much of the past year. Because of the shortage of parts, we have seen significant price increases on scarce components that we need and we had to buy some components on the spot market at inflated prices. This increases the cost of goods and lower somewhat the gross margins of the products that we sell. Some of the cost increase, we have been able to pass on, but not all of it.

Second impact of this is actually on the large OEMs that we work with that sell cars in Brazil, Argentina, Mexico, Ecuador and Colombia. The OEMs are unable to manufacture and sell cars to meet the demand. And therefore, we are indirectly impacted as new subscriber ads are below the level of subscription that comes to an end. This impact the OEM subscriber births, and we had a net decline of 16,000 in the quarter.

During the quarter, we use our solid cash position to grow our inventory to ensure that, first of all, we continue to have the components we need to build products.

And second, to have the product in place for new customers, that are coming in which you can see from the strong aftermarket subscriber growth.

With regard to the UBI business, one of our main growth engines, which has gained strong traction in the past year, as you know, we are now working with all 7 mega insurance companies in Israel. The Israeli consumer market is becoming increasingly educated to the value that began by using a usage-based insurance plan rather than fixed, especially since the work from home trend has significantly reduced typical.

Our rollout in Israel has proven to be successful, and we look to replicate the success in our other markets in the coming quarters and years.

Another growth engine, which is gaining traction in our services to the second hand car market. Because of the shortage of components and ultimately new cars, which I discussed before, the second-hand car market has grown stronger everywhere. This can be seen by the increase in secondhand car prices in the past year and not just in the U.S. but globally. New fintech start-ups as well as the large banks have come in to provide financing to this growth market. Ituran provides a location base and connected car technology to a number of financing customers in Latin America, which will monitor the cars and the driver behavior and lower the risk of the loan against the car.

I know that while there is a part and ultimately cash shortage, these companies still do not currently sell as much as they could in a healthy market. However, we are growing the business all the time and see the car shortage situation is temporary. We are looking constantly to bring in new financing customers and broaden the service to additional geographies. We're excited about this business and see great potential for additional growth in the coming years.

In summary, all in all, I'm very pleased with our performance, both our traditional business and especially our growth engines, which we expect will accelerate our growth in the year ahead.

The solid performance can be seen most by the jump in our subscriber base, which has grown well ahead of our traditional expectation and now stand between as I said, 140,000 and 160,000 in a year, and we are at the cusp of a subscriber base of 2 million customers, playing us on a regular monthly basis for 1 or more of our services. We are pleased with our financial performance. And while, as is often the case, there is some noise from currencies and mark-to-market financial expenses.

The big picture shows that we clearly have a healthy and growing business. I'm more excited now than ever with our long-term potential over the coming years.

And I will now hand the call over to Eli for the financial summary.

Thanks, Eyal. I will provide the first quarter results. You can find the more detailed results we issued in the press release earlier today.

Revenues for the first quarter 2022 were $72.1 million, an increase of 7% compared with revenues of $67.4 million in the first quarter of 2021. Revenues from subscription fees were $50.2 million, an increase of 10% over first quarter 2021 revenue. The subscriber base amounted to 1,924 million as of March 31 in 2022. This represents an increase of 43,000 net over that of the end of the prior quarter and an increase of 136,000 year-over-year.

During the quarter, there was an increase of 59,000 in the aftermarket subscriber base and a decrease of 16,000 in the OEM subscriber base. The decrease in the OEM subscriber base was primarily due to a lower cost sales at OEMs, primarily as a result of the global supply chain issue and part shortage.

Product revenues were $21.8 million, an increase of 0.5% compared with that of the first quarter of 2021. The geographic breakdown of revenues in the first quarter was as follows: Israel, 53%; Brazil, 21%; rest of world, 26%. The gross margin in the quarter on subscription revenues was 55.9% compared with 55.1% in the first quarter 2021. The gross margin on product was 23.7% in the quarter compared with 25.4% in the first quarter of 2021, and the product margin was somewhat impacted due to the product sales mix as well as significantly increased post prices of components due to the global shortage.

EBITDA for the quarter was $19.3 million or 26.7% of revenue, an increase of 13% compared with EBITDA of $17.1 million or 25.4% of revenue in the first quarter of last year.

I would like to address the financial expenses. Financial expenses for the quarter was $2.6 million compared with financial expenses of $1 million in the first quarter of last year. The increase was primarily due to the fall in the public market value of our holding in Phase 1, which amounted $2.4 million in the current quarter.

Net income for the first quarter of 2022 was $8.7 million or 12.1% of revenue or diluted earnings per share of $0.43 compared with $8.3 million or 12.3% of revenue or diluted earnings per share of $0.40.

Cash flow from operations for the first quarter of 2022 was $7 million. As of March 31, 2022, the company had cash, including marketable securities of $45.2 million and a short and long-term bank reading of $26.5 million, amounting to a net cash of $18.7 million. This is compared with the cash, including marketable securities of 54.7 million and a short and long-term bank credit of $31.4 million amounting to a net cash of $23.3 million as of December 31, 2021.

For the first quarter of 2022, a dividend of $0.14 per diluted share, approximately $3 million was declared. This is in line with the board's current policy of issuing at least $3 million on a quarterly basis.

Under the new renewed buyback announced August 4, 2021, in 2021, a total of 280,000 shares were purchased totaling $7.3 million. The buyback was renewed on April 1, 2022, and we will announce purchases in the second quarter in next quarter results announced.

Share repurchases were funded by a variable cash and to run ordinary shares were made based on SEC Rule 10b-18.

And with that, we would like to open the call for a question-and-answer session. Operator?

(Operator Instructions) The first question is from David Kelley of Jefferies.

David Kelley. It looks like OEM subs saw the biggest quarterly decline of the COVID-related downturn in early 2020. You touched on it briefly in the prepared remarks, but can you provide more details on what drove the sub losses here?

And is it fair to assume that the clients continue at this level? Or should we expect improvement in the back half of the year as global auto production improves?

As you know, the OEM sales is the only thing which influenced our OEM installations. And since the shortage influence more dramatically the car industry. We see that in the markets that we operate, but also on the rest of the world, I understand and see the market. There is a decline of approximately 20% in sales of new cars. When we finished the free trial that the OEMs buying from us. We are always working to renew on the base of the customer that we have that start paying directly. And this usually up and after about a year. So if we see that today, the sales or 20% less than a year ago, Assuming that the conversion rate of the renewals are in the same levels, but the new car sales is lower it automatically create a net decline in our subscriber base, and that's what we report now.

Looking forward, nobody expect this segment to change in the next couple of quarters or a year because the shortage is not something that everybody can assure will change in this period of time. So we assume that these numbers is something that we will continue to see during 2022.

But in the end of the day, we know that the demand is higher. So like we faced in the end of the corona in the market that we saw onetime of very high sales of cars. Once the shortage of components will finish, we believe that the sales will grow dramatically higher at the first quarter after it. And then we will succeed to overcome this declining customer base.

I just want to add something which is very important. The profitability for one on the OEM, each subscriber in the OEM, it's much, much lower than our profitability in the aftermarket subscribers. So when you see today, if we grow the aftermarket in more than 50,000, even closer to 60,000 and on the other hand, we lost 16,000 on the OEM, it's much better than the opposite. Of course, the best is to grow in all segments. But as long as we know that the situation is not depend us, it's not depending on market needs. It depends on something which today I think it's the, let's say, the pandemic of the oil industries, which is the component, I think that this is the -- the best case scenario on this -- with these problems.

I'm not expecting that we will grow our net subscribers in the OEM, looking ahead in the coming quarters. But again, I'm much more happy and satisfied that we succeed to do numbers in the aftermarket, which are dramatically higher and multiple by more than 203 than we did in the last years every year.

Great. And then just as a follow-up, the press release mentioned that product margins were negatively impacted by mix as well as increased spot prices components. Can you just quantify the impact of shortages and increased spot buys that have had on your gross profit? And should we assume that second quarter gross margins would be at a similar level before improving in the back half of the year? Or do you expect gradual improvement in margins starting next quarter?

First of all, I think that you can analyze it from the gross margin that we have on products compared to last year. About 2% less, which is almost 10% lower profitability on product. This has happened only because of the cost of our inventory, but what you see today is an inventory that we purchased 6 or 9 months ago. This was the beginning or the first time that we faced the shortage, and all the world, let's say, was in kind of a historic situation. And we first bought on spot prices with a very high prices. First, to secure our supply chain. Now today, when we are 8, 9 months after it, I'm happy to say that we are no longer buying at those prices, meaning we succeed after understanding what will be our needed and what our customers need and what is the level of sales of hardware, we made the orders for more than 18 months in advance, and we didn't have to pay again the spot prices that we paid a year ago.

Today, what we see in our P&L is what we paid for the inventory, but now it's appearing the P&L and it's, of course, creating -- declining in our gross margin on hardware. Just rough number for this quarter, it was more than $1 million. This is something that we will live with in the next quarter or 2. But looking forward, we expect -- again, we expect nobody really can assure for longer term. But for the midterm and for 2023 that we are in a very good shape of inventory. By the way, if you look on our cash position, this cash flow this quarter, you will see that it looked dramatically low, but part of it is because we already acquired high inventory in the lower prices. And this, of course, today sit in the balance sheet. But once -- we will sell it in 3, 6 months from now because this is the time of our inventory, we will see increasing in our profitability on the hardware because the inventory already were acquired by us in a much lower price than those that you see today in the P&L. So we will have to leave 1 or 1.5 quarter more with this let's call it, damage of about $1 million. But looking more mid and longer term, we are more optimistic that we will turn the profitability to become higher again.

The next question is from Tavy Rosner of Barclays.

Most of my questions have been asked I wanted just to ask about UBI. It sounds like a real differentiator. And I'm wondering what's your gross market? Are you going -- I mean I know you're very present in Israel, but outside of Israel, are you marketing these solutions to kind of new logos? And what do you see as the potential to bear down the road?

Ituran by definition is today, I would say, we are providing kind of a black box with tens of new dose in our black box, and it depends on the market needs, depending on the customer needs and those things are changing between geographies. .

Israel today, we're educated. And I think that the insurance industry in Israel changed to be much more customized and this fits the Israeli market. Of course, for us it's more than a commercial wide solution and a revenue generator. Of course, it's also providing us with a kind of local pilot, let's say, for the rest of the world. But we realize other segments, for example, in Latin America, as I mentioned, the finance market that they want to secure the collateral. And when we talk with the same customers, which can be insurance companies or finance companies about UBR or customized the customers, some of them now start to understand what we are talking about. Those are very heavy companies. It's a very traditional industry. And it would take more time. We do some pilots in Brazil. We do some pilots in Argentina, but I wouldn't count that this will contribute to sell UBI out of Israel in 2022 and for the first half of 2023.

But a year from now, based on the movements of the markets, I hope and I want to believe that what we will achieve in Israel will support our exporting this solution also to other geographies. And this is, by the way, always was (inaudible). When we started with our main traditional segment, which is storing vet recovery in Israel, no one in the world did it. And we came to Brazil, we came to Argentina. It took us about 3 to 5 years to convince insurance companies that this is a solution. And today, Ituran in São Paulo and stolen vehicle recovery in Brazil, it's a generic solution. So I totally believe that in a year from now or a little bit more than this, we will lead the UBI market also in Latin America, but it will take more time.

If there are any 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 Ituran's website, www.ituran.co.il. Mr. Sheratzky, would you like to make your concluding statements?

On behalf of the 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 on the next quarter.

Thank you very much, and have a good day.

Thank you. This concludes the Ituran First Quarter 2022 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.