Ladies and gentlemen, thank you for standing by. Welcome to the Ituran 4th Quarter and Full Year 2018 Results Conference Call. All participants are 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-sixteen forty six-six eighty eight-three thousand five hundred and fifty nine or view it in the News section of the company's website, www.icaron.co.im. I will now hand the call over to Mr. Kenny Green of GK Investor Relations. Mr.
Green, would you like to begin?
Yes. Thank you, operator. Good day to all of you, and welcome to Ituran's conference call to discuss the Q4 and full year 2018 results. I would like to thank Ituran's management for hosting this conference call. With me today on the call are Mr.
Eyal Sharatzky, CEO Mr. Udi Mizrahi, Deputy CEO and VP Finance and Mr. Eli Kamal, CFO. Eyal will begin with a short summary of
the quarter's results, followed by Eddie with
a summary of the financial.
We will then open the call for
the question and answer session. I'd like to remind everyone that Safe Harbor statements in today's press release also covers the contents of this conference call. And now Eyal, would you please like to begin?
Thank you, Ehud, Kenny. I would like to welcome all of you and thank you for joining us today. 2018 has been a good year for Ituran from both a strategic and financial perspective. We are very pleased with our overall performance and following the Road Track acquisition, we ended you as a much larger scale company with broad capabilities. We now have a significant footprint across Latin America with many growth opportunities ahead of us.
From the financial perspective, as has been the case throughout 2018, the weakness in the Brazilian real, in particular in the earlier half of the year as well as the Argentinian peso had a very significant impact on the translation from local currency in which we operate U. S. Dollars, which is our reporting currency. Despite the currency impact, we are pleased with our performance with revenues of over a quarter of $1,000,000,000 growing 20% in local currency terms, adjusted EBITDA of $79,000,000 and net income of $65,000,000 Contributing factor this year to our net profit was our share in affiliate. This was primarily due to the capital gain from our investment in Brink.
It represents a yearly proof of success from our investments in companies which are building tomorrow's disruptive mobility technologies and solutions. Today, we have invested several very promising early stage mobility technology companies of which Brink is at most advanced stage. Each of them has a strong potential to become a future industry leader. My role is that Ituran will be at the forefront of technological advancement in an ever changing and fast developing mobility market. The 4th quarter is the 1st full quarter in which we consolidated the result of our recent acquisition, Road Track.
We now have close to 1,800,000 subscribers, while our subscribers last year were predominantly in Israel and Brazil with a small portion in Argentina and the U. S, we now also have subscribers throughout Latin America, including Ecuador, Mexico and Colombia. While our business growth traditionally was driven by the net increase in the subscriber base in the aftermarket, today there are 2 legs driving our growth. 1 remains the traditional aftermarket subscriber heads in Israel and Brazil. This is now the other leg, which is working with our existing OEM partners and adding additional OEMs in the aftermarket in both new as well as existing geographies.
We now have a much stronger platform to penetrate additional car manufacturer OEMs beyond the 2 that we are already working with. Furthermore, there are strong synergies that will enable us to grow our business by cross selling our capabilities to grow truck contact and vice versa. And now we have a foothold to penetrate service into new countries. We are already looking to launch additional services in our new geographies. In summary, we are pleased with our performance in 2018 and with integration of Road Track, and we look forward to harvesting the foundation we laid out into continued growth in 2019 and beyond.
I will now hand the call over to Eli for the financial review. Eli? Thanks, Eyal.
I know that some of the results I present will be will all be on a non 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. For further details with regard to the reconciliation between the non GAAP and the GAAP results, please see the table published with the press release. Revenue for the Q4 of 2018 were $79,200,000 representing an increase of 31% compared with revenue of $60,600,000 in the Q4 of 2017. In local currency terms, 4th quarter revenue grew 39% year over year.
Revenue break down for the quarter was $55,000,000 coming from subscription fees, a 24% year on year increase. In local currency terms, subscription fees grew 53% over the same period last year. Product revenues were $24,100,000 which were a 50% increase over the same quarter last year. The geographic breakdown of revenues in the 4th quarter was as follows: Israel, 34% Brazil, 36% and rest of the world, 30%. Non GAAP operating profit for the Q4 of 2018 was $18,900,000 an increase of 29% compared with an operating profit of $14,700,000 in the Q4 of 2017.
In local currency terms grew 41% year over year. Adjusted EBITDA for the quarter was $25,200,000 an increase of 38% compared to an EBITDA of $18,200,000 in the Q4 of 2017. In local currency terms, the increase was 80% year over year. Share in affiliates net during the quarter was an income of $4,200,000 versus an income of $3,000,000 in the same quarter of last year. In each respective quarter, the majority of this income was due to a capital gain.
Non GAAP net profit was $16,800,000 in the quarter of fully diluted EPS of $0.74 a growth of 61% year over year compared with a net profit of $9,800,000 or fully diluted EPS of $0.47 in the Q4 of 2017. The local currency terms, the year over year increase was 73%. Cash flow from operations during the quarter was $18,500,000 In terms of our full year 2018 numbers, revenues for 2018 were $253,300,000 an increase of 8% compared with revenue of 200 and $34,600,000 in 20 17. The local currency terms revenue increased by 20% year over year. Revenue breakdown for the year was $181,400,000 coming from subscription fees, up 7% year over year.
In local currency terms, subscription revenues increased by 23% over those of last year. Product revenues were $72,000,000 up 11% year over year. Non GAAP operating profit for 2018 was $63,300,000 up 12% compared with an operating profit of $56,500,000 in 20.17. In local currency terms, it grew 21% year over year. Adjusted EBITDA for the year was $79,200,000 an increase of 13% compared to an EBITDA of 70 $500,000 in 20.17.
In local currency terms, the increase was 23% year over year. Share and affiliates net was an income of $8,100,000 in 20.18 compared with an income of $8,500,000 last year. Non GAAP net income in 2018 was $51,600,000 or fully diluted earnings per share of $2.45 This is an increase of 18% compared with a net income in 2017 of $43,800,000 or fully diluted earnings per share of 2 point $9 In local currency terms, the net income grew 26%. Cash flow from operations for 2018 was $53,200,000 As of December 31, 2018, the company had cash including marketable securities of $53,300,000 or $2.50 per share. Following the acquisition
of
Road Drug, as of December 31, 2018, the company had debt of $73,200,000 or $3.43 per share. This is compared with cash including marketable securities of $40,400,000 or $1.93 per share and 0 debt as of December 31, 2017. For the Q4, a dividend of $5,000,000 was declared. For the full year of 2018, the total dividend declared including that of the Q4 of 2018 was $20,000,000 representing 51% of the full year net income. The dividend record date is March 26, 2019, and the dividends will be paid on April 10, 2019, net of taxes and levered at the rate of 25%.
And with that, I'd like to open the call for the question and answer session. Operator?
Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. The first question is from Sasha Karim of IPI. Please go
ahead.
I think you didn't catch my question. I'll try and repeat. How much of the services revenue in the Q4 came from Road Track versus Ituran's Investing Services business?
That breakdown since we are fully consolidated and detailed now are not something that we are going to establish. We are actually providing the geographies breakdown for the numbers.
Okay. Okay, fine. I'll come and ask a different question later. But perhaps you can also just look at the Services gross margin. It dipped in the Q4 even in non GAAP terms following the consolidation of Road Track Services revenue.
Can you just explain why Road Track Services business seems to be having a negative impact from the gross margin there?
Basically, today, Ituran has 2 different segments. One segment is the aftermarket and second is the OEM segments. This OEM segment is carrying a lower margins compared to the aftermarket. So once we start to consolidate all segments, it has, I would say, a onetime, let's say, drop of the margins. And this is should be the margins that we will probably will continue to show.
Got it. And should I take it that there is actually a revenue share paid out to partners like General Motors there in your cost of
goods sold? Or is there
another reason for the gross margin to be lower?
No, because the price for the prices and the cost for OEM are different than for the aftermarket, a different segment, which carry different prices and different costs.
Got it.
Okay. And also on the product gross margin, in the Q4, it was quite high. I'm guessing it's probably mix that's driving the volatility there. Can you tell us which products are highest and lowest gross margin? How should we think about mix going forward?
We are not providing a disclosure of the gross margin between the mixture of products. But as you mentioned, you're right, the mixture of the product, especially on the group segment, brought us to a higher gross margin. I want to remind it's supposed to be in the future a little bit higher.
And was it going to have an impact there in the 4th quarter? Or is it really just a mix that's causing that spike in the 3rd and 4th quarters?
It's mainly the mix, yes.
And can
you give us a rough range to expect going forward? I imagine it's quite a wide range.
I believe that going forward, the gross margin of approximately 20% is something that makes sense to me.
The next question is from David Kelley of Jefferies.
I guess just the first one, could you talk about maybe some of the drivers of subscriber base growth? Is obviously the road tracking the primary contributor? But just any way to think about either a regional breakdown or some of the different metrics of how we should think about corridor AM versus Road Track contribution of the subscriber base?
The OEM subscriber base is much more depends on the car market and car industry, I would say. The correlation, which was a little bit lower when we talked or when we are talking on aftermarket, it runs it run has more way to affect the market by using our tools, by using more different marketing, approaching different segments. Sometimes it's work more, but sometimes less. But still a lot of it is something that depends between us and the market. When we are talking about OEM, we totally depend on the sales of cars from the specific car manufacturers that's working with us.
So our visibility as well is our dependency is very, very high. And since we know that the markets which we operate with OEM services, which include Argentina, Brazil and Mexico, less stable market, of course, there will be some volatility, which we less get used to in the aftermarket.
Okay, great. And as we think about 2019 opportunity, you mentioned the volatility in the OEM market. I think South America maybe as a region looks better than some of the other regional production outlooks this year. Any way to think about potential contribution there? Do you think it will be a more or less volatile year in 2019 as we think about the OEM subscriber base?
As I said, we don't have a full visibility. What we are assuming is that we will on the aftermarket, we should expect the average numbers that we shown in the last years. In the OEM, it's something that we believe or we hope that it will be stable. But again, this is something that are more changing among the quarters along every year since we know this segment.
Great. And last one for me just to to jump in the share and affiliates contribution from the capital gain from Brain. Could you just talk about the opportunity of some of your investments, what you see in 2019 as we think about share and affiliates? Should that continue to be a significant jump year over year?
Wing, as we said, is in the most advanced stage, and this led to a very high valuation and a very high amount of money that was raised during their fund, the last fundraising round. The investors, as we said, are very major names in the software industry such as Salesforce and Siemens Venture Capital. And the other companies that we invested are still in a earlier stage than Brink. So we see how they are moving forward, but I'm assuming that during 2019, assuming because of course I don't know that even if they will go into the next round, it still will not be significant to each one
results. In addition, just to remind that 2018 includes until the acquisition of Road Track in the share of affiliated contribution of the JVs that we have in Brazil and Argentina that in 2019 will be consolidated with the numbers.
The The next question is from Eitan Assoni of Assoni portfolio management.
I wanted to ask, it appears that organically there's a significant drop when we take the numbers from Road Track and subtract them and compare them to the previous quarters. Can you explain where that drop is coming from, please?
As you're right, in U. S. Dollars, again, it seems that the and it's the revenues are going down if you exclude with some assumptions, but the main effect the main decrease relates to the FX. Without the FX in local currencies, organically, of course, comparing to last year, the revenues went up.
On the previous call, you said that year end 'eighteen, you're at a run rate of $400,000,000 revenue. Is there is that still the approximate number? Or do you have an update for that figure?
It wasn't the last call. It was during the PR of the acquisition of Road Track which was the beginning of 2018 and everything that we published was based on the numbers that we knew which was 2017 and based on the currency exchange rate that was in 2017. And of course, when you are computing the differences with the currency exchange rate, everything is the same place.
So looking at the Q4, excluding, of course, the gain in the affiliates, it's pretty much a representative quarter of the current business with the current exchange rate. Is that fair to assume that, that's what we should be looking
for going forward? Absolutely, yes.
With the current, as you mentioned, and it's very important since our operation is based only on local currencies, which are none of them is dollar, almost none of them is dollar. So assuming that this is the currency exchange rate that we will continue to live with, So it's absolutely right what you said.
We have a follow-up question from Sachin Karim with RBC. Please go ahead.
Just one follow-up. You weren't giving us the breakout, I guess, between Roadtrek and Ituran Existing Services business. So I'm having to make some assumptions. But it seems to me like the Brazilian services business that you had prior to the acquisition is probably still declining slightly in constant currency organic terms. And you've obviously been making some changes to that business, expecting a return to growth, I think, in 2019.
Can you give us an update on how those changes are going down and when you would expect decent growth to return to the business?
We actually, most of what you described is right because, of course, we said it in the last few quarters because we changed the model working with our ICS Ituran Konsiguro, which is the Ituran insurance program. Of course, we changed the model. Since we changed the model, it start to ramp up. We are in a very, I would say, a good rhythm of coming back to the numbers that we shown in the past. It will take us a few more quarters to be in probably or fully in the highest numbers, but we are now in a positive trend of losing less subscribers and growing more.
Our next question is from Hickey Lamminan, Private Investor. Please go ahead.
Slightly low compared to kind of the transformation of debt that we have taken forward. So have you considered maybe bringing this new little run to investor knowledge in a better way? And maybe, for example, regarding the capital, which you are providing back to shareholders, so you have been doing only dividends. Have you identified maybe starting doing some share repurchases in the future?
From time to time, the Board is considering issues regard the equity of the business, which is discussion regard dividends, share purchasing program, the debt that we are using, etcetera. Currently, the situation stayed as continue with the dividend policy and continue to serve the net debt of the company.
Exactly. Maybe a add on. So I understand that there is that you have incurred to purchase crude, but still you are now generating very healthy cash flow. So what do you see that's increasing the dividend in the future? I guess that might come into play during this year.
The company to discuss what is Ituran policy regard all these matters. We always need working capital. We always had our policy regard how the balance sheet has looked like. And I think that we try to mix between the needs of the company and the way to share the profits with the shareholders through dividends, it's always a mixture between chances, risks and needs. And that's how we are operating and now our goal, taking the decision.
Of course, we did this from time to time every quarter.
It's okay. And maybe a number of operational questions. You mentioned in the press release that you see a lot of promising revenue side synergies. Could you maybe provide us with any number like ballpark figure, say, 10% additional sales in 2 years or something like that? And then also how then on the costs, I think that this is very scalable.
Now you are now combining 2 different business with them and been operating slightly different geographies. So do you see a lot of as soon as you come and sell also on the outside?
I don't know what is the meaning of a lot, but of course, we are doing our best to leverage this acquisition by creating synergy and creating efficiency, and we already started to do it. And we find that we can contribute to the profitability of the group today from a cross selling. Of course, again, some of the regions were especially focused on aftermarket, and we will try or we are trying
to do
our best entering OEMs or other OEMs in those geographies. On the other end, geographies that was very focused on OEMs has a platform to offer services and solutions also to the aftermarket. This is something which we will try to create, but it's not something that happened from day 1 to 2. It will take a time. And we believe that the move and the things that we will do will contribute in the future to this solution or to these results of the cross railing.
We start with this, but it will take time, of course.
Exactly. And maybe one further question, then I understand that management plan has been well spent on the South America. But in the past, you have also mentioned that you have been doing some progress in India. So maybe if you can provide any update on that.
You're right. We are counting on India for the longer terms. I will repeat and will mention that we have a joint venture as we started in the past with Brazil and Argentina. Now we have a joint venture, 50%, 50% with Lumax, local big and respective OEM integrator. We are now in a phase of building the infrastructure and creating the business and answering bids, which will lead to opening new market and new segments in markets, which is very premature in the telematics industry.
We actually have to create market education, and we spend many hours and we spend resources, which are not significant now. But I believe that as long as we will move on with sales or with deals, we will increase this platform, this business. And we see very positive reaction. We see we believe we have a good reason to be optimistic, but again, this is a longer term market. When we enter the Brazilian market in the late '90s, we start prepping the coffee foods only after 5, 6 years.
I hope that it will be here earlier that we are talking about market which is sitting significantly larger than the Brazilian. And now it's in a phase India is in a phase of coming from emerging market to more industrial market. More people are transferring from rural areas, the municipal areas, and it gives us the confidence that in the future, we should do our best to be the dominant of the telematics market in India.
Exactly. Let's hop in the post Basel. And maybe one question, which I think that hasn't been different in any calls, if I may. So the electric costs are really growing fast from a low base, but growing fast, of course, as we all know. And kind of that's a very different kind of car compared to the Audi Gasoline and so on have been.
So how do you see that transformation into electric vehicles? What kind of opportunities does it present for Ituran? And is it possible it will be easier to install your hardness of the electric vehicles? And also do you see any threats like if there are over new entrants or so due to easier taxes maybe in electric cars?
The way the engine is working has no influence on the services and given the hardware that D2L is providing, whether it's electric car or whether it's a car based on regular engine is a fuel. So we don't see any threats. On the other hand, we can think, and that's what we do, about having more things or more sensors that we can be involved with the telematics. And this is an upside and not a downside by, for example, managing energy for cars, whether we're talking in fleets, whether we're talking about groups of cars, etcetera. But generally speaking, there is no difference for telematics services whether it's in a fuel engine or it's an electric engine.
Yes, yes. It's fuel engine. It's I was exactly looking after that kind of the pesos and so on. They are in a very smart cars compared to what maybe the gasoline cars have been. So there is lots of more monitoring and different sensors and so on, as you mentioned, So I'm not happy here, but you are also looking at.
I guess I will let others ask questions as well. Thank you. Thank you.
The next question is from Daniel Dopas of Alpha
FPI. One simple question about the One simple
question about future margin. Obviously, the Goldstrike
acquisition brought operational and net margins down. Would you expect future margins to improve as you bring growth in to run all the margins or current margin level did
a steady state margin some way up to safety? I would consider our 4th quarter results as the right margins to consider. Yes. Margins are representing margins that we should show.
There are no further questions at this time. Before I hand Mr. Sharosky to go ahead with the 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. Shirazki, would you like to make his concluding statement?
Yes. I would like to thank all the Turan's employees, including our new employees for their hard work and effort in 2018. 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 look forward to speaking with you next quarter. Have a good day.
Thank you. This concludes Citi's 4th quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.