Ladies and gentlemen, thank you for standing by. Welcome to the Ituran's 4th Quarter and Full Year 2020 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 GK Investor and Public Relations at 1-six forty six-six eighty eight-three thousand five hundred and fifty nine or view it in the News section of the company's website at www.ituran.co.il. I will now hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr.
Helft, would you like to begin, please?
Thank you, operator. Good day to all of you, and welcome to Ituran's conference call to the Q4 and full year 2020 results. I would like to thank Ituran's management for hosting this conference call. With me today on the call are Mr. Eyal Sharatzky, the CEO Mr.
Udi Mizrahi, Deputy CEO and BD Finance and Mr. Eli Kamal, CFO of Futurant. 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 question and answer session. Back to Manavu to remind everyone, the Safe Harbor and B's press release also covers the content of this conference call. And now, Eyal would be like to begin to speak.
Thank you, Ehud. I'd like to welcome all of you and thank you for joining us today. I hope you and your families are continuing to stay healthy. We are very happy with the improvement in our results in the Q4, which outperformed our expectations in what concludes a very hard year for every one of us. Despite being a difficult year for everyone, we are pleased that we maintain our profitability and strengths and in particular, we generate record operating cash flow of $60,000,000 This is a solid demonstration of the strength of our business even in the toughest of times.
For the Q4 of 2020, revenues were $63,600,000 growing by 3% year over year in local currency terms. And bear in mind that the year ago Q4 was pre corona. Our aftermarket subscriber growth was 21,000 net in the quarter, which is a growth rate we are very happy with and at a level that we typically expect in normal times. I see this as a very positive sign for the coming quarters, and it shows that Ituran is well on the way to recovery and renewed growth. On the profitability side, as you know, we have managed the business very carefully to ensure we remain lean and profitable.
For the quarter, we reported EBITDA of close to $17,000,000 demonstrating growth of 17% year over year in local currency terms when excluding last year's impairments. This shows that we continue to be successful in mitigating the impact of the pandemic on our improving profitability. It is a strong testament to the overall resilience and stability of our business model. On the cash side, 4th quarter cash flow from operating activities of $16,500,000 bringing our cash and marketable securities position to just under $79,000,000 Because of the continued cash generation, strong results and improvement in the general market environment, the Board decided to restart the dividend payment policy to shareholders with a payment this quarter of $10,000,000 for 2020 and the new policy of issuing at least $3,000,000 on a quarterly basis. We are very pleased to renew the sharing of the rewards of Ituran's success with our shareholders.
Again, the Board is remaining conservative while the pandemic is still having its impact and we review the policy as things develop. Our stability is built on our subscriber base, which remains strong and healthy. It's close to 1,800,000 subscribers, whereby the majority of them are paying us on an ongoing basis and monthly fees. Our revenue starting point each month is already on the back of this. During the quarter, as I said, our aftermarket business returned to its normal growth rate of 21,000 new net subs.
The regions that were particularly strong were Israel and the U. S. I note that in January 2021, Israel had its highest level of new car sales in history, up 16% year over year, which compares with the January 2020 and pre COVID months of car sales. While it is only 1 month, I know, and maybe catching up from car sales, which were not completed in the Q4 shutdown, it is another sign that 2021 is starting well. While many countries in South America are still highly impacted by the virus and economies remain weak there, but we are seeing improving trends, especially in Brazil and in Mexico.
During the quarter, we saw a decline of 5,000 OEM subscribers. I remind you that in Q2, we lost 27,000 and in Q3, the loss declined to 12,000. Therefore, the decline in the OEM base over the past year has been dramatically curtailed in the Q4 and we are clearly moving in the right direction. We don't see the OEM base as simply a subscriber growth story. We are working hard to harvest all the synergies across our entire business and in all our various geographies, cross selling and replicating successful business models and sales from one region to another.
We tap our large subscriber base of almost 1,800,000 paying customers to bring them new and valuable telematic and related services by which we can organically grow our sales. We believe that as the world moves past of the pandemic, each run is very well positioned for growth. In summary, overall, we are very pleased with our Q4 financial results ending the hardest year in our history. Given our improvements and the strong cash generation, the Board decided to renew our dividend payment while maintaining a level of conservatism as long as the pandemic impact continue globally. As you can see, we are sharing the ongoing fruits of our success with our shareholders.
We've managed through the crisis well, maintained profitable business and generated a strong level of cash flow, which represent the resilience of our business model. We also use the slower periods to make incremental improvements throughout our business to look for efficiencies and harvest synergies. I believe we are now very well positioned to resume growth and increased profitability through 2021. I will now hand the call over to Eli for the financial review. Eli?
Thanks, Eyal. I know that the results I present will all be on a GAAP basis, including adjusted EBITDA, which excludes revenues and costs related to the purchase price allocation. We believe this will provide a better understanding of our ongoing performance. Revenue for the Q4 of 2020 were $63,600,000 a decrease of 3% compared with revenue of $65,500,000 last year. In local currency terms, 4th quarter revenue increased by 3% year over year.
Revenues from subscription fees were $45,800,000 a decrease of 8% year over year. In local currency terms, subscription fees were at the same level as that of last year. The subscriber base at year end was 1,768,000, an increase of 16,000 net over that of the end of Q3 2020. During the quarter, there was an increase of 21 1,000 in the aftermarket subscriber base and a decline of 5,000 in the OEM subscriber base. Product revenues were $17,900,000 an increase of 13% compared with that of the Q4 of 2019.
The geographic breakdown of revenues in the Q4 was as follows: Israel, 49% Brazil, 23%, rest of the world, 28%. Operating income for the quarter was $12,500,000 19% of revenues compared with an operating loss of $16,400,000 in the Q4 of last year. I note that Q4 2019 operating expenses included an impairment loss of $26,200,000 related to the acquisition of Road Track Holdings. In local currency terms and excluding last year's 4th quarter impairment, the operating income would have grown by 33% year over year. EBITDA for the quarter was $16,600,000 26.1 percent of revenues compared with an EBITDA loss of $10,700,000 in the Q4 of last year.
In local currency terms and excluding the above mentioned Q4 2019 impairment, EBITDA would have increased by 17% year over year. Financial expenses for the quarter was $2,200,000 compared with a financial income of $3,300,000 in the Q4 of last year. The quarter, we were impacted by non cash expenses, primarily due to the exchange rate exchange on Iran U. S. Dollars cash holdings in Israel as well as the change in market's value of favor 1, while the financial income last year was as a result of the change in obligation to purchase the non controlling interest of Road Track in the Q4 of 2019.
Net income for the Q4 2020 was $6,800,000 10.7 percent of revenue or earnings per share of $0.33 This is compared to a net loss of $15,300,000 and net loss and loss per share of 0.73 dollars in the Q4 of 2019. Cash flow from operations for the Q4 of 2020 was $16,500,000 In terms of our full year 2020 numbers, revenues for 2020 was $245,600,000 12% below the 200 and $79,300,000 reported in 2019. Revenues from subscription fees were $182,900,000 representing a decrease of 11% over last year. In local currency terms, subscription fees were at the similar levels to those of 2019. Product revenues were $62,700,000 representing a decrease of 16% compared last year.
Operating profit for 2020 was $27,800,000 11.3 percent of revenue, an increase of 23% compared with operating profits of $22,700,000 8.1 percent of revenues in 2019. Excluding the impairment in both 2019 2020 and in local currency terms, the operating income decreased by 7%. EBITDA for 2020 was $46,700,000 19 percent of revenue, an increase of 3% compared to $45,500,000 16.3 percent of revenue in 2019. Excluding the impairment in both 2019 2020, the EBITDA in local currency terms decreased by 7%. Net income in 2020 was $16,100,000 6.6 percent of revenue or fully diluted earnings per share of $0.77 compared with net income of $6,900,000 2.5 percent of revenue or fully diluted earnings per share of $0.53 in 2019.
Cash flow from operation for 2020 was a record $60,100,000 As of December 31, 2020, the company had cash including marketable securities of $78,800,000 and a debt of $54,500,000 amounting to a net cash position of $24,300,000 This is compared with cash including marketable securities of $54,300,000 and a debt of $67,900,000 amounting to a net debt of $13,600,000 as of December 31, 2019. For the year 2020, a dividend of $10,000,000 was declared. The Board decided to restart dividend payment to shareholders and resume a new policy of issuing at least $3,000,000 on a quarterly basis. The dividend's record date is March 23, 2021, and the dividend will be paid on April 6, 2021, net of taxes and levies at the rate of 25%. And with that, I'd like to open the call for the question and answer
This is Peter Zepsky on for Tavy. Thanks for taking my question and congratulations on a solid quarter. I was wondering if you could give us some color, some more color on the gross margins in the quarter and maybe on the trajectory going into 2021, particularly on what seems to have a big uptick in the product gross margin in the quarter? And then also as a follow-up, I just I was wondering if you could give us an update on the Road Track operations and the Code strategy there?
Okay. So we got the gross margins and the I would say the increasing in the hardware sales during Q4, I would say that this is not a typical and average quarter. And the reason is that, if you remember, until around July, August, the plant, the production lines were closed in Mexico and in Brazil. And as you remember, our OEM business is done with 2 car brands in those regions. So soon after the lockdowns finished and the market start operating again, there was, I would say, impact on their needs to increase their inventory.
And they automatically made a very high purchase from us for the houseware and the plans that they are buying from us. So I would say that Q4, it's not a typical quarter. This, by the way, something that can explain that the growth in our gross margins, which reflect also to the growth on our operating profits from Q3, the sequenced situation, is more than $1,000,000 difference, which is not a typical growth quarter to quarter in Q1. So I in order to be more realistic and in order to be on the same page with the investors, I would say that we are not expecting this growth rate and growth numbers in the coming quarter. Saying that, I would like to, of course, to repeat my speech in the PR is that we totally expect that we will continue the trend of growing.
We see a very positive trend. We see a positive request and the markets open, which is we've been in favor of our growth. But the difference between Q4 and Q3 in this specific item is because of the explanation that I just gave to you. Okay?
Thank you. That's great color. And then maybe just a brief update on the road track operations.
Okay. So the road work operation is very depend on, as I said, on 2 customers. Both of them are car producers. We have one in Mexico and we have one, which is our customer in Ecuador, Colombia, Brazil and Argentina. The one in Mexico, we find a very enthusiasm from its side to increase the relationship, to increase the installation, to cover more model of cars from the hardware point of view and also from the service point of view.
And we are quite sure that based on the discussion that we have, that in 2021, we will install in Mexico a higher number and maybe the highest number of units ever. On the other hand, with the other car manufacturer in Brazil and Argentina, as we said 2 years ago, we are no longer a hardware provider. We are only a service provider. So we already showed a very sharp decline during 2019 and even in the beginning of 2020. Now we are not expecting additional decline, but on the other end, I am not I cannot say that we expect growth on these 4 geographies, but we really will maintain the profitability, the profits.
And on the same time, as I said in the past, we bring other assets to those geographies. In Brazil, we already have. We have the historically to run operations, which continue to grow. But in Ecuador and Colombia, we are now more focusing in penetrating different segments, mainly fleet management and other car dealers or even car manufacturers, which I believe will overcome the ungrowth business with the current common effect
The next question is from David Kelley of Jefferies. Please go ahead.
Hi. Thanks for taking my questions. Maybe to start with a solid rebound in aftermarket subscribers. Just curious as to your view on the sustainability of that growth or even if there's opportunity for upside. I believe you referenced the robust January SAAR, but also could be some pent up demand driving that as well, but we're also having the vaccine ramp up.
Just curious as to how you're thinking about the potential for this aftermarket subscriber growth rate going forward.
1st of all, I must mention that in the end of the day, there is a lot of influence from the pandemic as we faced during the mid-twenty 20. Now I think, and it looks like, of course, because of the vaccine aspect, but also I think that countries, governments and people understood that all of us have to find a way to live aside, to live with and we cannot shut down for the rest of our life all the business and all our life quality. So I think that it looks like and by the way, in Latin America, for example, there is not yet vaccine and they still decide not to go for a strategy of lockdowns 3 or 4 months ago, and the markets are open. Of course, there's some limitations, some obligations, some obey, some not obey. But from our perspective, from the business side, it looks like the business shall work.
Of course, they are not the same cell a car sales that it was in 2019, but it's look like the decline is lower than we were expected. It's not 20%, 25%, 70% less. It's going to be, we believe, 10%, 12% less than the before the pandemic. And we know as it run how to overcome it by gaining more market share, offering more solutions and more applications. Regarding Israel and regard the aftermarket subscribers, I want to be conservative, but still say that I believe that we're going to the number that we showed in Q4 when most of the markets were open in Israel and in Brazil and in the U.
S, by the way, is giving us a sense of how the next quarters are going to look like. Don't forget that we are now in a position to reap the fruits of our investments, mainly in UBI, in application for every customer that we charge for it. So we see that we are no we are not only sell fleet management or traditional fleet management and traditional SVR, we are selling UBI, we are selling application, We improve and expand our fleet management solutions. We provide diagnostic, which 3, 4 years ago, we didn't have it, etcetera. So I believe that in the aftermarket, we will continue with this trend of being of a number of this close to 20,000, maybe it's 17 or 22, I don't want to but of course, much, much bigger and much higher growth than we showed during 2020 during the pandemic.
Absolutely.
Okay. That's helpful. And maybe just I was looking for an update on some of your cost initiatives. There's some structural cost savings, you're allowed to pull out of the model, but I believe compensation expense started to ramp back up last quarter, offsetting that a bit. Could you just walk us through the puts and takes of some of the cost initiatives that impacted Q4?
And maybe how we should be thinking about the cost structure into 2021?
Okay. So with compensation, during Q4, majority of our cost saving until Q4, we are back to the times before the pandemic. We changed back all the compensation or not all, but major portion of the compensation in the group. The additional will be in Q1 when we had the decision that the employees, except very few people like me, will back to the normal compensation. And of course, they deserve it.
They've been with the company during almost a year. All of them were very effective. They work from remotely. They work when they've been needed in the offices all around the world. And I'm happy that we are in a position that we took this decision, by the way, before we decide to pay dividend because the employees are in the 1st stage of P21.
Regarding other expenses, we have to understand, it's not material, but I must mention it. For example, we have less flight, people not flight, they need to run. And we are a global company. It has some savings, but all the additional savings, I think, are in a number of few $100,000 a year, not more than this. The major portion of the saving was compensation.
And in Q4, major part of it already in the numbers that you see, meaning we are not expect a major growth in our expenses in Q4. It's maybe a very unmaterial number, but there will be a few tens of $1,000 for Q1. That's all.
Okay, got it. Thank you very much. I will pass it on.
The next question is from Asafar El Shandali of Oppenheimer. Please go ahead.
Hey, guys. Congrats on a really positive end of 2020, and it's encouraging to hear that the company returns to paying the dividend. On the topic of the dividend, we appreciate fully that we're not past COVID. The company likes being kind of managed and run-in a very conservative way. But what would be the puts and takes as to how the Board might be thinking about dividend levels, where the outlook normalizes and more broadly on capital allocation?
And I'll just add, how should we be kind of interpreting the word minimum when we think about minimum $3,000,000
Thanks. Okay. First of all, we have to keep even from a legal perspective because those all these policies has legal meaning. So we don't want to be in a position that there is 0 flexibility. But also historically, when we decide on policy, when it was $5,000,000 if you check back, you'll see it always was $5,000,000 or it was a minimum of 5.
I would be I would say that we should expect $3,000,000 per quarter. And I think that quarter in the next couple of quarters, we will review again what is the situation with the pandemic, how things change in the world, how the company feel, because there is no doubt that when everybody looks on our balance sheet, there is and you could take a view on the current balance sheet for today without looking in future, so even myself, why not paying more? Because when we take a decision, we cannot change it every month or every 2. And all of us know we're still in a shaky world. It's not something very stable.
I'm optimistic. I see that we as it run should be and we proved it that even if things will be bad in the world, we know how to overcome it. But effort run to be conservative. So we decide to go for the sales side. I would expect as an investor that it will be $3,000,000 Once we will decide to change it, we will change it.
We will declare. We will report. It's not something that we will surprise people. Although it's a good surprise, we will not come. The reason that we did the $10,000,000 which might look like a surprise, it still was on the paper.
When we had the last quarter's call and I've been asked the question, I said that I feel that the company in coming in the short future we'll probably review again and take a decision again. And since we didn't pay dividend almost all the year, we decided, I would say, to compensate this past by paying something as a one time that can compensate all 2020. This is the reason maybe that the $10,000,000 might be a little bit surprised. But when we talk about the policy, looking forward, what we said or what we report, this will be the number. It will be $3,000,000 It will be more.
We will change the policy, and we'll let people mows in advance.
Okay, great. That's very clear. I wanted to follow-up on a previous question that you guys had on operating expenses, just to clarify it fully. So there are maybe some minor management kind of salaries that may not be at the full levels. But otherwise, when I look at the 4Q operating expenses, I should be kind of thinking at 1Q and 2Q as somewhat plusminus similar levels.
I know that there is some foreign currency that could come and move the numbers. Obviously, that would be adjusted also on the revenues, but just to clarify here.
Absolutely. I think that, again, when we not talk when we don't want to talk about small change, so Q4 expenses is very close to the actual expenses of Q1, of course, on the local currency. And we always give a we give a kind of translation in our numbers how it would look like without the currency effect. But in terms of expenses, the change in Q1 will be very, very minor, which will not be material for the results of the company.
Okay, great. Any updates you guys can give us on how the aftermarket plans in Mexico are going? Any changes in the timeline and acceleration in the timeline delays?
The aftermarket in Mexico, which is mainly something that we are what we are doing is we are duplicating the ICS Ituran consiguro that we do in Brazil, meaning selling Ituran Plus Insurance when we have a backup of insurance companies and we're kind of a digital agency, something that we are leading in the Brazilian market. We are almost the sole supplier of those solutions. What we did in Mexico, 1st of all, of course, we had a delay because of the COVID-nineteen. We didn't want to start the first campaign and the launch campaign while everybody are in lockdown and the mood is low and we, of course, took the advisers the advice of our marketing and advertising agencies. But now, really beginning of 2020 one, we launched it.
And what we did first, which is very important, and I'm very proud that we get to this point, we signed contract with the insurance companies that we needed in order to give us the insurance for the market because how it's worked, people are buying a solution, only theft solution, anti theft solution with insurance for me to run. And since it run cannot sell insurance, we cannot provide insurance, we have to have a backup, we have to have partners. So this is something that we have many years in Brazil. So today, it looks like ongoing. But to create it at the beginning, it's very difficult because the insurance companies, by the way, taking a risk of cannibalism for themselves.
Because when I sell a specific insurance, people can decide to buy this insurance and not their full insurance, which they make more money. But we succeed to convince insurance companies in Mexico that the cannibalism will be very low and they open a new segment through us. So I'm really optimistic, but we have to understand it's like creating a new business. It's not something that in 2021, in the end of the year, you will ask me how it goes, what is the contribution. It will be low contribution.
But since it's also as an operating leverage business and since we once you educate the market, which will take 1 year, 18 months to educate the markets that there is a new solution for insurance. It's like I would compare it, for example, to a digital insurance. When the first digital insurance company launched, I think they have some difficulties. But today, probably, they are the leaders. We always have difficulties when it's you have to educate market with a new product, new solution.
They have to trust you, etcetera, and it takes time. But the first pilot, which is in a low flame and low numbers that we just did recently, really in the last week, few weeks, looks very, very good. It looks better than when we start 10 years ago in Brazil. If I want to compare the 1st months in Brazil 10 years ago and the 1st months in Mexico, Mexico looks better. How long it's going to take?
It will take time. It runs today the business of $250,000,000 a year. It's very difficult to provide growth organically in few weeks or few months. But I look more longer future, mid future, 2023, 2024, I feel confidence or I hope that this is going to be a very important arm of our future growth.
Okay, great. And then with respect to UBI in Israel, I mean, I assume it's part of the really kind of nice rebound that we're seeing in the aftermarket growth. But any change there with how you're thinking about going international with it? Any kind of update you can get on that timeline?
Absolutely right. This is part of our, I would say, success in growing our aftermarket subscribers. I must say that since the Israeli market and also the Brazilian market, back to sell cars in a very high numbers, we also succeed with our traditional SVR solution to grow our subscribers. I mean, during the pandemic, we thought that we will find ourselves selling or growing only in the UBI. Today, a few months after, again, after the car sales renewed, I see that we have also SVR sales also growing in our SVR subscribers.
But of course, the UBI pushing it stronger and looking forward, and I see how the UBI is growing. Again, I just want to remind you, we started again all about 15 months ago and the exactly the word that I said. It will take time. It will not influence 2020. But now in 2021, absolutely, the number will be more with more major influence.
Of course, again, it's not we not count only on UBI, but UBI has a very strong influence on growing subscribers. And this is even before all the insurance companies that signed contract results already integrated and start selling. I mean, we still have additional insurance companies. And don't forget again, it's also an educating. We educated the market less than a year ago, and we are talking about thousands of new subscribers a month after a year.
So I'm very happy and proud that we are in this trend. We got copied to other markets. The main markets are our other markets are in Latin America. And I think that Latin America is in a stage like Israel was 3 years ago until 3 years ago that insurance companies didn't understand what is our offering because they were very traditional orientation. They didn't want to change the traditional insurance policy and insurance way of selling through brokers, etcetera.
And then the digital insurance companies benefit to Israel, the price went down. And in order to compete with those companies, they have to go out of the traditional way, and that was the door or the window that we get in because today they can offer a cheaper policy and to compete among new digital insurance companies. Now in Latin America, specifically in Brazil and in Mexico, I think they are 1 full legs behind Israel. So we try because we have solution, we have the technology, we have the relationship. I must say that the insurance companies are very polite in letting us know that they are not interested in not in a to run solution, but in this solution.
But 15 years ago, nobody thought that we will have iPhones, and now everybody has an iPhone. We are when somebody threw us from the door, we come from the window. And if the window is closed, we come through the wall, and we will be there. We have a strong relationship in with insurance companies in Brazil that trust us. And I believe that as long as we continue to sell ICS and to sell the insurance company solution for SVR, that in one day, this door will open and we will be the supplier like in Israel.
I hope and believe that we will be leaders. This is in Latin America. But now I don't see sales come from UBI out of Israel.
Okay. Okay, great. Great. Last question from my end, a bit more of a technical question. CapEx was obviously lower this year relative to last year.
Again, I know that there are probably some currency impacts here, but how should we be thinking about spending in 2021? Is there anything that may have been delayed that might have to be even raise the number a little bit higher? Any kind of guidance there
would be helpful in that regard?
Basically, the CapEx the majority of the CapEx relates to
the end units that we are selling as a Comogato in Latin America, especially in Brazil and Argentina. And again, due to the in this year in 2020, due to the pandemic, of course, there were less sales. And that means, let's say, also less CapEx than purchases of units.
Okay. Any kind of general number that we should be thinking about on the CapEx? And we should be looking at it as a proxy from the products revenues that are going to be coming in? And how does that get time relative to the quarter? Any kind of guidance there would be helpful.
It's really hard to say, especially with the pandemic now. I would say
I mean, I would say if
you want to take somewhere between 2019, an average of those, I believe this is something that can be represented for 2021.
Okay. That's great. That's very helpful. Okay. Thank you guys for taking my questions.
Thank you.
The next question is from Etan Etzioni of Etzioni Portfolio Management. Please go ahead. There are no further questions at this time. Before I ask Mr. Sharatsky to go ahead with his closing statement, I would like to remind all participants that a replay of this call will be available tomorrow on Ituran's website at www.ituran.
Co. Il. Mr. Sharatzky, would you like to make your concluding statement?
Thank you. On behalf of management of Fituran, I would like to thank you, our shareholders, for your continued interest and long term support of our business. I do look forward to speaking with you next quarter and hope that we will all see better times by then. Have a good day.
Thank you. This concludes the Ituran 4th quarter and full year 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.