Ladies and gentlemen, thank you for standing by. Welcome to the Ituran 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. For operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded. If you have not received it, please contact Ituran's investor relations team at GK Investor & Public Relations at 1-646-688-3559, or view it in the news section of the company's website at www.ituran.co.il. I would now like to hand the call over to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?
Thank you, operator. Good day to all of you, and welcome to the conference call to discuss Ituran's acquisition of Road Track Holdings. I would like to thank Ituran management for hosting this conference call. With me today on the call are Mr. Eyal Sheratzky, the Co-CEO, and Mr. Udi Mizrahi, VP Finance. Eyal will begin with a discussion of the acquisition, including a description of Road Track business, the rationale for the deal, and the terms of the deal. W e'll open the call for the question and answer session. I'd like to remind everyone that the safe harbor in the press release issued earlier today cover the contents of this conference call. Now, Eyal, would you like to begin, please?
Thank you, Ehud. I'd like to welcome all of you and thank you for joining us today. The acquisition of Road Track is a monumental event in the history of Ituran. Part of Ituran's strategy has always been to acquire a synergetic business with our own to enable us to accelerate our long-term growth and reach beyond our natural organic rate. We've considered many acquisitions over the past few years, and it has taken a long time to find the right partner. Over the years, we have weighed many potential acquisitions, and for various reasons, we didn't complete them. This may have been due to valuation, which was too expensive, lack of synergies, or complexities in integration. Ultimately, unless we saw a clear path of strong enhancement in shareholder value, we didn't pursue any acquisitions.
Having worked closely with Road Track for five years in Brazil and Argentina and following a long due diligence process, we believe that Road Track meets all our requirements for a highly synergistic and value-added acquisition and will unlock substantial value in a combined company. Road Track is a company we've been working with closely under an equally owned JV in Brazil and Argentina for a few years called IRT. As you know, we've been together providing telematics services on various new car models under an OEM agreement to a major global car manufacturer in those countries. Because until today, we've not been a majority owner of IRT, we've not consolidated IRT's results or the subscriber numbers into our own, except the net profit on the bottom line under share in affiliates.
Our partner, Road Track, is one of the largest OEM telematics provider in Latin America to provide a factory-installed aftermarket and commercial fleet telematics solutions under a global car manufacturer OEM brand. Road Track's major customers include two global automotive manufacturer, one of which we have shared at IRT, as well as car dealers, insurance companies, and fleet operators. Road Track has significant operation in Colombia, Ecuador, and Mexico, three new markets for us. They also operate in Brazil and Argentina together with us. As of year 2017, Road Track had 550,000 subscribers, which continues to grow. In terms of the details of the actual deal, Ituran will pay the shareholders of Road Track Holdings $91.7 million, acquiring 81.3% of Road Track. For the coming three years, the former shareholders will retain 18.7%, and will continue to be our partners.
This values Road Track at about $113 million. In terms of funding the purchase, $76 million will be paid in cash through a debt facility, which our leading bank in Israel will provide, our lending bank. We will have the right to pay back the loan at any stage. An additional $12 million will be paid in Ituran shares using treasury shares, which will be blocked until 31st December 2020. The remaining $4 million will be paid out of Road Track's equity as a bonus over the coming three years to the senior management of Road Track Holdings who will remain with Ituran through the end of that period. I note that the final acquisition price may be subject to downward adjustments depending on the full-year 2018 performance of the Road Track business.
Following three years of joint operations, Ituran will purchase the remainder of Road Track's shares at a price based on evaluation that will be made at that time. Subject to various approvals and customary closing condition, we accept the closing to take place during the third quarter of 2018. I would like to spend a few moments covering Road Track's financials, which I know that are under non-GAAP IFRS, and discuss how Ituran will look post-closing. As I explained, we are acquiring Road Track at a valuation of $113 million. Road Track full-year 2017 revenues were $96 million. Ituran was $235 million. Road Track's 2017 non-GAAP EBITDA was $21 million, and net income was $8.5 million. Ituran 2017 EBITDA was $70 million, with a net income of $44 million.
Note that IRT is held 50% by Ituran and 50% by Road Track, so neither company consolidated the JV's result except at the bottom lines. Following the acquisition, IRT's results will be fully consolidated into Ituran's. Going forward, the 18.7% portion of the profit from Road Track, and ultimately 9.35% portion of profits of IRT, which we do not own, will be taken out at the share in affiliate line. On a fully consolidated 2017 pro forma non-GAAP basis, which would also include IRT, Ituran, including Road Track, would've been $366 million in revenue, $98 million in EBITDA, and $51 million in net profit, and that's after deducting the 18.7% minority of Road Track's net profit, which will continue to be held by its current owners for three more years. Total subscribers at year-end 2017 would have totaled in 1.7 million subscribers.
Following the acquisitions, Ituran's full-year revenue run rate will be close to $400 million, with a combine of 1.8 million subscribers, providing us with ongoing subscription fees. In summary, we are very excited with what today's news represent for the future of Ituran. Having worked closely with Road Track for five years in Brazil and Argentina, we are convinced that Road Track is the right acquisition for us, which will quite quickly unlock substantial value in the combined company. Significantly, it will enable us to further penetrate major car manufacturers, will provide Ituran a significant scale in the telematics industry, and allow us to provide a broader service offering into new country. We believe that it is a very much game changer for our company.
We're excited to welcome the management and employees of Road Track to Ituran, and we look forward to accelerating our growth together, sharing the success, and ultimately enhancing shareholders' value for all parties. 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'll begin the question-and-answer session. If you have a question, please press star one. If you wish to cancel your request, please press star two. If you're using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. First question is from Bret Jordan of Jefferies. Please go ahead.
Hello, guys. Hi. Quick question. On the 550,000 subscriber base at Road Track, what has been the growth rate in that subscriber base, or how were you thinking about that?
Basically, along the last three years, it was a double-digit number. We are not yet exposed exactly the number, but it was double-digit and some tens of thousands of new subscribers, net new subscribers every year.
Okay. I guess the economics around those subscriptions, are they higher value than your company average because it's more GPS-based technology?
No, I don't think there is a connection whether it's a GPS or a RF technology. I think that, no, it has almost the same profitability.
Okay. A s we think about new markets, Colombia and Ecuador and Mexico, will this accelerate your focus in those markets given the fact that they are there, or will it change the rollout pace?
Of course. I think that one of the advantages, or even one of our aim to create synergy is to integrate some of our aftermarket skills and fleet management skills in those regions. No doubt that Mexico, and if we had to start from scratch, Mexico would be one of our goals. It's the second-largest region in Latin America. Of course, yes, we will do our best in the next coming years to integrate aftermarket and fleet management in those regions, yes.
Okay, one final question. The borrowing rate on the $75.7 million paid in the purchase?
It will be around 2% interest rate per year.
Okay, great. Thank you very much.
You're welcome.
The next question is from Sasha Karim of Inflection Point Investments. Please go ahead.
Hi, guys. I've got a few questions. I'll just ask these one by one. First one is when you say the consolidated entity would have had 1.7 million subs at the end of 2017, does this include subs from the IRT OnStar partnership, or is that just from Ituran's own and Road Track's own subs?
It includes everything, of course. It includes the IRT subscriber, which, until the acquisition, we couldn't consolidate these numbers of subscribers, not us and not them.
Got it. When you said in the press release that Road Track has 550,000 subs, had it at year-end, is that because you're now including all the IRT subs in that figure? Because technically they were half yours and half theirs anyway. Do you see what I mean? Can you just clarify?
You're right. It includes the IRT subscribers. Right.
It includes 100% of the IRT subscribers at 50%?
Yes.
Right.
Yes.
Got it. Can you give us a rough breakdown of Road Track's subscriber base by product, i.e., by SVR, fleet management, connected car, IRT. Can you give us that breakdown or some more color?
Most of their subscribers are getting services of stolen vehicle recovery and driver applications. This is what I can say. Regarding the customer base or segment base, we are not providing exactly, but I can tell you that the IRT is not the major portion of their subscriber base. It's a minor share. It's a minor portion.
Got you. Can you also give us a breakdown of how their revenue, the $96 million, how that splits between hardware and services?
Major portion is for the services, but since it's based on OEM, the portion is, in Ituran, we have about 75% services and 25% hardware. In Road Track situation is a little bit different, but still a major portion of the revenues comes from services. Don't forget that when you have OEM contracts, you still are selling the hardware, which in aftermarket, what we do in Brazil, for example, is the comodato, meaning, we lease the hardware together as part of the services. This is the differences. To make the long story short, still major portion of Road Track revenues comes from services.
Got you. One more from me, then I'll cede the floor. Just thinking. Yeah. Okay. When we come to the increase in subs that you've had from 1.7 million at year-end to 1.8 million today, that obviously implies roughly 100,000 increase in subs. We would have expected that only 50,000 of that might be from Ituran existing core business. That would imply roughly 50,000 incremental on the Road Track subs, which has a much smaller base of subscribers of 550,000. What I would infer from that is you're both adding the same absolute number of subs, broadly speaking, but they're coming from a much lower base and therefore must be growing much faster than Ituran's core business. Would you concur with that?
Actually, we are rounding the numbers. It's not the exact numbers as you can see at the 1.8 million. Of course, once we will close, we will consolidate it with our future GAAP results. Of course, you will see the exact number.
Would you at least be able to confirm that the business is growing significantly faster than Ituran's current revenues?
Absolutely not. Again, I don't want to use the percentage as the measurement because, as you know, Ituran has much bigger subscriber base, and we have much bigger scales. In percentage, you may be right, but in numbers, the answer is not. Absolutely not.
Got you. Okay. I might have a couple more, but I'll cede the floor for now.
Okay.
If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. Please stand by while we poll for more questions. We have a follow-up question from Sasha Karim. Please go ahead.
Okay. I think maybe I'm the only person asking questions. A couple more from me, if that's okay. Firstly, can you talk to any cost synergies that you might be able to reap from this combination?
Yes, we of course, thought and what we believe that we can integrate and can enjoy in the future, mid and long term. One of the things is that Road Track has a technology which has experience and authorizations of OEM of car manufacturers. We think that we can use this technology in order to expand to other geographies. For example, just as an example, as you know, we started to do business in India in the last few months. One of the things that we believe that we will do in India in the future is a type of OEM contracts. Now we will be, I think, able with more confidence to have the technology, which has a lot of experience in the OEM business. Second is the vice versa.
As I said, regarding Mexico, is to expand Ituran aftermarket experience and aftermarket services and aftermarket know-how to the geographies that Road Track operates, which is again Mexico, Colombia, Ecuador. Together also we can offer more services and more application to other countries in the area, in Latin America. Also, on the side of the expenses, I believe that we can working together to reduce cost in buying electronic, buying hardware, buying products, reducing cost in manufacturing and in R&D. This is basically the main synergy that we see for the future.
Thank you. I think my final question would just be on dividends going forward. Because you will now be in a position of net debt, although fairly modest, may you be tempted to pay lower dividends or cut the dividend to pay off debt first before that dividend stream resumes?
As it now, this issue didn't change, and the board of director didn't get any decision to change the dividend policy currently. For the future, of course, few things can happen. We have a debt. We believe that we can serve the debt and maybe the same time serving the same level of dividend, but of course, we have to be more conscious. We will see after the closing and the beginning of consolidated, the results and the cash flow, and what the company will need. That's what I believe I will recommend the board to do. The future will say. Don't forget that also the debt, as I said, under the loan contract, we can pay back the loan every day immediately. Of course, we will continue to judge and explore opportunities based on the most valuable way of financing Ituran.
Great. Thanks for those comments.
You're welcome.
We have a follow-up question from Bret Jordan. Please go ahead.
Yeah. Just a question on the OEM relationships. You're obviously partnered up with Road Track. Is the OEM relationship that you're part of larger or smaller than the second one? A re there any terms to the relationships that we should be aware of, as far as expiration or renewal?
I would say that it would be fair to say that the OEM size is basically depend on the size of the markets, and no doubt that Brazil and Mexico are larger, and Argentina, Mexico, and Colombia are smaller. Also, it depend on the market share of the OEM player that we are working with. Basically, this is the differences. Again, Brazil, Mexico are, I would say, the two major markets, and the other four are smaller.
Okay. Is there any renewal term or expiration?
Yeah. The terms basically are changing between region and region, and it is important to explain. Some of the contract has one more year with automatic renewals for additional two years. Some contracts were renewals already for two years. This is an average time between, I would say, something around two to three years. Historically, most of the contracts were renewals, but it is also important to explain. Every time that condition change, the needs of the customer change. It includes changing in pricing. Sometimes the services are higher, sometimes the hardware is higher, sometimes is in a different model. What is the participation part of the car manufacturer? What is the participation of the dealer? There are various of contract and various of timelines.
Okay. Thank you.
You are welcome.
If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. Please stand by. We'll pull for more questions. 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.il. Mr. Sheratzky, would you like to make your concluding statement?
Yes. 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. We look forward to continuing a journey as a much larger entity with significant scale and larger potential value to unlock. As we are focused on completing the acquisition, we will be releasing our second quarter results slightly later in the quarter than we typically do, which will be toward the end of August. I look forward to speaking with you then. Have a good day, and thank you very much.
Thank you. This concludes the Ituran conference call. Thank you for your participation. You may go ahead and disconnect.