Earnings Call Transcript - ITRN Q1 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran's First Quarter 2024 Results Conference Call. All participants are currently 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 at www.ituran.co.il. I would now hand over the call 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 first quarter 2024 results. I would like to thank Ituran's management for hosting this conference call. With me on the line 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 statements in today's press release also cover the content of this conference call. And now, Eyal, please begin.

Eyal Sheratzky, CEO

Thank you, Kenny. I'd like to welcome all of you to our first quarter 2024 call and I would like to thank you for joining us today. We are pleased with our results, especially in the ongoing growth in revenues and continued improvement in profits as well as the additional net subscribers we brought in the quarter, which came in at the high end of our expectations. As our strong financial results demonstrate, our business remains in good shape and continues to be resilient against challenges. I also want to highlight that part of our resilience is due to Ituran being a globally diverse business with a loyal subscriber base of 2.3 million customers in Israel, Brazil, and other countries in Latin America and around the world. Our subscriber base added 39,000 subscribers in the quarter, at the high end of our expectation of between 35,000 and 40,000 net new subscribers per quarter. This is well in advance of the long-term rate we had in prior years, which was typically between 20,000 and 25,000 per quarter and it's come about due to our more diverse global footprint as well as the new service we continue to bring to our end markets. I would like to highlight what is happening in the Israeli market. In recent quarters, we've seen a steady rise in theft rates which has somewhat intensified in the last quarter. As a result, insurance companies are pushing their customers to install an SVR unit and connect to the theft prevention service even in vehicles that are not new or have a lower initial value than in the past. The outcome of this is that SVR penetration has gone up and our total addressable market has grown and we, as the clear market leader, are enjoying an accelerated growth of subscribers in Israel. Given the strong net cash position of $53.9 million, our ongoing growth and our solid profitability, we are pleased to again declare a quarterly dividend of $8 million, in line with the dividend policy we updated just last quarter. We are very pleased to share the fruits of our success and we see our ongoing dividends as a reward to our loyal shareholders for their long-term support of our company. Given the stability of our business, last quarter we began to provide EBITDA guidance in addition to the guidance on subscriber growth, which we used to do. As a reminder, for 2024, our guidance is full-year EBITDA of between $90 million and $95 million and we expect to cross the $100 million EBITDA landmark in 2025. We believe that our first quarter results put us well on track and we reiterate this expectation. We expect subscriber growth to continue growing at around current rates of between 35,000 and 40,000 net new subscribers per quarter. I note that this expectation is as of today. Our EBITDA expectations are based on relevant currency levels remaining around current average rates and assume that the current global macroeconomic situation and political situations specifically in Israel do not significantly worsen. In summary, the first quarter of 2024 has started very well with solid performance and we believe that 2024 will continue this trend. I believe that our constantly growing subscriber growth will continue to translate into increased revenues, increased gross profit with faster-growing profitability over the long term due to the operating leverage inherent in our business. 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. First quarter revenues were $85 million, a 7% increase compared with revenue of $79.5 million last year. Revenues from subscription fees in the quarter were $60.9 million, an increase of 9% over the first quarter of 2023's revenues. Product revenues in the quarter were $24.1 million, an increase of 2% year-over-year. The subscriber base expanded to 2,291,000 by the end of the first quarter, an increase of 39,000 from the end of the previous quarter. During the quarter, there was an increase of 33,000 net in the aftermarket subscriber base and an increase of 6,000 net in the OEM subscriber base. The geographic breakdown of revenues in the first quarter was as follows: Israel 52%, Brazil 26%, rest of world 22%. EBITDA for the quarter was $22.3 million, or 26.3% of revenues, an increase of 7%, compared with EBITDA of $20.8 million, or 26.2% of revenues in the first quarter of last year. Net income for the first quarter was $13 million or diluted earnings per share of $0.66, an increase of 15% compared to $11.4 million or diluted earnings per share of $0.56 in the first quarter of last year. Cash flow from operations for the first quarter of 2024 was $11.4 million. As of March 31, 2024, the company had cash, including marketable securities, of $54.2 million and debt of $0.3 million, amounting to a net cash position of $53.9 million. This is compared with cash, including marketable securities, of $53.6 million and 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, in line with the company's recently updated dividend policy, which was increased by 60% in the prior quarter. 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. Ladies and gentlemen, at this time we will begin the question-and-answer session. The first question is from Chris Reimer of Barclays. Please go ahead.

Chris Reimer, Analyst

Yes. Hi, thanks for taking my questions and congratulations on the strong results. I wanted to ask if you could comment about the product mix specifically as it pertains to the gross margin? And any comment on moving parts around that would be helpful.

Eyal Sheratzky, CEO

Hi, so basically during the first quarter of 2024, our sales which derived from the Israeli market was much higher than the average since we had to compensate for Q4 when the war started and there was almost a shutdown of two months, which were October and November. So I think that it's not a typical quarter in terms of the ratio between the sales and the services. This is basically the major difference. It does not represent forward the sales amount.

Chris Reimer, Analyst

Got it. And more specifically also around Israel, can you comment on any of the trends you're seeing versus last quarter? And if maybe you're seeing some traction that's outperforming your expectations.

Eyal Sheratzky, CEO

Yes, so the situation in Israel didn't start because of the war. So it's kind of a trend that started soon after COVID and it has ramped up in the last two years. Today we are facing a material, I would say, growth in the cost of freight. When the cost of freight is high, it means that the insurance companies are increasing the insurance premiums and also much more need for security solutions for the car to prevent these car thefts. In that case, as we are the dominant player in Israel by providing this solution, we see high attraction and high demand. As I said in my speech, we are even facing something that we never faced in the 30 years since the inception of the company, is that even car models, which are, let's call it second-hand, when they were bought as brand new cars three to five years ago and they didn't install security and SVR solutions, today, when they come to renew their insurance policy, they're required to put location and SVR solutions. As mentioned, we are seeing growth in Israel, which is more than we expected for this year. Yes.

Chris Reimer, Analyst

That's great. Thanks. That's it for me.

Operator, Operator

The next question is from Boris Schneider of More Mutual Funds. Please go ahead.

Boris Schneider, Analyst

Yes, hi. Just a question on your 20-F, on the growth in Brazil, which is actually even higher than the growth in Israel. So if you could speak on what's driving that and how do you see this going forward.

Eyal Sheratzky, CEO

Just to be clear, the 20-F is actually representing the year 2023. I can, of course, provide information regarding 2023. As you remember, during the end of '22, we signed a contract with Santander Bank regarding providing a solution for financing car purchases. This supported our growth in Brazil in 2023. It continues, by the way, because it's under the contract also in 2024. But we have to take into account that there is always a churn after 18 months, as the contracts go, so the growth from Santander, by definition, will decrease. Although, we are selling the same quantities, the growth is not the same as when the contract started because at the beginning, there is no churn, but after 18 months, the churn arrives. So I'm not expecting that in '24 in Brazil it will be the same growth as it was in '23. However, on the other segments, we are not seeing any dramatic changes, meaning we continue to sell our retail solution. There is always some volatility between months and the expectations are to keep the same numbers. Looking forward, we are doing a lot of work to penetrate new segments and expand the financial customers. So, for the mid and longer term, I am expecting that we will continue to show growth in Brazil as well.

Boris Schneider, Analyst

Okay. And previously you mentioned also in your last several calls, I think you mentioned on insurance of the motorcycles, which is a vertical that you didn't penetrate in Brazil. Is there any update on this?

Eyal Sheratzky, CEO

Yes, of course, there is no update. We just started to sell solutions for motorcycles. It's something quite new. It still does not have a dramatic influence on our subscriber base in Brazil. However, we see that it's ramping up. I believe that, as always, when you introduce a new solution for a new segment, it's—when we're talking about subscribers and when the company has 2.3 million, it takes time until it becomes more material. Therefore, I believe that during 2025, 2026, the motorcycle segment will support the additional growth that we expect.

Boris Schneider, Analyst

Okay. And last final question. In terms of gross margin for your product, it was low, even lower than during the crisis of the supply chain. How should we think about this in future quarters?

Eli Kamer, CFO

Yes, it was a little bit low, like 4% less. But you need to remember that usually there is a mixture of products that we are selling all over the country. So basically, this is the range, more or less, of let's say, gross margin of 20%, a little bit up or down, but that's the range.

Boris Schneider, Analyst

Thanks.

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 at www.ituran.co.io. Mr. Sheratzky, would you like to make your closing statement?

Eyal Sheratzky, CEO

Yes. 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. We hope to speak with some of you over the coming quarters. 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.

Operator, Operator

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