Ladies and gentlemen, thank you for standing by. Welcome to the Ituran Second Quarter 2020 Results Conference Call. All participants are at present in a 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'll now hand the call over to Mr. Ehud Helft of GK Investor Relations.
Thank you, operator. Thank you. Good day to all of you and welcome to Ituran's conference call to discuss the Q2 of 2020 results. I would like to thank you to our management for hosting this conference call. With me on the call today are Mr.
Eya Sharatzky, Co CEO Mr. Rudin Mizrahi, Deputy CEO and VP Finance and Mr. Eli Kamar, the 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 question and answer session.
I would like to remind everyone that the Safe Harbor in the press release also covers the contents of this conference call. And now Eyal would like to begin, please.
Thank you, Ehud. I'd like to welcome all of you and thank you for joining us today. I hope you and your family stay healthy during this unprecedented time, and I wish all those who have been infected by the virus a fast recovery. During this period, our top priority has been ensuring the health and safety of all of our employees, and we continue to follow local authorities' directives as they develop and adjusting as needed. Just as important, we continue to maintain business continuity and serve our customers around the globe.
From a financial standpoint, even though our Q2 was particularly difficult, we are pleased with our achievement, especially given the unprecedented full economic shutdowns over a part of the quarter in Israel, Brazil and other geographies we operate in. We reported an adjusted EBITDA of $13,900,000 which was about 9% below those of the Q1 2020. And excluding currency impacts, the decline would have only been 2%. I remind you that we expected 2nd quarter EBITDA to be between 10% 20% below those of the Q1. So our results show we were successful in mitigating some of the impacts.
I note that this excludes a non cash impairment in Road Track, which is an accounting effect mainly due to the sharp increase in the macro risk factors of the various countries in which Road Track operates and not related to Road Track's long term performance or outlook specifically. The increase in country risk caused an increase in the weighted average cost of capital, WACC calculation, which lowered the valuation of this business on our balance sheet. Excluding the non cash impairment charges, Ituran remains profitable and continues to be cash generating. In fact, with one of our strongest quarter of cash generation, with a positive operating cash flow of $19,300,000 Ituran stability during this unprecedented global crisis demonstrate the overall resilience of our business model. You may remember that already in the Q1, we took some early steps focusing on cash preservation and reducing our expenses, matching expenses with expected revenue levels.
Our ability to remain profitable and cash flow positive during this global crisis demonstrates the overall resilience of our business model. Despite the logistical working challenges, COVID-nineteen pandemic has created for everyone, including us, it is clear that our business is highly resilient. I remain optimistic over the long term and am confident that Ituran will emerge this period a stronger and more efficient company. Once we can all put this pandemic behind us, we have the platform for long term sustainable and profitable growth. Our subscriber base remains strong with close to 1,800,000 subscribers, whereby the majority of them are paying us on an ongoing basis a monthly fee.
Our starting point each month is already on the back of this. This enabled us to remain profitable and cash flow positive during this current unprecedented global crisis. However, new car sales drives growth in this subscriber base and the lack of new car sales, especially during April and May in many of our geographies, impacted our ability to recruit new customers and grow our business in the OEM business, as well as in the aftermarket business. I will spend the next few minutes diving into the details of both the corona impact first on the OEM business and then on the aftermarket business. I will start with our OEM business in Brazil and Argentina.
As you all know, this business suffered last year prior to the corona because of the weak economic situation in Brazil and Argentina as well as the change of model using their own hardware and also reducing the OEM pay term of service down to 1 month only. In 2020, the corona pandemic has taken a further toll on their economies and ultimately on our OEM businesses. During the Q2, we saw a net decline of 27 1,000 subscribers in the OEM segment as a whole. Because of the weak economic situation in Brazil and throughout Latin America during the Q2, country risks in the region have increased in the Q2. The higher country risk has increased the discount rate, the WACC, used when calculating the value of Road Track on our balance sheet.
This means we had to reduce the value in which Wobstra quiten on our balance sheet and therefore write an impairment on this business during the quarter. I stress that the impairment is a non cash first and second doesn't reflect a specific worsening or lowering of long term forecast for the Rotorak business. The net amount was $13,500,000 of which $14,200,000 was on the operating line and income of $700,000 in financial income related to the liability to purchase the non controlling interest. Despite the impact of the pandemic and the weak economy situation in Latin America on the business, More broadly, we do feel that Road Track has brought Ituran strong synergies, giving Ituran access to new markets, as well as an ability to cross sell additional products and services into existing ones. Looking at the aftermarket business, we saw a net decline of 16,000 subscribers.
The cause in Q2 2020 was the unpresented complete economic shutdown, primarily in Latin America for a large portion of the Q2 because of the pandemic. In Israel, the shutdown impacted April and May, while new car sales recovered in June to levels similar almost of those of June 2019. The subscriber base in Israel was more or less stable over the quarter. In Brazil, our other large aftermarket geography, new car registration in June were up from the lows of April, but still down 40% versus June last year. Our results in Brazil have been further compounded by the significant weakness in the real currency versus the dollar, which at the 2nd quarter peak lost half of its values versus the dollar in only 1 year.
Elsewhere, in Mexico, we continue planning and building out the infrastructure for our new EatOne Compsiguro program using our overall success in Brazil and adjusting it for the Mexican market. This is an example of the synergies we are exploring from Road Track. We hope to launch and start selling the product toward the end of this year. As our markets start to open up again, I do expect the new car sales to recover and we are confident that our aftermarket business will resume growth as well as eventually put the viewers behind us. It runs today as other strategy for penetrating additional segments.
Our UBI offering, whereby we can offer insurance companies a solution to build the customer per usage and driver behavior, continues to gain traction. We have now signed on 5 insurance companies in Israel. The subscriber numbers are growing quickly, but are still small. We believe this will already have a positive impact on next year results. Now that we have proven the success in Israel, we recently signed a UBI agreement in Argentina and negotiating potential UBI projects in Brazil.
I expect this business to become significant to our long term subscriber growth in future. In summary, the Q2 of this year was unprecedented with complete economic shutdown in our markets, significantly impacting our business. However, we are pleased with the resilience of our business model, built on a revenue base of 1,800,000 subscribers. Furthermore, we prepared ourselves in advance to weather the storm, and we are constantly ensuring that our expense level is matched to our revenue levels. Even during such unusual times and the most severe global crisis in 100 years, We are able to remain profitable and generate cash, and we expect that this will continue to be the case in the coming quarters while the pandemic is still with us.
We have made improvements throughout our business to improve efficiencies and as we emerge from the corona pandemic, I believe we are well positioned to resume growth and increase profitability. I will now hand the call over to Eli for the financial review. Eli?
Thanks, Eyal. You can also refer the press release we published today with our results. Revenue for the Q2 of 2020 were $53,300,000 a decrease of 25% compared with revenues of $71,200,000 in the Q2 of 2019. Revenues from subscription fees were $43,700,000 This represents a decrease of 15% over Q2 of 2019 revenues. Excluding the currency effects, revenues from subscription fees would have shown a decrease of 7% versus the period quarter.
The subscriber base amounted to 1,751,000 as of June 30, 2020. They represent a decrease of 53,000 net over that of the end of the period quarter. During the quarter, there was a decline of 16,000 in the aftermarket subscriber base and a decline of 27,000 in the OEM subscriber base. Product revenues were $9,600,000 a decrease of 51% compared with that of the Q2 of 2019. The geographic breakdown of revenues in the Q2 was as follows: Israel 51%, Brazil 25%, rest of world 24%.
During the Q2, it runs operating expenses were $32,500,000 The operating expenses include an impairment loss of $14,200,000 related to the acquisition of Road Track. As Eyal mentioned, this was due to an increase in country rate in Latin America due to the COVID-nineteen pandemic, which negatively impacted the evaluation of Roadside. Excluding the impairment loss, operating expense amounted to $18,300,000 This is compared with $19,900,000 in operating expenses in the Q2 of 2019. Operating loss for the quarter was $4,900,000 Excluding the impairment charge in the operating expense, the operating income was $9,300,000 17.5 percent of revenues. This is compared with $13,600,000 or 19.1 percent of revenues in the Q2 of last year.
This is a decline of 31% year over year. In local currency terms, excluding the impairment, the operating income decline would have been 25% year over year. EBITDA for the quarter was a loss of $300,000 Excluding the above mentioned impairment charge, EBITDA was $13,900,000 26.1 percent of revenue, a decrease of 28% compared with $19,400,000 27.2 percent of revenue in the Q2 of last year. In local currency terms, the decline would have been 20% year over year. It is noted that versus the period quarter, the decline in EBITDA was 9%.
And in local currency terms, this decline was only 2%, which was ahead of management expectation of 10% between 10% or still 20% sexual decline in EBITDA versus the Q1. Looking ahead, we expected similar levels of EBITDA in our Q3 results. During the Q2, one of our health company, Favor 1, raised NIS 26,000,000 and as a result of our holding in the company was diluted. As a result, we had a capital gain of around $1,500,000 which is recorded as part of our financial income in the quarter. Net loss for the Q2 of 2020 was 6 point $3,000,000 or loss per share of $0.30 Excluding the above mentioned impairment charge and excluding $1,700,000 financial gain due to the reduced minority liability related to the impairment of Road Track, net income for the quarter was $7,200,000 13.4 percent of revenue or fully diluted earnings per share of $0.34 Net income excluding the impairment charge represents a decrease of 7% compared with $7,700,000 10.8 percent of revenues or fully diluted earnings per share of $0.37 in the Q2 of last year.
In local currency terms, the gain would have been 1% year over year. Cash flow from operations for the Q2 of 2020 was $19,300,000 As of June 30, 2020, the company had cash including marketable securities of $57,200,000 and a debt of $60,800,000 amounting to a net debt of $3,600,000 This is compared with a cash including market securities of $54,300,000 and debt of $67,900,000 amounting to a net debt of $13,600,000 as of December 31, 2019. And with that, I'd like to open the call for a question and answer session. Operator?
Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. First question is by David Kelley of Jefferies. David, please go ahead.
Hi, everyone. This is Gavin Kennedy on for David Kelley. You guys mentioned expected return to aftermarket subscriber growth as the pandemic subscribes.
Can you just describe how
you're thinking about OEM positioning going into the second half of the year?
First of all, at the OEM businesses, we have to mention that the plants and the production lines just reopened around end of Q2, specifically at the geographies that we operate. And we're absolutely expecting that we will sell restart selling new products and services to the plants. We have to understand that we recognize as subscribers at the moment that they actually shipped it and installed it in the end user cars, which is creates some timing difference between start selling and realize it as subscribers. So I would expect it more toward Q4 and beginning of next year, but something that we absolutely see happening is that our customers, our car manufacturers are increasing their inventories and buying products from us.
Great. And then just as a changing gears a little bit as a follow-up, really solid gross margin performance this quarter despite the dip in aftermarket subscriptions. Can you just talk a little bit about the gross margin drivers this quarter and how we should think about modeling margins going forward for the rest of the year? I know there's a lot
of moving parts of the pandemic.
It's important to mention that this time, one of the major things that we did, and we mentioned it even through the end of Q1, is that we got prepared to the pandemic and the crisis, and we're lowering our costs starting from salaries, compensations, all around our geographies. Of course, also lowering payments and changing condition with suppliers. So by doing this, that we lowered our cost at the beginning. Probably, we were conservative enough, and we still succeed to retain some better revenues than we expected or less churn that we expected. So that's led to maybe a higher gross
In addition, the mixture between the service revenues and the product revenues due to the fact that the product revenues were lower due to the lower sales and the gross margin in the service revenue is much higher, this also contributes to a higher gross margin for the whole group.
Got it. And then if I could just sneak one quick one, just a quick housekeeping question. You mentioned similar levels of performance in Q3 as Q2. And I think in the follow ups about the financials, you mentioned that maybe EBITDA would be at similar levels. But just with that comment of similar levels of performance in Q3, can you just describe what you're talking about there?
And that's it for me. Thanks.
We set a general, I would say, expectation, which is across the board, which we expect to have same profitability, same numbers in mainly EBIT and EBITDA. Of course, we have to be conscious, so we think some short range, but we really expect that we will repeat, meaning we will during this recovery time, we will succeed to again, to overcome the crisis and keep the same results in Q3.
Next question is by Sachin Dally of Oppenheimer. Sachin, please go ahead.
Congrats on the solid results. I guess just following up on the gross margin, specifically in the services business, obviously very strong and a nice reversal from steady declines. We discussed in recent quarters specifically cost cutting measures, number 1, relating to COVID and then just generally relating to kind of the shift away from OEM. You have in lower costs related to supporting the business. To what extent can we kind of model these elevated levels of subscriber or services gross margin moving forward?
We believe that once the pandemic we overcome or that will pass, then the margin should be more or less the same as it was before the pandemic.
Okay. Understood. So at the 56 ish percent levels?
That's correct. Okay, cool.
And so given the fact that we're now 2 thirds of the way through the quarter, any sequential momentum that you guys want to kind of point out, whether it be Israel coming back stronger? Do you how do you see Brazil and Mexico overall
in terms of
the business you guys are seeing?
We have to I think we have to be clear. We know that even though after the lockdowns start being released and more car sales or more car dealers and car plants are starting selling again. Still, We expect looking forward to 2021 that car sales along the world, by the way, will not be the same as back like 2019. It will recover compared to Q2 and maybe the beginning of Q3, but we know that car sales is very depend on economic situation, and we all knew that the macro economy is not going to be as it was before the pandemic, at least not in the short term, let's say, 2021, 2022. And people are buying cars depend on their wealth situation, their compensation, etcetera.
So I'm not expecting that the growth can be as it was before the pandemic. But that's led us to be more efficient to save costs. Probably some of the costs that we saved, we will continue to save. So if we succeed to get to higher levels than Q2 and Q3, and the car production lines will start turning again. And if we succeed to show profits and profitability during the lockdowns, I'm quite sure that we will succeed to show, hopefully, next year better results, but it will be very difficult to grow to a double digit numbers as it was in the past because overall, our businesses depend on the car industry.
We have 2 things which we created during the last, I would say, the last quarters and something which we will launch hopefully, and that's our plan before the end of this year. One is the UBI, which is in Israel, is ramping up. And although each subscriber is represent something like half typical subscriber, but still the numbers that we expect to have in 2021, 2022 going to be more and more material. So this can create some growth engine for it to 1, although the historical business will be less growing, will be more stable. And the second thing, which we are at least very exciting and have expectations is the ICS, which is our business that we created and became the number one in Brazil to do it also in Mexico.
Again, this is something which will allow us to overcome less car sales, but still going to more segments and in the end, growing our subscribers and growing our profits. This is not something that we will be able to show yet in our financial results in the coming 2 or 3 quarters. But going more to mid-twenty one and to 'twenty two, to be fair and a little bit optimistic, it's good to do in those days. We really think that for more mid- and long term, we really still can think about coming back to growing subscribers and growing also the results across the board.
Okay. Thank you for the color. Just one last point for me. Any commentary you guys want to offer on capital allocation specifically related to the dividend and the share buyback? I know it's off the table until things get back to normal, especially with some of the cost cutting measures you guys are taking.
But any way you guys are seeing it, maybe longer term?
Historically, I think that Ituran DNA is not to hold, I would say, excess cash. We always hold the cash that we need to operate the business. And in some point of time, in order to be able, whether it's a small or mid acquisition or partnerships, Ituran, I must say, and be honest, is in a very good position in terms of balance sheet. I know that these times many companies that are leveraged are, I think, struggling a lot. I also think that in the future, the capital market is going to be more difficult.
So I think that we feel very confident and very safe. But on the other end, I think that the things that are part of Ituran is to be conservative, to be conscious and take 2, 3 more breaths before we are releasing the money. And as I said, as long as our employees are cutting salaries, as long as our long term suppliers are cutting prices, as long as the pandemic create uncertainty, we decided to be conservative. And still, let's say, even so, as you saw, we the company is generating satisfied cash and we're in a satisfied cash position, we will still hold it for the unknown short future. But of course, once the uncertainty will change, We will feel more confidence, and the market will and the world will create more certainty, and we're back to work at the levels that we expect and as our business plans are.
And no doubt that from this moment, we will recommend to the Board of Directors to go and take a decision whether paying the dividends, whether by starting again to buy our own shares, maybe do these two things. No doubt that it runs strategically, no need to have excess cash. But at this time, it's a little bit different. I hope that, I don't know, nobody knows, but 2, 3, 4 quarters from now, we will be more smart to know where the world macro situation is going and how it's influenced it to us. When it's happened, I will be the first to recommend to share with our shareholders the profits.
Okay. Thanks for taking my questions. And just again, congrats on the solid execution despite the challenges. Thank you.
Thank you very much.
Next question is from Sasha Karim of IPI. Sasha, please go ahead.
Hi, guys. Some of my questions were taken, but there's one more I'd like to ask, which is on the Affiliate, which you mentioned had a funding round and you got diluted. Could you give us your stake post dilution? And I think you said the company was called Sabre 1. Could you talk a bit more about what it does and why you invested in it?
Thanks.
This company, by the way, that you mentioned, Coldsaver 1, it's a startup that took a decision to make IPO IPO in the Tel Aviv Stock Exchange. We are part of a group of shareholders. We present some of the Israeli car industry players, which is car importers. And we were part of the I would call it like the angels investors. It's interesting it was interesting for us to invest because they have a unique solution, which is not the application, like we can find 100 in the world.
It has some hardware and software solution to eliminate the ability of a driver, but only the driver, by the way, the rest of the peoples can use any text application and message in his iPhone. We know today in the world that there are 2 main reasons for severe accidents. 1 is alcohol and second or even the first is people texting and using the phone during their driving. And since we are having a strong relationship with the insurance companies, The industry that we are a major player in, interest in this solution, and we thought that we for us to connect to this investment is important. Now for the financial aspect, the company raised ILS 26,000,000, dilutes the shareholders.
Now it's a publicly company in Tel Aviv. And we have about 11%. We hold 14% before the IPO. After the dilution, we hold 11%. It's not a major investment.
It's not major portion in our P and L and balance sheet. But since the IPO was just Q2, of course, we provide this information. On behalf of management of Ituran, 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's Q2 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.