Ituran Location and Control Ltd. (ITRN) Q4 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Ituran Fourth Quarter and Full-Year 2017 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. [Operator Instructions] 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 1-646- 688-3559 or view it in the News section of the Company's Web site at www.ituran.co.il. I will now hand the call over to Mr. Gavriel Frohwein of GK Investor Relations. Mr. Frohwein, would you like to begin.

Thank you, Operator. Good day to you all, and welcome to Ituran's conference call to discuss the fourth quarter and full-year 2017 results. I would like to thank Ituran's management for hosting this call. With me today on the call are Mr. Eyal Sheratzky, CEO; Mr. Eli Kamer, CFO; and Mr. Udi Mizrahi, VP of Finance. Eyal will begin with a summary of the quarter's results followed by Eli with a summary of the financials. We will then open the call for the question-and-answer session. I'd like to remind everyone that the Safe Harbor in the press release also covers the contents of this conference call. And now, Eyal, would you like to begin?

Thank you, Gavriel. I'd like to welcome all of you, and I thank you for joining us today. We are pleased with our performance in 2017 as well as our fourth quarter results. We showed another quarter of solid subscriber growth despite Q4 typically being seasonally the slowest quarter of the year. At the end of the year, we had 1.16 million subscribers, adding 103,000 subscribers during 2017. And that excludes the additional hundreds of thousand of subscribers we've been adding through IRT in Brazil and Argentina in the past two years. Looking ahead, we expect to grow our subscriber base with a similar net addition on an annual basis as we have done in the past year. Our subscriber growth led to record subscriber revenue amounting to almost $117 million in 2017, up 20% over the last year. We also reported a solid level of profit for the year, and net income for 2017 was at a record $43.8 million, up 36% over the last year. A strong contributing factor this year to our net profit versus last year was the contribution from our share in affiliates, which this year provided us with additional income of $8.5 million versus an expense of $0.4 million last year. This amount primarily includes a capital gain due to Ituran's investments in Bringg, net of our portion of the loss in Bringg's results, as well as the contribution of Ituran's joint venture in Brazil and Argentina, Ituran Road Track. As you know, IRT, Ituran Road Track, is a joint venture that we have already been successfully operating for two years, which is 50% owned by us. IRT has an OEM agreement with one of the major and global auto car makers in Brazil to provide their customers with telematics services on various new car models they sell for the first year. I note that as a 50% owner we do not consolidate IRT's results into our own, including the subscriber numbers. IRT continues to perform in line with our expectations, and we are bringing new subscribers constantly to this service. IRT has the potential for Ituran to bring additional hundreds of thousands of sales using our services in Brazil and Argentina. In fact, it positions us as the clear market leaders in Brazil. Earlier, in 2017, in India, together with Lumax Auto Technologies we established a joint venture for sale of telematics products and services to the Indian automotive industry. With over 200 million registered cars in the country the market potential for Ituran is phenomenal in India, and is in its infancy. We believe that over the coming years we can establish ourselves as market leaders together with Lumax. And I believe we can achieve results similar to what we have achieved in Brazil. I would also like to, a little about our contacted car activities. After a number of years in R&D, as we move through 2018, we are beginning to reap the fruits of some of our investments in the connected car technologies we have developed. In Israel we have a program with Toyota, called Toyota Connect built on the Ituran Connected Car solution which we launched in 2017. Since the launch with Toyota a few months ago we have already gained some thousand subscribers using our solutions, and we are gaining traction quickly. So far we launched with Toyota, and we are now in discussions with other car importers in Israel as well as other car manufacturers internationally. Another interesting aspect of our results was the capital gains from our investments in early stage companies in 2017 that I mentioned earlier. Already, over the past few years Ituran has been actively seeking out and investing in some of the companies which are building tomorrow's mobility technology and solutions. We see ourselves as a leader in SVR and vehicle telematics. With over a million subscribers globally we are well positioned to make a significant contribution in what is very exciting, emerging mobility technology space. To date, we have invested in three very promising early stage mobility technology companies, each of which we believe has the strong potential to become a future leader. Bringg is one of those companies which is currently at the most advanced stage, having been founded in 2013. It is a software as a service next-generation supply chain and deliveries technology platform for enterprises. During 2017, the reported capital gains from our investments in Bringg, totaling $4.6 million, an amount which was offset partially by our share in Bringg results. We are currently the largest shareholders of Bringg with around 25% of the equity. This capital gain is an example of the initial fruit of success from early stage investments that we have made. During March 2017, we also made two additional investments in two Israeli startup companies, both in the transportation sector. One of which is a mobile app, and the other a machine vision company. And these investments amounted to about $1 million in total. Earlier last year, we also invested and partnered in the launch of the DRIVE Innovation Center & Startup Incubator in Tel-Aviv to promote the development of smart mobility technology. Our partners in this venture are Mayer Cars and Trucks, as well as leading car companies, Hertz, Honda, and Volvo. Our involvement will gain us early access to some of these most advanced ideas and technologies that are born within innovation center. I see tremendous importance in the investment and development of new technologies that will drive Ituran in the long-term to the forefront of technological advancements in an ever-changing and now fast developing market. In summary, we are pleased with our performance in 2017, and we look forward to continued strong performance in 2018 and beyond. I will now hand the call over to Eli for the financial review. Eli?

Thanks, Eyal. Revenues for the fourth quarter 2017 were $61.3 million, up 22% when compared to revenues of $50.4 million in the fourth quarter of 2016. Revenue breakdown for the quarter was $44.5 million coming from subscription fees, a 19% year-on-year increase. Product revenues were $16.8 million, which were a 29% increase over the same quarter last year. The geographic breakdown of revenues in the fourth quarter was as follows: Israel, 52%; Brazil, 39%; Argentina, 6%; and United States, 3%. Gross margin in the quarter was 49.8% compared with the gross margin 52.4% in the fourth quarter of last year. The gross margin in the quarter on subscription fees improved to 67% compared with 65.5% in the same period last year. The gross margin in the quarter on product was low at 4.5% compared with 14.9% in the same period last year. The lower margin in product during the quarter was due to the mix of the product sales in the quarter. Operating profit for the fourth quarter of 2017 was $14.7 million, an increase of 13% compared with an operating profit of $13 million in the fourth quarter of 2016. EBITDA for the quarter was $18.2 million, an increase of 13% compared to an EBITDA of $60 million in the fourth quarter of 2016. Net profit was $9.8 million in the quarter or fully diluted EPS of $0.47. This is compared with a net profit of $9.3 million or fully diluted EPS of $0.44 in the fourth quarter of 2016. Cash flow from operation during the quarter was $14.7 million. In terms of our full-year 2017 numbers, revenues for 2017 reached a record of $238.5. An increase of 20% compared with revenues of $199.6 million in 2016. Neutralizing the affect of a change in currencies between the U.S. dollar versus the various currencies in which it Ituran operate; compared with their levels in 2016, Ituran would have shown a 13% increase in revenue versus last year. Revenue breakdown for the year was $169.8 million coming from subscription fees, up 20% year-over-year. And product revenues were $68.8 million, up 19% year-over-year. Gross margin in the year was at 50% compared with 51.1% last year. Operating profit for 2017 was $56.5 million, up 18% compared with an operating profit of $48 million in 2016. EBITDA for the year was $70.1 million, an increase of 17% compared to an EBITDA of $59.6 million in 2016. Sharing in affiliates net was an income of $8.5 million in 2017 compared with a loss of $0.4 million last year. This includes a capital gain of $4.6 million due to additional round of investments that were made in Bringg. And this was offset partially our share in Bringg's results. Net income in 2017 was a record $43.8 million or fully diluted earnings per share of $2.09. This is an increase of 36% compared with a net income in 2016 of $32.1 million or fully diluted earning per share of $1.53. Cash flow from operation for 2017 was a record 53.9 million. As of December 31, 2017, the company had net cash of $40.4 million or $1.93 per share. This is compared with $31.5 million or $1.5 per share in December 31, 2016. For the fourth quarter, a dividend of $5 million was declared. For the full-year of 2017, the total dividend declared including that of fourth quarter 2017 was $20 million, representing 46% of the full-year net income. The dividends record date is March 27, 2018, and the dividend will be paid on April 11, 2018 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 session. Operator.

Thank you. Ladies and gentlemen, at this time we'll begin the question-and-answer session. [Operator Instructions] The first question is from [indiscernible]. Please go ahead.

Congratulations on a great year. I wanted to ask about the finance charge on the $2.1 million on the fourth quarter.

As we mentioned in the press release, in the Q4 of 2017 we received and we paid a tax assessment from the Brazilian tax authority. Some of the amount was related or linked to an interest, so it is appearing in the finance expenses.

I see. So this is of a one-time nature, I assume.

That's correct.

Okay. And going back to the profit in affiliates, so if I neutralize the $2.3 million capital gain we're left with $0.7 million, so that's more or less the current quarterly run rate at the moment.

As you know, for commercial reason we cannot elaborate about the performance on the results of the IRT joint venture. But other than the capital gain of the $2.3 million in Q4, of course Ituran is also taking its share in Bringg losses. And this is something that we do not elaborate at this point.

I see. Okay, thank you very much.

The next question is from Charles Elliot of Inflection Point. Please go ahead.

Hi, congratulations on those results. A question about Bringg, did this markup result from a new investment round to your original investment was worth more, or how did it occur?

Yes, actually Bringg made a round of investment of $10 million. Under evaluation we choose a much -- a bigger than our investment was.

Okay, thanks.

[Operator Instructions] The next question is from Lena Rogovin of Chardan Capital Markets. Please go ahead.

Thank you. Good afternoon. Congratulations, great results. My question is about subscribers' geographical breakdown. Is there something you can provide now or this would wait for the 20-F? Thank you.

We'll have to wait for the 20-F. This is our practice for the rest of our historical numbers.

Okay, thank you.

[Operator Instructions] The next question is from Isaac Shapiro [ph]. Please go ahead.

Yes. If I understood you correctly, stripped of changes in currency valuations your growth in operating income -- net operating income was about 13% per year. Is that kind of the run rate expected going forward?

You're right here regarding the 13% over the last year. And we do not give any guidance going forward, so for us it's not something that we can provide at this point.

Okay, thank you.

The next question is from Patrick Buchanan of Fidelity. Please go ahead.

Hi, guys. Nice results. I was wondering if you could elaborate on the wireless products, why the gross margins climbed there, and what's also driving the strong top line growth there?

So, actually this is something that it's -- we always having some volatility in the mixture of the product lines. Sometimes, and as you saw, we developed in the last few years some other applications and things which are related to connected cars solutions. Practically the price or the margins for this hardware in Israel start with low margins in order to attract more and more users and subscribers. So it appears on the sales of the products part of our P&L. But on the other end, you can see that our service margins are growing, and this is our main goal in our operating leverage business model.

Okay. And specifically what kind of products are these?

For example, the connected car, as I mentioned, with Toyota in Israel which become more and more we are penetrate more and more through Toyota models with it. And the cost for us and the sales price are more low. Second, also there is some different timing by selling or creating some sales activity to specific models of car in the end of the year, and things like this. This is something that are less -- has visibility regard the margins months over months. But again, I say that we are reacting upon request of mainly the car dealers, the car importers in Israel and some agencies in order to continue growing our subscribers. So the hardware is part of the tool to attract subscribers. So sometimes we give up some of the margins or do we have some costs which are higher than other specific units.

Okay. And the product with Toyota, what is that solution offering for them?

It's offering a connected car. You get first from any vital sensors in the car through multimedia, through satellite, say radio, through a screen with specific; I would call it, kind of an Ituran app store. And all of these attach to the SVR or to accident notification or to UBI, it's various of applications that the car driver can choose based on this platform which Toyota integrated in the -- I would say, not in their plans, but even their assembling places to the car.

Okay. And on the prior question about the finance expense in the fourth quarter, was that also liked to the higher tax rate in the fourth quarter? Maybe, what was the total net impact of --?

That's correct. The tax stayed around -- was around $3 million, some of it was reflected in the tax expenses, and some of it was reflected in the finance expenses.

Okay. So the total amount related to the Brazil charge was how much if you include both?

Brazil and Israel, together both of them, it's approximately $3 million.

Okay, all right, great. Thanks a lot, I appreciate it.

[Operator Instructions] 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 Web site at www.ituran.co.il. Mr. Sheratzky, would you like to make your concluding statement.

I would like to thank all my employees and my team for their hard work and effort in 2017. 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 and pull in some air.

Thank you. This concludes the Ituran Fourth Quarter 2017 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.