Ladies and gentlemen, thank you for standing by. Welcome to the Ituran Third Quarter 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 & Public Relations at 1-646-688-3559 or view it in the News section of the company's website, www.ituran.com.

Thank you. Good day to all of you, and welcome to Ituran's conference call to discuss the third quarter 2020 results. I would like to thank Ituran’s management for hosting this conference call. With me today on the call are Mr. Eyal Sheratzky, the Co-CEO; Mr. Udi Mizrahi, Deputy COO and VP Finance; and Mr. Eli Kamer, the CFO of Ituran. 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 questions-and-answer session. I would like to remind everyone that Safe Harbor in the press release also covers the content of this conference call. And 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. I hope you and your families are continuing to stay healthy and I wish all those who have been impacted by the virus a fast recovery. I do hope that with the recent progress towards a vaccine we can soon look forward to a post-COVID world. We are happy with the improvement in our results in the third quarter and this is down to our effort to overcome difficulties in many of our geographies due to the ongoing pandemic. We are also pleased that we are looking at our revenues in local currencies, our subscription fee revenues were at similar level to those of the quarter last year, demonstrating the stability in the Ituran business model. On the profitability side, the steps we took earlier this year as the effect of the pandemic became apparent, enabled us to reach similar operating profit and EBITDA levels compared with last year when excluding ForEx impacts. We reported an EBITDA of $15 million. I will remind you that we had expected third quarter EBITDA to be similar to that of the previous quarter, which was $13.9 million. So I’m happy that we are being successful in mitigating the impact of the pandemic on our profitability. On the cash side, we generated cash flow from operating activities of $13.6 million. This bring our business back to a net cash position for the first time since our acquisition of RoadTrack two years ago. Our ability to remain profitable and cash flow positive throughout this global crisis, demonstrates the overall resilience and stability of our business model. Our stability is built on our subscriber base, which remains strong, with close to 1.8 million subscribers, where by 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. During the quarter, our after-market business returned to growth for the first time since the pandemic started and we added 13,000 new subscribers in the quarter.

Thank you, Eyal. You can also refer to the press release we published today with our results. Revenues for the third quarter of 2020 were $60.3 million, a decrease of 13% compared with revenue of $69 million in the third quarter of 2019. In local currency terms, third quarter revenues declined by 6% year-over-year. I also note that revenues increased by 13% over the period quarter. Revenues from subscription fees were $44.5 million, a decrease of 12% over third quarter 2019 revenues. In local currency terms, subscription fees declined by only 2% year-over-year. The subscriber base amounted to 1,752,000 as of September 30, 2020. This represents an increase of 1,000 subscribers net over that of the end of the period quarter. During the quarter, there was an increase of 13,000 in the after-market subscriber base and a decline of 12,000 in the OEM subscriber base. Product revenues were $15.9 million, a decrease of 15% compared with that of the third quarter of 2019. The geographic breakdown of revenues in the third quarter was as follows: Israel, 52%; Brazil, 24%; rest of the world, 24%. Operating income for the quarter was $10.5 million, 17.5% of revenue compared with $11.9 million, 17.2% of revenues in the third quarter of last year. This is a decline of 11% year-over-year. In local currency terms, the operating income would have been similar to that of the third quarter 2019.

Ladies and gentlemen, at this time, we will begin the question-and-answer session. The first question is from David Kelley of Jefferies. Please go ahead.

Hi, good morning, and thanks for taking my questions. Maybe one to start with your cost savings, some of the initiatives you noted in the second quarter, I think, actions included salary reductions, payment conditions with suppliers. Can you talk about kind of the impact to the third quarter, just curious given your nice profit recovery on a sequential basis here?

Hi, yes. So, it’s important to mention that during Q3 in the old geographies, we start increasing back salaries and contracts, because we saw, as you could see, that we grow our sales. Once we have the market open, again, of course, the numbers are not the same as before the pandemic, but are growing compared to Q2, when most of the countries that we are operating was under very tough lockdowns. And since this was the situation after the lockdown, we had, for example, to bring back more installers. Our service people has to work 100% of the time. So practically, during Q3, we increased back major portion of the savings, first.

Okay. That's super helpful. Yes, I really appreciate the color there. Maybe asking, I want to follow-up on kind of the conversation around the ongoing uncertainties that you noted into Q4. Just curious as it relates to the after-market trajectory and the visibility there, kind of saw a nice return to growth for that business in the third quarter. With the ongoing uncertainty comment, is that largely tied to the OEM business, just curious if you're having some better visibility at this point to sustainable after-market growth and that historic levels that you've generally seen over the years?

Okay. So there’s – we – first of all, we have visibility that the business model allow us to have visibility. But in order to be conservative, we know that this visibility at this time have some, I would say, more risky to provide guidance or to provide a potential specific range on numbers. So this is the main reason. If – and just to give you some more example, lockdowns in countries are stopping sales of cars, which is – it’s an important driver for our sales. So, those lockdowns, two months ago, everybody said that in Europe, for example, we are not operating in Europe. But just as an example, the leader said, we will never go to another lockdown, because it's not there, it's not everything, but I don't know if it's political, I don't know if it's because people are hysteric. Major countries in Europe are in lockdowns, this is the situation. Now in Latin America, for example, there are no lockdowns, not tough lockdowns when it was in April and May, but I wouldn't bet, that it won't come again. So to come today and be only happy with the results of Q3, telling you that it is going to be ahead for the next year, I want to believe, we have our internal assumptions, but I prefer at this time, specifically be more conservative, not rush with guidance, not rush with expectation.

Okay, great. Thank you. I really appreciate you taking my questions.

The next question is from Ethan Etzioni of Etzioni Portfolio Management. Please go ahead.

Yes. Happy to see the improvement. Looking at the world past the vaccine, is it fair to assume that this improvement trend will continue? That's one question. The second question is, we're seeing other software companies going through a model of recurring revenues as opposed to one-time revenues, are you also doing that?

For your first question, I think that we rush to ask a doctor. No, I'm just kidding. But nobody really knows what vaccine, when the vaccine will be. What will be the influence of the vaccine? If you -- if all of us want to be optimistic, as the Prime Minister of Israel, Benjamin Netanyahu, so no doubt that the Corona is soon behind us, all of us want it is a very large crisis. So I don't have answer. Once there will be no Corona effect, and the economy will recover themselves, I don't know somehow, in the short and midterm, of course we will, I believe that the assets of Ituran in the business model, in the market that we are operate, in our brand and marketing will allow us to continue from the point that we were a year ago, but now again, we have to be very defensive and conscious about the situation. Regarding the second question, if I understand it correctly, it was main assets. And every morning, this is the only assets that we want to keep is a recurring revenue model. This allow us to create operating leverage model, this allows us to have a very, very secure revenue portion every quarter as you can see. Of course, there is some volatility during this time, but all around this volatility influence is very low. It's mainly influence on our growth, but on our basic numbers, basic assets, basic revenues, basic profits, as you can see, I think we keep it quite impressive compared to other industries and other business models in this time.

Okay, and one last question. The holding in SaverOne is that in market that appears in marketable securities or cash equivalents or where do we see that?

You can see it in investment, in the market, in the, it is profit as also the effects of this is appearing on the finance and the asset itself investment itself there is a separate line investments in marketable securities.

But we have to…

Is that at market value or is that at cost?

It’s market value and this is the part of the things that I would mention here that this is something that may create volatility, that this quarter it was on our benefits, but again, some other quarters it can be with a bad influence, but this is not in our hands.

Okay, thank you.

The next question is from Asaf Barel of Oppenheimer, Israel. Please go ahead.

Hey, guys, congrats on a pretty solid quarter. You had mentioned at the top of the call on strength in the U.S. subscribers. I know you don't talk about this topic too often, so is there any kind of color you can give us any where specifically you would want to point us?

I think that one of the things that we've been surprised by the USA operation is that compared to the other geographies, including Israel and Brazil, and of course, the other markets is that the Corona, the pandemic effect in the U.S., and specifically in our business was very low, if at all. And this allowed us to show in the states the same numbers of subscribers or the same growth of subscribers as we did last year. So, overall it contributed positive net growing subscribers. And the main reason is that our segments that we are operating in the U.S. is what they call a Buy Here, Pay Here, those are dealers, which support or have their own finance company, and subprime customers taking loans from the dealers or lease the cars from the dealers. And one of the condition is that they will have unit to recover the car. During this period, we assume and we see that the need for this kind of finance companies and the needs for this kind, and the demand for this type of population is growing and it supports our growth in the U.S.

Okay, that’s very interesting. Okay, I appreciate all the detail. Maybe more of a modeling question, R&D was markedly lower this year. We assume there is obviously some COVID impact here, but it's even much lower than 2Q. Anything one-time in nature here, how should we think about that line item on a go forward basis?

Actually, the main reason for the decrease in the R&D is coming from a reclassification, based on the recommendation of our auditors between the R&D depreciation and between the operational costs. So basically, it's we would measure it the same as before the R&D would have been more or less the same as the second quarter.

Okay, now, where did you say that cost was being funneled? Is that the G&A?

No, no, no, it's coming from the Telematics Services.

You're saying that's in the cost of revenues of Telematics Services, yes?

That’s correct.

Okay, yes. So maybe, yes. Okay. Okay, anyway then that we should be modeling a little bit differently? Should I be just be thinking about whatever contribution was in R&D just moving up to the cost of revenues, meaning it's going to look like there's a bit of a kind of pressure on that margin, when it's not really the case?

I think it's going to be more or less expense -- the third quarter will be more or less representative, maybe a little bit higher as it was a little bit, some of it was retroactive for the second quarter, but more or less it’s the same level.

Okay, okay. That's helpful. Okay, yes. So, I guess, I know you haven't made budgets and everybody wants for you to give a clear confidence, so when you can't. So color would be more helpful. How should we be thinking about operating expenses for 2021? You had mentioned the longer term cost reductions or restructuring that you took in the second quarter. I just kind of want to understand how when some of the salary reductions kind of led off by the end of the year, how -- what costs really look like on a normalized basis?

As I said, Q3 quite represents a cost which are very close to the highest point, because we raised salaries, we raised costs, as I said, we start paying, for example, bonuses for all the sales departments around the world, because we are selling, the markets are open. Still of course, we keep some costs, I would say some cost reduction on compensation for management teams, which I believe that if the situation that we are facing now, meaning the markets are open, I assume that during Q1, 2021 we will back to almost similar cost or we will increase some portion of the cost. But as I said, the cost reduction divided for two. Firing costs, which this will not come back, and we fired some hundreds of people around the world that this cost will not back so mean, we will continue to save it. But the other side of the cost reduction, which is reducing salaries, this probably as much as we will continue with this trend of our continue to sell, continue to grow subscribers, continue installing more and more OEM cars will be back and we should expect very few percent, by the way very few percent of our cost increasing with a correlation to growing the revenues, of course.

Okay, great, that's helpful. As the company has kind of shifted back into a net cash position, which is great to see, although pretty expected, the financing cost line, I know that it's obviously been made, kind of, a little bit difficult to read by some of the recent impairments and gains, but how should we be thinking about that on a go forward basis? I know you have some hedging costs involved.

We expect that it will not change and we will not have to do a cost in the future, but as it looks now, it is our confidence that this is the case, and because of this, we didn't do it again. I believe that we will not do it again.

Regarding the financial costs, again we have, as you can see in the balance sheet, we have the loans, and the loans supposed to, we are paying them until 2024. So until then, of course the company will continue to have financial expenses related to that.

Okay, fine. Last question on my end, I know that there hasn't been any final decision made yet. But just given all the signs of stabilization we're seeing across the business, whether it be, the profit levels or be it subscriber levels, which are finally up on that basis, quarter-over-quarter, how are you guys thinking, at least as at this point about shareholder return and dividends? Because the yields, even if you do this returns and maybe the $20 million level that you've had historically, would be pretty significant. So I do think it's pretty important for investors, how they should be thinking about it?

There is no, we can see our, first of all our cash, cash positive that we performed, Q2, Q3. Hopefully this will continue. I think that we need a little bit more time to feel more confident. As I said, we are very conservative and the Board is very conservative. Maybe it requires a little bit more attention from investors. But as we did more than 15 years, when we're making positive cash and when the company is confident and we don't see a specific goal to keep excess cash, we always pay dividend. I think that as a management, we see that it's something that in the close future, we will ask the Board to do it. Of course, it depends on the Board, but I assume that as soon beginning of next year, we will push the Board to vote for, they can pay dividends and are going for a buyback, et cetera. And I must add again, that one of the values that we are holding here in Ituran is that since there is a, still a large portion of management team, hundreds of those at voluntarily together with the company and support the company these days by decreasing their salaries and we have suppliers of many years which they’re also we find it a little bit, we find a correlation between this and paying dividend to shareholders once we feel confident. And we will back all the employees and the suppliers to be in a position that the company is confident in a good shape to go to the next level or we feel that we overcome the pandemic effect on the business, it will come together and we will do it.

Okay great to hear. Thank you for all the detail.

The next question is from Sasha Karim of IPI. Please go ahead.

Thanks for taking my questions. I've just got two left. The first one, can I just clarify? So in the third quarter, you had a one-off cost for redundancies or restructuring and you didn't back this out from the EBITDA number you gave, so could you give us a feeling for how big it was?

Yes, you're correct.

And can you give us the feeling was a $1 million or $0.5 million or something like that?

No, it’s not. First of all, it's not something material; we're not talking about millions of dollars of firing costs in the third quarter. But what we presented, we didn't exclude this.

Yes. And my next question. Thank you. And then my next question would be regarding UBI, we're seeing some companies now doing IPOs in the U.S. that are essentially UBI insurance-based companies getting very high valuations. And obviously, there's a part of it around, which has a similarity to that your UBI division, which is still small, but growing fast. Could you maybe just give us a bit more detail about exactly what the IP that UBI division has? And by that, I mean, are you mainly providing just information on Telematics to the insurance companies or are you also heavily involved in the algorithm which prices the drivers risk level?

So first of all, I don't know what companies you're talking about. There are companies that provide insurance in the states that mix with some algorithm that know to measure the risk of the customers, it is not what we do. We provide a Telematics unit and software and algorithm that to the insurance companies that provide a real-time driving behavior of their insurers. And based on this, they know how to price the premium. We are not involved with the pricing of the insurance. We are not involved on the insurance portion. What we give for example, if this is a fleet, for example, that want to know how the driver behaves, which this with something we do many years, it's almost the same technology, the same IP and the same software, but the insurance companies now we integrate it into their system, they get kind of results of how the driver is driving, and they choose with their algorithm what price they should do. So it's a little bit different. I believe than what you mentioned.

Yes, it's definitely a bit different. Just wondering, are you actually providing the insurance companies with some kind of a score, this driver is safe or unsafe or are you just providing raw data?

No, no, we provide a score, but I must say again to be clear, the system that we provide a score, but currently since this is the first year and insurance companies in Israel, when we started as you remember, less than a year ago, they want now only one criteria of the entire data, which is mileage, how many mileage the driver is driving. The system or the unit and the software can allow them to get score and much more information, but they want it for the first stage for educating the market to integrate it with their marketing campaign, they use only the mileage usage by the customer. Okay, for this stage.

Yes. And just thinking about the other question in the U.S., given that this type of product is being taken up in the U.S. given that you have technology for it, why would you not try and sell this product into the U.S. market?

First of all, we are in the U.S. many years The business or the segments that we approach are first of all stolen vehicle recovery, stolen vehicle recovery for the mass market in the U.S., based on insurance and car theft rate, as we saw as no market, there was company called Logic. Actually they were sold to but is not, I would say, it's not the business anymore, because insurance companies in the U.S. are not suffering from car sales. So recovery, it's not the market in the U.S. for us, as we see it again, compared to more virulent market like Latin America, Israel, et cetera. Second is fleet management. Fleet management, we provide services of fleet management in the U.S. and the competitive landscape is very, very tough. Regarding the UBI, we started to show it to some insurance companies. As long as I remember, from some discussions that we had, I must say it was more than a year ago. Insurance companies are not open to use UBI. Again, the UBI I would say something which is more competitive to UBI it is the companies which are digital insurance companies, something very new, those companies provide insurance and they provide all the algorithm including the usage with a algorithm to their customers, maybe they use some subcontractors. It's not us. But we try to offer the UBI, our UBI solution in the U.S., and we didn't see open an interest from the insurance companies in the U.S. from the traditional insurance companies.

Thank you.

The next question is from Tavy Rosner of Barclays. Please go ahead.

Hi, this is Peter Zdebski on for Tavy. Congratulations on a strong quarter. Great to see the sequential subscriber growth. I'm trying to think about the sustainability of the product revenues. Could you maybe dig down a little on the sequential growth and product? I was just having a little trouble reconciling the drivers of that given the new car sales challenges that they still face in Brazil and the more modest subscriber growth number.

Mainly what you see of Q3, we have to maybe put more color now. We sell hardware mainly in the OEM countries let's call it and also in Israel. The Israeli market during Q3 were soon after the lockdown, so the sales of cars in Israel and the aggressive marketing campaigns and the car importers and the car dealers in Israel, they sold and installed many cars. There was a vacuum of two months. You have to understand what happened in Israel in March and April, they didn't install. They couldn't open their garages. But they had to give cars to people that bought it before the pandemic. So soon after we had in Q3 almost two quarter of our sales of hardware to the car importers in Israel, so I wouldn't say it is a shift, but it's practically it's like a shift. So this number was high for Q2, Q3, sorry. I assumed that it will go down but not as it was in Q2 because there is no lockdowns anymore. Also during the lockdown in Q3 in Israel, by the way, the car dealer garages or installation points were open. It was a little bit different lockdown. So the vacuum is not the same. So I believe that the average between Q2 and Q3 of sales, this is the right number of sales in Israel in the quarter.

That's very helpful color. Thank you. And then maybe I wanted to ask about Brazil. Earlier this year, you had overhauled the market the go-to-market strategy there. Is that still helping to boost the retail figures all else equal?

Look now, first of all, yes, it's helped us then. There was a reshuffle of everything because of the pandemic. But one thing that I can say now is and I said it during my speech at the beginning, is that we had very high negative net new subscribers in Q2. And in the end of Q3, we've come to a point which it's almost not negative, I mean, the trend is very, very strong, very, very positive, strong. So this is the situation as long as again as Brazil will be at the same situation as now I believe, that we will change from a negative to positive net subscribers in Brazil very, very soon. Hope it will happen in Q4.

Great, thanks. Thank you for taking the 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 www.ituran.com. Mr. Sheratzky, would you like to make your concluding statement?

Yes, on behalf of management of Ituran I'd like to thank you, our shareholders for your continued interest and long-term support of business. I do look forward to speaking with you next quarter and hope that we will see better time by then. Have a good day.

Thank you. This concludes the Ituran third quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.