Ladies and gentlemen, thank you for standing by. Welcome to the Ituran First Quarter 2021 Results Conference Call. [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 & Public Relations at 1-646-688-3559 or view it in the News section of the company's website, www.ituran.com. Now I would like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, 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 first quarter 2021 results. I would like to thank Ituran's management for hosting this conference call. With me today on the call are Mr. Eyal Sheratzky, Co-CEO; Mr. Udi Mizrahi, Deputy CEO and VP Finance; and Mr. Eli Kamer, 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 questions-and-answer session. I would like to remind everyone that the safe harbor in this 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. We are very pleased with the results of the first quarter, which outperformed our expectations. We demonstrated that Ituran is well on the way to full recovery and renewed growth. This is despite ongoing impact from the pandemic, which still affect many of geographies in South America in which we operate. Not only have we maintained our profitability and strength, we grew our subscriber base at the highest rate we have seen for many quarters, at 20,000 net adds, while the OEM segment is stabilizing. The strength was driven by the aftermarket segment, which grew at remarkable 25,000 net. This is a rate which is nicely ahead of our typical range of between 15,000 and 20,000. We are very happy with this strong increase, and it is promising sign for potential growth in the subscription revenues over the many quarters ahead. For the first quarter of 2021, revenues were $67 million, 6% ahead of those of the fourth quarter and just 1% behind the $68 million reported in the first quarter of last year, prior to pandemic. All this demonstrated Ituran is now recovered to its former strength and is primed for renewed growth in the quarters ahead. On the profitability side, as you know, over the past year, we carefully managed the business, which allowed us to maintain our cash generation and profit. As we return to the growth trend in the coming quarter, we expect that the operating leverage inherent in our business model, which enable us to add subscribers on a more or less fixed operating base, will allow us to see the top line revenue growth from the increase in subscribers, drop down to the bottom line. From the profitability standpoint for the quarter, we reported EBITDA of $17 million, our highest level since before the pandemic. Again, it is a strong statement to the overall resilience and stability of our business model. On the cash side, we had first quarter cash flow from our operating activities at $9.2 million, bringing our cash and marketable securities position to $70 million. I'd like to go into more details on the various parts of our business. During the quarter, as I said, our aftermarket business returned to above its normal growth rate of 25,000 new net subs. The regions that were particularly strong were Israel and the U.S. It is worth mentioning that in Brazil, even though the situation with the pandemic still remains tough, we are pleased with the stabilization in the aftermarket subscriber base. I note that in Q1, Israel had its highest level of new car sales in history, an increase of 18% year-over-year increase. This is another sign that 2021 has started well in our key geographies. Many countries in South America are still highly impacted by the virus and the economies remain weak there, but we are seeing improving trends in Brazil and in Mexico. During the quarter, we saw an overall decline of 5,000 OEM customers. This decline has slowed from last year, and it's moving in the right direction. One of the major goals of the acquisition of the OEM business was to harvest synergies across our entire business and in all the various geographies, cross-selling and replicating successful business model and sales from 1 region to another. We are very much in the process of doing this now and tapping our large subscriber base of almost 1.8 million, regularly paying customers to bring them new and valuable telematics and related services by which we can organically grow our sales. And in summary, overall, we are pleased with our start to 2021. Ituran has resumed its growth trend and a strong increase in subscriber base sets us up well for the coming quarters. And I will now hand the call over to Eli for the financial review. Eli?

Thanks, Eyal. I note that the results I present will all be on a 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. Revenues for the first quarter 2021 were $67.4 million, a decrease of 1% compared with revenues of $68.4 million in the first quarter of 2020. In local currency terms, first quarter revenues were at the same level as those of the first quarter of last year. Revenues from subscription fees were $45.6 million, a decrease of 7% over first quarter 2020 revenue. In local currency terms, first quarter subscription fees decreased by 4% year-over-year. The subscriber base amounted to 1,788,000 as of March 31, 2021. This represents an increase of 20,000 net over that of the end of the prior quarter. During the quarter, there was an increase of 25,000 in the aftermarket subscriber base and a decline of 5,000 in the OEM subscriber base. Product revenues were $21.7 million, an increase of 12% compared with that of the first quarter of 2020. The geographic breakdown of revenues in the first quarter was as follows: Israel, 52%; Brazil, 22%; rest of world, 26%. Operating income for the quarter was $12.8 million or 19% of revenue, an increase of 27% compared with an operating income of $10.1 million or 14.7% of revenues in the first quarter of last year. EBITDA for the quarter was $17.1 million or 25.4% of revenue, an increase of 12% compared with an EBITDA of $15.3 million or 22.4% of revenues in the first quarter of last year. Financial expenses for the quarter was $1 million compared with the financial expenses of $700,000 in the first quarter of last year. Net income for the first quarter of 2021 was $8.3 million or 12.3% of revenues or earnings per share of $0.40. This is an increase of 30% compared to a net income of $6.4 million and an earnings per share of $0.31 per share in the first quarter of 2020. Cash flow from operations for the first quarter of 2021 was $9.2 million. As of March 31, 2021, the company had cash, including marketable securities of $70.1 million and debt of $41.8 million, amounting to a net cash of $28.3 million. This is compared with cash, including markable securities of $78.8 million and debt of point $54.5 million, amounting to a net cash of $24.3 million as of December 31, 2020. For the first quarter of 2021, a dividend of $3 million was declared. This is in line with the Board's current policy of issuing at least $3 million on a quarterly basis. And with that, I'd like to open the call for the question-and-answer session. Operator?

The first question is from Tavy Rosner of Barclays.

This is Peter Zdebski on for Tavy. Congratulations on the quarter. You had another very strong quarter in hardware, both on sales and margins. I recall last quarter that was related to some inventory restocking. Could you give some color on whether that continued in Q1. And then as a follow-up, have you or your customers have been impacted by any supply chain shortages this year that we should consider for the outlook?

Yes. Usually, Q1 is very strong in terms of the OEM purchasing process since in Latin America, the OEM plants are -- it's the last quarter of the year. This is how they consider it. So they are increasing their volumes and their inventory. So this is typically, I would say, the highest season from the OEM purchase point. Also, in Israel, as I mentioned, Q1 was the highest ever of sales of new cars in Israel, which, of course, create correlation between purchasing the hardware and install it. So it was strong. And it's not a onetime, but it shows a little bit of seasonality in hardware sales for us. Usually, Q2 and Q3 are a little bit weaker than Q1 and Q4. But as you remember, still, the contribution of hardware sales to our overall profit is lower than, of course, the service revenues, but still, this is the reason for Q1, yes.

The next question is from David Kelley of Jefferies.

Two for me, maybe to start, the step-up in the U.S. aftermarket subscriber business. Just hoping you could provide a bit more color, the drivers of the contribution there? And maybe remind us of the size of your U.S. business and kind of how the competitive landscape shapes up there would be great.

Okay. So just to remind everyone that our main segment in the United States market is what they call the buyer payer, which is -- represent financing people to buy the cost in the dealers' shops. And in some events, those finance dealers would like to control payments of their customers, and they're using the systems like our systems and others in order to control payments. And during last year, I think that after a while our solution showed a very, very excellent application solution, very reliable, and we succeeded to increase our penetration to additional master dealers in the United States, a trend, which I believe will continue. We are now putting more resources in marketing and sales because we found that we have an advantage, which we have to turn to sales. So I think that we are gaining more market share. I think we have a better solution. And fortunately or unfortunately, during the pandemic, we succeed to increase our market share and grow the subscribers there now. The American or the U.S. market is very competitive. So the price issue is based on this competitive landscape is creating low margins. So this is why when you see our annual results, and we are providing some data, the U.S. market profitability is low compared to the number of subscribers that we have there. But this was always like this. This is the mentality and the DNA of the U.S. competitive markets, but we are there. We are growing. We're gaining market share. And in the end of the day, we are increasing our profits. We grow our sales. And if this trend will continue, which we do our best that it will happen, I believe that it will be more material year-over-year.

Okay. Got it. That's helpful. And maybe just to clarify on that last point. I mean it sounds like you're expecting to continue to be selective in your U.S. business is -- while still trying to grow market share where it makes sense from a profitability standpoint. So just making sure that we understand kind of the approach there.

Can you repeat, I understand, maybe I didn't understand clearly your issue.

Yes, yes. So just maybe another way of putting it. Do you expect to remain selective with your approach to the U.S. and kind of focused on the profitability. You noted it's a region with of historically lower profit margin. So should we expect kind of your approach to the market to remain as you've always approached it historically, meaning you're not willing to sacrifice margins for growth.

Okay. So we -- our -- I would say, our strategy is to keep profits, keep profitability, even giving up some growth. Because when we are analyzing the market for more than 15 years, we saw that most, if not all of our competitors, which are bigger than us, always lost money. Most of them bankrupted and changed ownership during the years. We have always made money. Now fortunately, we succeed, I think, to show that we have some advance -- we have some advantages. And we succeed to increase our growth or maybe to create new growth without sacrificing our profitability. Still compared to other regions that Ituran operates like Israel and Latin America, the U.S. business for Ituran has lower margins, but will we always keep and everything for profits because to start giving, for example, units for free on going and advertising for $50 million and then sells hundreds of thousands a year, it's very nice, but no one proved that even in a long-term, it's turned to profits. And the business in the end of the day has to serve shareholders by creating profit. So we will not sacrifice our profits. We always try to balance between growing and profitability. Now we are in a trend, I think, which we start reaping the fruits, also grow, but without giving up for our profits. Of course, for a short term, and I'm saying that we will increase some marketing resources, of course, maybe we will not grow our profits in the next 1 or 2 quarters in the U.S., but we do it very, very consciously. And we always know that this will lead to increase profits. This is our holy thing, profits, profits and profits.

Okay. That's helpful. And then last 1 from me, and I'll pass it along. Just curious to get your views on the setup in Brazil. I believe you noted stabilization in the aftermarket segment there in first quarter. Can you talk a bit about what you're seeing in Brazil Q2 to date?

First of all, when we compare the situation today to the situation during 2020, we are in a much better solution because during 2020 until about October, the sales was very 0, very low, not 0, but very low. On the same time, the churn is something that's not depend on the market, there is a churn. So we lost or we had the minus and a negative growth in our subscriber base, which typically it's the opposite of what we are aiming. But the pandemic hurt and changed a little bit, shake the situation. Since October or up until today, we -- and we show it also in the Q4, we succeed to overcome the situation. We back to -- at the beginning, the decline started shrinking. And then we saw -- we see now that the trend will lead us very shortly to change to a growth of net subscribers. So looking to the back is not the idea. But when we look forward, we are very optimistic. We see the graph growing. We are now close to the full recovery. And when we look on the market, we have to understand that there is less car sales, which has influenced us. People have less money. Some people with a second car decide to sell it and not buy a new one because most of the people are in quarantines for a longer period of time. We see, and we learned it from Israel, and we see it now in Europe, in the States. And we know that it's now turned to be the situation also in Brazil. The Brazil vaccination start late, but they are now in a very strong trend with very impressive goals of vaccinating the population, which for us is very important, the situation in São Paulo and so for them because it's the main commercial area for Brazil. And I believe that once it will be more free from the pandemic and people will be back to work, et cetera, it will allow us to grow because even today with Brazil, it's still in pandemic, we see that we are in a very good trend of recovery. So when it's turned to a free market at all from the pandemic, I'm totally sure that we will back to the best times. And in terms of market share, we have to understand that our position is very, very strong in Brazil. We are the strongest player. During the pandemic, we didn't see or we even saw that we are gaining more and more market share. Our competitors were also from the economic point of view with a worse situation. So overall, looking forward, I'm very optimistic that Brazil contribution will continue to be more and more on the positive results.

The next question is from Asaf Barel of Oppenheimer.

Congrats on a very strong quarter. Maybe we can just kind of revisit the product segment because that's what really stood out to us in terms of surprise versus estimates. And obviously, I think that's part of what drove the kind of sequentially higher EBITDA generation. How should we be thinking about a normalized product revenue run rate? Should we go back to thinking about this as a $15 million kind of quarterly business? Or should we be kind of adjusting that number up given maybe some newfound strength in the auto market globally and of course, in the specific countries where you operate like Brazil, Mexico and Israel, obviously. So any color there would be helpful.

Asaf, as I said before, there is a specific issue, which is the situation on the OEM during Q1, and in Israel, based on the high-growth of new car sales. But of course, when we look backwards to 2020, it wasn't a regular year, meaning when we, I would say, talked with you guys, with the investors and shareholders 3 months ago or 6 months ago, don't forget that we've been in the middle of a pandemic. Even in Israel, it was only the beginning of the vaccination. So we -- based on conservative reasons, And based on the last year data, which we had to count on, we couldn't, of course, forecast this change, on this trend so fast. So first of all, when we compare it to a year ago, of course, it's a different time, different times. Israel is free for everything, I would say it's very clearly. No corona at all in Israel. We know it. Now when we go to the states and when we go to Latin America, things are -- even the pandemic is there, people get used to live like this, and they also get out of it now. So Q1 was strong in terms of the car industry compared to the same time a year ago or beginning of Q2 -- end of Q1, which was dramatically low last year, which, of course, affected us. Now looking forward, as I said, I don't think that we will back to the lowest numbers of sales. But if we've been last year in about $17 million per quarter, I believe that we will be somewhere between the sales that we have been last year to the sales in Q1, we will not drop dramatically now. This is not what I mean. But Q1 was strong. Again, don't forget that different of about $2 million of sales, with $2 million in revenues, it's a high number. When you go to the margins of our -- to the margins of our hardware is less than 20%, which means it's low. So I'm less sensitive to change in sales of hardware. The nice thing of selling hardware in the end, it's turned to subscribers. A few months later, it will turn to subscribers. And this is what's nice. And this is what's important in sells hardware, not the sales of the hardware by itself. This is good, but it's -- in the end, it's not a major portion of our profits. But when you talk about those numbers turn to subscribers, going with us 6, 7, 8 years, then you're talking about high numbers, and this is what is optimistic in the sales of hardware during Q1, and I'm expecting that we will show always a growth in sales, but there is some volatility between the quarters. That's all what I want to say.

Okay. Okay. That's very clear. Very helpful. You mentioned earlier about the -- obviously, the subscriber growth being strong, above the $15,000 to $20,000 run rate that we were at prior. When you talk about operating leverage, can you walk us through how that plays out between the services gross margin, which has stabilized at about 54.5% for the last couple of quarters? And then maybe just kind of walk us through the operating expenses because, I think, we're all asking what a normalized operating expense run rate looks like post-COVID? G&A, it's pretty modest at these levels, but we've seen R&D come up. I know that there are some currency effects maybe playing in here. But what does a normalized spend rate look like in terms of OpEx? And then any color you can give us on the services gross margin over time.

Last year, and I mention it every call, we did a lot of decreasing in our costs for the period of the pandemic because we want to be conservative and I was happy that all our employees and managers were shoulder to shoulder with the interest of the company. After we show that we overcome the pandemic after we show that the company is still alive and kicking during mid -- until Q1. And during Q1, we back to the cost before the pandemic. Meaning, the cost that we show in Q1 across the Board, including operating, including our margins and everything. I think that this represents -- this is a normalized cost of a quarter we need to run now. Of course, if we will grow our profit, our sales, we need to sell more. So of course, from time to time, we add some costs. But again the operating leverage allow us to add costs less than the profits that we generate from our sales. So looking for the short term, I don't see growth in our, I would call it, budget, our cost. We are now back to the almost the highest cost in every division, every region. So this, I would say that Q1 is very close to a normalized cost situation of the group.

Okay. Okay. That's very clear. Can we get an update on the -- maybe the outlook for the Mexico aftermarket business and how that's going to play out maybe over the next year? Because I think we all expect for it to maybe more meaningfully impact numbers in 2022, but kind of really start to take shape this year. So any color there would be helpful.

Again, this is something that I discussed last Shareholders' Meeting -- Shareholder Conference Call. And as we said, we delayed a little bit our launch of the ICS Day to [Rancon Sigur], the Ituran's insurance plan in Mexico. And we started only in the end of 2020 when we felt together with our marketing advisers, that this is the right time to launch because to launch it when everything was in quarantine and lockdowns and people were in a very bad mood, is not the right time to launch a new product and to do it. So we did it in the end of 2020. And we see the rough -- the graph growing. We sell every day more and more, but we have to understand when you have 1.8 million subscribers, adding few hundreds for the first month and then even 1,000 for the next months, et cetera, in percentage and in the plan, it's even better than our plan, but it has no meaning in terms of showing our results in our quarterly financials. I'm not expecting that it will affect in the coming quarters. But I think that as it was in Brazil when we started, it's looking that we entered the right market. We put our legs in the right door. And now we are, again, adding more and more direct cost, I mean, more insurance companies and more sales discussions, et cetera. I don't think that it will be material in 2021. And in 2022, I hope that somewhere in middle of the year, we can be in a position to start talking about thousands of new subscribers per month from the ICS. Add to this that in Mexico, we also do what we call a regular aftermarket, which is not the Ituran insurance solution, but we're selling now to more insurance companies. We're selling to leasing companies. We're now in a pilot with a large company of payer buyer, which they try to copy. This, I would call it as kind of a startup, but they are a very large company today, try to compare finance and dealership in the U.S. to Mexico. So we are their tool also to monitoring their subprime customers. And I must say that this pilot is going very well. They are very satisfied with what they see. But of course, again, it will take time to educate a market. Overall, I am very satisfied with our penetration to the aftermarket segment in Mexico, but it will take time to be more major to our results, no doubt.

Okay. Great, great. Yes, it's very clear. We noticed that, you can dismiss this if it's not relevant, but in case if you give us any insight into any other kind of subsidiaries. Net income attributable to noncontrolling interests was quite strong this quarter around, I think, $700,000. Anything you can comment there? I mean, if anything, it looks quite positive, but you can correct me if I'm misreading it.

Asaf, as you mentioned, we have the minority rights, which, of course, contributed to the consolidated Ituran profit this quarter. Of course, some quarters, they contribute more, some quarters they contribute less. As of today, I think it's very important for us to keep this minority -- as this minority is also acting at an active position in the company, and it's very relevant. So I think as of now, as we see it, is a good position for us.

Okay. Great. I'll just finish up with a technical question here. Can we get an update on what the effective tax rate should look like? It hasn't been around 30% for a while. I know it fluctuates from quarter-to-quarter, and there's a very big difference in marginal and effective. But given maybe some of the shift in revenues and profits, can we get an update there on how we should be thinking about effective tax rate longer-term or even for just the next few quarters?

Yes. I think that you know more or less approximately 27% as the tax rate may make sense for us.

Okay. Great. Great. And again, congrats on a great quarter, and hope to speak again soon.

Thank you, Asaf.

Thank you. Welcome.

[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 website, www.ituran.com. Mr. Sheratzky, would you like to make your closing statement.

Thank you. 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. And I do look forward to speaking with you next quarter. Have a good day. Bye.

Thank you. This concludes the Ituran First Quarter 2021 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.