Earnings Call Transcript - ITRN Q3 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran Third Quarter of 2024 Results Conference Call. All participants are at present in listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. 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 EK Global Investor Relations at 1-212-378-8040 or view it in the News section of the company's website, www.ituran.co.il. I will now hand the call over to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin?

Kenny Green, Investor Relations

Thank you, operator. Good day to all of you, and welcome to Ituran's conference call to discuss the third quarter 2024 results. I would like to thank Ituran's management for hosting this call. With me today are Mr. Eyal Sheratzky, CEO; Mr. Udi Mizrahi, Deputy CEO and VP Finance; and Mr. Eli Kamer, CFO of Ituran. Eyal will begin with a summary of the quarter's results, followed by Eli with a summary of the financials. We will then open the call for the question-and-answer session. I would like to remind everyone that the safe harbor statement in today's press release also covers the content of this conference call. And now, Eyal, would you like to begin, please?

Eyal Sheratzky, CEO

Thank you, Kenny. I'd like to welcome all of you to our third quarter 2024 call, and thank you for joining us today. We are pleased with our third quarter results, presenting steady growth in revenue and profit across the geographies in which we operate. We are also happy to report a high level of 40,000 net subscribers added in the quarter, which came in at the top end of our expectations. The results were achieved despite the negative impact of the US dollar strength in the quarter, which lowered our local currency denominated results when presented in US dollars. In fact, in local currency terms, our growth in most of the geographies in which we operate was even higher. We increased our subscriber base by a net of 40,000 in the quarter, at the high end of our expectation, which is between 35,000 and 40,000. Our ongoing success reflects continued demand for our location-based product and telematics services, as well as traction from the new initiatives and services we continue to launch in the various geographies in which we operate. Last week, we announced a five-year contract with Nissan Chile. We have a long-term partnership with Nissan, one of the world's leading automakers and OEMs, and have partnered with them for many years in Mexico. Under our new contract with them, Ituran will provide Nissan Chilean customers with vehicle location units pre-installed in three new vehicle models, which potentially is tens of thousands of vehicles over the years. We will also provide telematics and stolen vehicle recovery services. Following Nissan Chile customers' car purchase, they will enjoy a year's free trial of Ituran services paid by Nissan, after which they will have the option to continue with their service, which they will pay to Nissan and Ituran. Customers will have access to a comprehensive Nissan branded on-vehicle application. Additionally, the customer will also have access to Ituran Chile's 24-hour contact center, assistance in the event of vehicle theft and emergency services such as breakdown assistance and towing. This new agreement in Chile is the culmination of well over a year's discussions on how we can replicate our strong service for Nissan in Mexico and bring this service to their customers in Chile. This new agreement shows the very strong satisfaction that Nissan has from our cooperation in Mexico, and I believe that this will enable us to expand to additional regions with Nissan in the future. We are also aiming to build a strong aftermarket business in Chile, leveraging the strong experience we have in this market in many of the other regions in which we operate. We are also in active discussions with a number of major OEM car manufacturers in addition to those that we already work with. We are looking to bring new OEM partners as well as broaden the services we provide existing OEMs to additional countries in South America. We see strong long-term growth potential via this initiative. From a financial perspective, even with the currency headwinds throughout the past year, we remain on track to meet our targets. We reiterate that for 2024, our guidance is full-year EBITDA of between $90 million and $95 million. We continue to expect that for the quarter, subscriber growth will be between 35,000 and 40,000 net new subscribers. Given the strong net cash position of over $67 million, our ongoing cash generation, which came to $17.2 million in the quarter, we continue to distribute a strong quarterly dividend of $8 million to our shareholders. This dividend is at the same level that we issued last quarter and is a 60% increase over that of the year-ago quarter. Our dividend yield, on an annualized basis, represents a return of over 6%, which is a very solid return from a strong and stable company. We see our ongoing dividend as a reward to our shareholders for their loyalty and long-term support of Ituran. In summary, we remain pleased with Ituran's performance. Our constantly growing subscriber growth will continue to translate into increased revenue, improved margins and better profitability growth over the long term due to the operating leverage inherent to our business. We aim to enhance our subscriber growth and we are currently engaged in active discussions with a number of major OEMs, car manufacturers, both current and new potential customers to bring our services to additional countries in South America as well as new OEM customers across all our regions. I look forward to updating you on our progress again in the coming quarter. And with that, I hand over to Eli. Eli, please go ahead.

Eli Kamer, CFO

Thanks, Eyal. I will provide a short summary of the financial results. You can find the more detailed results that we issued in the press release earlier today. Third quarter revenues were $83.5 million, a 3% increase compared with revenues of $81.1 million last year. The strengthening of the US dollar in the third quarter versus the various local currencies in which Ituran operates impacted the revenues when translated into US dollars. In local currencies, revenues grew by 7% year-over-year. Revenues from subscription fees in the quarter were $59.6 million, a decrease of 1% year-over-year, and in local currencies, an increase of 4%. Product revenues in the quarter were $23.9 million, an increase of 14% year-over-year, and in local currencies, an increase of 15%. The subscriber base expanded to 2,369,000 by the end of the third quarter, an increase of 40,000 from the end of the previous quarter. The geographic breakdown of revenues in the third quarter was as follows: Israel, 53%; Brazil, 23%; rest of the world, 24%. EBITDA for the quarter was $23.3 million or 27.9% of revenue, an increase of 4% compared with EBITDA of $22.5 million or 27.8% of revenues in the third quarter of last year. In local currencies, EBITDA grew by 9% year-over-year. Net income for the third quarter was $13.7 million or diluted earnings per share of $0.69, an increase of 9% compared to $12.5 million or diluted earnings per share of $0.63 in the third quarter of last year. In local currency, net income grew by 14% year-over-year. Cash flow from operations for the third quarter of 2024 was $17.2 million. As of September 30, 2024, the company had cash, including marketable securities, of $67.5 million, and a debt of $0.2 million, amounting to a net cash position of $67.3 million. This is compared with cash, including marketable securities, of $53.6 million, and a debt of $0.6 million, amounting to a net cash position of $53 million as of year-end 2023. The Board of Directors declared a dividend for the quarter of $8 million. The current dividend takes into account the company's continuing strong profitability, ongoing positive cash flow and strong balance sheet. And with that, I'd like to open the call for the question-and-answer session. Operator?

Operator, Operator

Thank you. The first question is from Sergey Glinyanov from Freedom Capital. Please go ahead.

Sergey Glinyanov, Analyst

Hello, everyone. So, it's obviously very solid results, but we see price continuing to decline in service segments might be caused not only by currency fluctuation, but something else? Thank you.

Eli Kamer, CFO

Service revenues, as you mentioned, you are talking about comparing to last year or comparing to the previous quarter?

Sergey Glinyanov, Analyst

Comparing previous year.

Eli Kamer, CFO

Yes, compared to the previous year, service revenues decreased by nearly $600,000, primarily due to currency exchange effects. When excluding that, the actual impact from currency was around $3 million. Overall, service revenues increased as anticipated.

Sergey Glinyanov, Analyst

Thank you. I am glad to see an improvement in operating margin due to the decrease in general and administrative expenses. What was the main factor that influenced this change?

Eli Kamer, CFO

The operating margin for the third quarter was 22%, an increase from last year's 20.8%. The primary reason for this improvement is the operating leverage within the business model.

Sergey Glinyanov, Analyst

Okay. Got it. And yeah, you mentioned that recently you've signed an agreement with Nissan Chile. May any further agreements boost product revenue sales?

Eyal Sheratzky, CEO

The contract is a typical contract that we have had for many years with Nissan in Mexico. Of course, Chile is a smaller market than Mexico, but still since it's a longer-term contract, we are talking about tens of thousands of new customers/subscribers because the contract includes hardware and services that Nissan pays directly to us. Add to that, our experience with renewals that allows us to extend the contract also with renewals to a higher profit and profitability over the years.

Sergey Glinyanov, Analyst

Okay. Thank you a lot. That's all my questions.

Operator, Operator

The next question is from Allen Klee from Maxim Group. Please go ahead.

Allen Klee, Analyst

Yes, hello. Could you talk a little about your partnerships with potential ones or whatever with automakers, financing companies and auto insurance companies? What would you say are the major hurdles to get through to get someone to sign up? And what are the most compelling arguments that you can make to them for someone to decide to sign up? Thank you.

Eyal Sheratzky, CEO

The sales cycle in the B2B segment is lengthy for several reasons. Firstly, each brand or industry leader you mentioned, such as international car manufacturers or banks like Santander, must make their own decision to invest in these solutions as part of their strategy. While we play a significant role in convincing them of the benefits, the final choice is theirs. Secondly, once they decide to proceed, they need to select the right partner, which brings in technology considerations, installations, and the geographic spread across large regions like Brazil and Mexico. This process is time-consuming and involves validation and pilot programs. Thirdly, the contract negotiation takes time, as customers aim to lower costs while suppliers seek to maximize their returns, along with managing KPIs. All these factors contribute to the long duration of the sales cycle. Lastly, there needs to be assurance when a major company like Nissan associates its brand with a supplier like Ituran. Since consumers often perceive any issues with a Nissan vehicle as a Nissan problem, it’s crucial for them to trust that partnering with us will not harm their brand’s reputation, which is something we take pride in.

Allen Klee, Analyst

Thank you. Yeah, that was great. Could you talk about some of the bigger countries that you're in, what is about the environment there that makes it attractive for your product? And are there other countries that you see as big opportunities that you will also see set up positively?

Eyal Sheratzky, CEO

We have extensive experience and a substantial operation, and our brand is well-established in nearly all Latin American countries. This is crucial. The demand in those nations is significant, particularly due to security concerns; people face increasing security issues and require solutions that instill greater confidence. This is a key factor driving our business. Additionally, each country has its own unique mindset. For instance, in Brazil, many individuals cannot afford comprehensive insurance. To address this, we developed a solution like the ICS, which offers a car theft insurance product with a monthly payment option. This allows a large segment of the population, who typically do not insure their vehicles, to obtain coverage, while also allowing other insurance companies to collaborate with us without undermining their primary offerings. Moreover, when considering the automotive sector, manufacturers and dealers are keen to demonstrate to their customers that they prioritize their security and care for their vehicles even after purchase. Thus, I believe that, more broadly, Latin America presents favorable conditions for Ituran's business growth.

Allen Klee, Analyst

Thank you. My last question is regarding your involvement in usage-based insurance. Can you talk about what you do in this area and where you see potential opportunities?

Eyal Sheratzky, CEO

It comes from a basic idea that as much as the driver drives more mileage or his driving skills are better and more secure, so insurance companies will have less expenses because they will have fewer accidents and they will have less payment of claims. So, on the other hand, insurance companies can get something which they can customize the premium. So, when you attach these two components, I think, it will be something that we thought would be very interesting for insurance companies. It takes also time, it's a longer sales cycle, because we know that insurance companies are very traditional, very large corporates. So, it takes time to change from the traditional methods to something which is more customized depending on technology. I am happy that in Israel, we succeeded to do it about two, two-and-a-half years ago by convincing the first insurance company to adopt our solution. Since then, I would say that a major portion of the insurance industry and the insurance companies in Israel decided to join this train and adopt our technology. In terms of technology, we have two types of offers. One offer includes using our hardware and service; that our hardware for this solution has a module that provides the data that allow us to evaluate the risk of the driver online and then create the right billing method for his risk. And the second is without hardware, using the phone, the iPhone, or the Android application that we attach to our software and also with some partners that we integrated in order to do it without hardware in the car. In terms of our own, I would say, profitability, it's very equal. The prices are different, depending on what is the contract and the program that each insurance company did with us. We started it in Israel, and it's something that's very grown. We start putting some seeds also in insurance industries in Argentina and now in Mexico. It's not yet, I would say, mature enough. The needs in those markets or how insurance companies still look at that, it's something that will take more time because we have to convince them. It also, in Israel, took us a few years. Our experience and track record in Israel will, I think, or I see, support a faster penetration also to other geographies that we operate.

Allen Klee, Analyst

That's great. I actually did have one other question I just thought of. For your announcement with Santander, could you just explain what you think the size of that opportunity could be?

Eyal Sheratzky, CEO

The announcement with Santander was, I think, almost two years ago. This is when we started the contract, by the way, also after almost a year of a pilot. We are talking about hundreds of thousands of subscribers that derive from their needs to secure their collateral when they provide loans to car buyers. This is something that we aim to expand and extend to more years. And it means that on an annual basis, it provides us tens of thousands of subscribers, but we have to be aware that those subscribers are for 18 months or 24 months. When they finish their loan or their risk to pay the loan decreases then, of course, Santander releases them from the service with Ituran. So, it's kind of a cycle. In the end, it will be hundreds of thousands of subscribers; the net should be around 100,000 or 150,000 on average every year. Only in Brazil, by the way. Only in Brazil I hope, and we are doing our efforts to extend it to other Santander regions in Latin America.

Allen Klee, Analyst

Okay. Thank you very much.

Operator, Operator

The next question is from Chris Reimer from Barclays. Please go ahead.

Unidentified Analyst, Analyst

Yeah, hi. Thanks for taking my questions. A couple of quick ones from me. Can you just remind us if there's any seasonality with either of your revenue lines?

Eyal Sheratzky, CEO

No. First of all, we have a diversified business across different segments and geographies. So, even if there is something that isn't material in one area, which I can't specify, it will still be balanced out by others; there is no seasonality for the group as a whole.

Unidentified Analyst, Analyst

Got it. Yeah. And just touching on the motorcycle insurance products, can you give any color as to how that's trending? What's the initial reaction been like?

Eyal Sheratzky, CEO

Motorcycle insurance is a very risky area due to the high incidence of theft, as motorcycles are easier to steal than cars. However, we have developed a solution that enhances the security of motorcycles. There are two key factors to consider. In Israel, many motorcycle owners do not insure their vehicles, so they utilize our solution to mitigate their risks. We have a high recovery rate for stolen motorcycles, thanks to our technology and AI integrated with Ituran's software. In Brazil, the motorcycle market is significantly larger than the overall vehicle market, and while insurance companies are keen to insure motorcycles, the associated risks have been elevated. We have successfully reduced these risks and launched our proposal about a year ago, leading to a growing customer base that includes both motorcycle owners and insurers.

Unidentified Analyst, Analyst

Got it. Thanks. That's it from me.

Operator, Operator

The next question is from Josh Strauss from Pekin Hardy. Please go ahead.

Josh Strauss, Analyst

Yeah, I had a couple of questions. First, I'd like to talk about the core market of Israel. It's rather impressive that you guys have had the consistency of business in the face of the biggest war since the Yom Kippur war and in the face of a pretty rough economy in Israel right now with GDP down double-digits. And so, I guess I can't imagine there's a lot of importing of new cars coming in right now, and I'm just trying to get my arms around how you're able to keep the business as stable as it is. So, let's just start there.

Eyal Sheratzky, CEO

You're correct that car imports have declined due to the current situation, including the dollar’s value and the cost of cars here. However, factors supporting our growth in Israel during these challenging times include a significant increase in car theft rates. This trend isn't unusual; in countries facing security or economic issues, violence tends to rise, leading to higher car theft rates. As a result, Ituran is attracting more attention, with a growing demand for our solutions. To clarify, this is the first year in nearly a decade that we are seeing tens of thousands of cars purchased in the previous year or two, for which insurance companies did not require a security system. Now, when customers renew their insurance policies, they contact us to install a security system, and 90% choose Ituran. While we are losing brand new cars, we are acquiring more older or second-hand vehicles. As for the overall business, I don't recall any decrease in Ituran's GDP over the past year. However, the war at the beginning of 2024 and the shutdown in October, November, and December 2023 did affect operations. Despite living in a turbulent area, we have recovered, and commercial activities are nearly back to normal.

Josh Strauss, Analyst

That's helpful. Most of the population in the Tel Aviv and Jerusalem area is not particularly surprising, but for us across the pond, it's hard to envision it as a stable business in the midst of this war. Thank you for the insight. Can we discuss Bringg? Are there any updates on what's happening with Bringg?

Eyal Sheratzky, CEO

I, of course, cannot provide specific numbers and everything. It's a private entity, and we have only 17%, but talking general information, Bringg has a business plan. This year, they succeeded to achieve the business plan. It's a growing SaaS company. We understand that the last round that was done on a valuation of $1 billion and the investment that was led by inside partners of more than $100 million. There were different times in terms of financial market for startups. So, of course, it's not something that we can do now, for example, to liquidate our holdings whether it's by IPO or by M&A or by selling it in the market. So, we prefer to be wise and we wait. Of course, we are part of the Board members. We know what's going on, and we're really optimistic regarding being in a good position in the future to do it. I just want to remind you that Bringg's value in our balance sheet is zero. So, I believe that in the future, it will contribute or will be a bonus of profits.

Josh Strauss, Analyst

Right. No, I remember all too well. And the market values it at zero too, and they shouldn't. I agree. One more question. So, I was looking at your cash flow statement and you've got almost a $4 million gap in terms of increasing in other current and non-current assets. And I just year-over-year and wanted to know what's going on there? What does that mean?

Eli Kamer, CFO

Which item are you talking about? For which period?

Josh Strauss, Analyst

In your cash flow statement, comparing year-over-year, there's not much difference from a nine-month perspective. However, over the past three months, there is a $4 million increase in other current and non-current assets. This year, you experienced an increase of $957,000, while last year saw a decrease of $2.9 million.

Eli Kamer, CFO

I'm trying to find it so I can help you.

Josh Strauss, Analyst

It's in the cash flow statement.

Eli Kamer, CFO

Let me check, and we can get back to you on that because there is nothing specific; it is probably working capital that has volatility between quarters or periods. There is nothing specific on this item that can change, but again, we can check it and get back to you.

Josh Strauss, Analyst

Yeah, I'm very curious on whether or not it's revenues on the balance sheet that have not yet hit an income statement or something like that. So, yeah, please just shoot me a note or give me a call, let me know what the story is there.

Eli Kamer, CFO

Okay.

Josh Strauss, Analyst

But that's it for now. Great quarter, guys, keep going, and looking forward to see the stock going up to $40.

Operator, Operator

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 statement?

Eyal Sheratzky, CEO

On behalf of the management of Ituran, I would like to thank our shareholders for your continued interest and long-term support of our business. In the coming months, we will be meeting with investors and presenting at various venues, and we hope to see you soon there. 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, and have a good day.

Operator, Operator

Thank you. This concludes the Ituran third quarter of 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.