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Edited Transcript of ITRN earnings conference call or presentation 11-Mar-19 2:00pm GMT

Q4 2018 Ituran Location and Control Ltd Earnings Call

Azuor Mar 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Ituran Location and Control Ltd earnings conference call or presentation Monday, March 11, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eli Kamer

Ituran Location and Control Ltd. - Executive VP of Finance & CFO

* Eyal Sheratzky

Ituran Location and Control Ltd. - Co-CEO & Director

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Conference Call Participants

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* Daniel Topaz

* David Lee Kelley

Jefferies LLC, Research Division - Equity Analyst

* Ethan Etzioni

Etzioni Portfolio Management Ltd - CEO

* Sasha Karim

* Kenny Green

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Ituran's Fourth Quarter and Full Year 2018 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.co.il. I will now hand the call over to Mr. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin?

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Kenny Green, [2]

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Yes. Thank you, operator. Good day to all of you, and welcome to Ituran's conference call to discuss the fourth quarter 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 Sheratzky, CEO; Mr. Udi Mizrahi, Deputy CEO and VP Finance; and Mr. Eli Kamer, CFO. Eyal will begin with a short summary of the quarter's results, followed by Eli with a summary of financials. We will then open the call for the question-and-answer session. I'd like to remind everyone the safe harbor statement in today's press release also covers the contents of this conference call. And now Eyal, would you please like to begin?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [3]

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Thank you, 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 end the year 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 currencies, in which we operate, to US dollars, which is our reporting currency. Despite the currency impact, we are pleased with our performance. With revenues of over $0.25 billion, growing 20% in local currencies terms, adjusted EBITDA of $79 million and net income of $65 million.

The contributing factor this year to our net profit was our share an affiliate. This was primarily due to the capital gain from our investment in Bringg. It represents the yearly fruit of success from our investments in companies which are building tomorrow's aspirative mobility technologies and solutions.

To date, we have invested several very promising early-stage mobility technology companies, of which, Bringg is at most advanced stage. Each of them has the strong potential to become a future industry leader. My goal is that Ituran will be at the forefront of technological advancement in an ever-changing and fast-developing mobility market.

The fourth quarter is the first full quarter in which we consolidated the result of our recent acquisition, Road Track. We now have close to 1.8 million subscribers. While our subscribers last year were predominantly in Israel and Brazil with a small promotion 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, to date, there are 2 legs driving our growth. One remains the traditional aftermarket subscriber adds in Israel and Brazil, but 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 Road Track contract and vice versa. We now 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 the 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?

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Eli Kamer, Ituran Location and Control Ltd. - Executive VP of Finance & CFO [4]

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Thanks, Eyal. I note that some stated 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 regards to the reconciliation between the non-GAAP and the GAAP results, please see the table published with the press release.

Revenue for the fourth quarter of 2018 were $79.2 million, representing an increase of 31% compared with revenue of $60.6 million in the fourth quarter of 2017. In local currency terms, fourth quarter revenue grew 39% year-over-year. Revenue breakdown for the quarter was $55 million 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 $24.1 million, which were a 50% increase over the same quarter last year. The geographic breakdown of revenues in the fourth quarter was as follows: Israel, 34%; Brazil, 36%; and rest of world, 30%. Non-GAAP operating profit for the fourth quarter of 2018 was $18.9 million, an increase of 29% compared with an operating profit of $14.7 million in the fourth quarter of 2017. In local currencies -- in local currency terms, this grew 41% year-over-year. Adjusted EBITDA for the quarter was $25.2 million, an increase of 38% compared to an EBITDA of $18.2 million in the fourth quarter of 2017.

In local currency terms, the increase was 50% year-over-year. Share in affiliates net during the quarter was an income of $4.2 million versus an income of $3 million 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 $15.8 million in the quarter or fully diluted EPS of $0.74 and growth of 61% year-over-year compared with a net profit of $9.8 million or fully diluted EPS of $0.47 in the fourth quarter of 2017.

In local currency terms, the year-over-year increase was 73%. Cash flow from operations during the quarter was $18.5 million. In terms of our full year 2018 numbers, revenues for 2018 were $253.3 million, an increase of 8% compared with revenue of $234.6 million in 2017.

In local currency terms, revenue increased by 20% year-over-year. Revenue breakdown for the year was $181.4 million 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 at $72 million, up 11% year-over-year. Non-GAAP operating profit for 2018 was $63.3 million, up 12% compared with an operating profit of $56.5 million in 2017.

In local currency terms, this grew 21% year-over-year. Adjusted EBITDA for the year was $79.2 million, an increase of 13% compared to an EBITDA of $70.1 million in 2017.

In local currency terms, the increase was 23% year-over-year. Share in affiliates net was an income of $8.1 million in 2018 compared with an income of $8.5 million last year. Non-GAAP net income in 2018 was $51.6 million or fully diluted earnings per share of $2.45. This is an increase of 18% compared with a net income in 2017 of $43.8 million or fully diluted earnings per share of $2.09.

In local currency terms, the net income grew 26%. Cash flow from operations for 2018 was $53.2 million. As of December 31, 2018, the company had cash, including marketable securities, of $53.3 million or $2.50 per share. Following the acquisition of Road Track, as of December 31, 2018, the company had debt of $73.2 million or $3.43 per share. This is compared with cash, including marketable securities of $40.4 million or $1.93 per share and 0 debt as of December 31, 2017.

For the fourth quarter, a dividend of $5 million was declared. For the full year of 2018, the total dividend declared, including debt of the fourth quarter of 2018, was $20 million, representing 31% of the full year net income.

The dividends' record date is March 26, 2019, and the dividends will be paid on April 10, 2019, 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?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Sasha Karim of IPI.

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Sasha Karim, [2]

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(technical difficulty)

business.

I think you didn't catch my question. I'll try and repeat. How much of the services revenue in the fourth quarter came from Road Track versus Ituran's existing services business?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [3]

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That breakdown, since we are fully consolidating the details now are not something that we are going to establish. We are actually providing the geographies, a breakdown for the numbers.

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Sasha Karim, [4]

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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 fourth quarter even in non-GAAP terms, following the consolidation of Road Track services revenue. Could you just explain why Road Track services business seems to be having a negative impact on the gross margin there?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [5]

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Basically, today, Ituran has 2 different segments: One segment is the aftermarket, and second is the OEM segments. This OEM segments is carrying lower margins compared to the aftermarket. So once we start to consolidate both segments, it has, I would say, a onetime drop of the margins. And this is -- should be the margins that we will -- probably we will continue to show.

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Sasha Karim, [6]

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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?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [7]

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No. Because the price for -- the prices and the costs for OEM are different, and for the aftermarket, it's different segment, which carry different prices and different costs.

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Sasha Karim, [8]

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Got it. Okay. And also on the product gross margin, in the fourth quarter, 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? And how we should think about mix going forward?

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Eli Kamer, Ituran Location and Control Ltd. - Executive VP of Finance & CFO [9]

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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 products, especially on the 2 segments, brought us to a higher gross margin. I want to remind you that comparing to the previous quarter, that was the gross margin was quite low, we said that it's supposed to be in the future a little bit higher.

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Sasha Karim, [10]

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And was Road Track having an impact there in the fourth quarter? Or was it -- is it really just the mix that's causing that spike in the third and fourth quarters?

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Eli Kamer, Ituran Location and Control Ltd. - Executive VP of Finance & CFO [11]

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It's mainly the mixture.

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Sasha Karim, [12]

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And can you give us a rough range to expect going forward? I imagine it'd probably be quite a wide range.

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Eli Kamer, Ituran Location and Control Ltd. - Executive VP of Finance & CFO [13]

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I believe that going forward, gross margin of approximately 20% is something that makes sense to me.

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Operator [14]

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Your next question is from David Kelley of Jefferies.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [15]

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I guess just the first one, could you talk about maybe some of the drivers of the subscriber base growth, and obviously the Road Track being a primary contributor? But just any way to think about either a regional breakdown or some of the different metrics or how we should think about co-Ituran versus Road Track contribution of the subscriber base.

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [16]

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The OEM subscriber base is -- much more depends on the car market -- the car industry, I would say. The correlation, which was a little bit lower when we are -- we talked -- or when we are talking on aftermarket, Ituran's hasn't -- Ituran has more way to affect the market by using our tools, by using more different marketing, approaching different segments. Sometimes it works more but sometimes less, but still, a lot of it is something that depend 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 as our dependency, is very, very high. And since we know that the markets, which we are operate -- is in OEM service, which include Argentina, Brazil and Mexico, are less stable market. Of course, there will be some volatility, which we less get used to in the aftermarket.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [17]

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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'll be a more or less volatile year in 2019 as we think about, again, that -- the OEM subscriber base?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [18]

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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 showed 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 quarters along every year since we know these segments.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [19]

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Okay. And then the last one for me, just the jump in the share in the affiliate's contribution, I believe, it was from the capital gain from Bringg. Could you just talk about the -- maybe the opportunity of some of your investments? What you see in 2019 as we think about share in affiliates should that continue to be a pretty significant jump year-over-year?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [20]

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Bringg, 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 the Salesforce and Siemens venture capital. And the other companies that we invested are still in an earlier stage than Bringg. 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 earn results.

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Eli Kamer, Ituran Location and Control Ltd. - Executive VP of Finance & CFO [21]

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In addition, just to remind that 2018 includes, until the acquisition of Road Track, the -- in the share of affiliated, contribution of the JVs that we have in Brazil and Argentina that in 2019 will be consolidated with the number.

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Operator [22]

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The next question is from Ethan Etzioni of Etzioni Portfolio Management.

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [23]

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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?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [24]

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As you are right, in US dollars, again, it seems that -- 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.

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [25]

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Okay. On the previous call, you said that year-end '18, you're at a run rate of $400 million revenue. Is there -- is that still the approximate number? Or do you have an update for that figure?

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Eli Kamer, Ituran Location and Control Ltd. - Executive VP of Finance & CFO [26]

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What? It wasn't in the last call, it was during the PR of the acquisition of Road Track, which was beginning of 2018. And everything that we've 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.

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Ethan Etzioni, Etzioni Portfolio Management Ltd - CEO [27]

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Okay. So looking at the fourth quarter, excluding, of course, the gain on the affiliates, it's pretty much representative quarter of the current business, with the current exchange rates. Is that fair just to assume that that's what we should be looking for going forward?

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Eli Kamer, Ituran Location and Control Ltd. - Executive VP of Finance & CFO [28]

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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.

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Operator [29]

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We have a follow-up question from Sasha Karim of IPI.

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Sasha Karim, [30]

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Just one follow up. You weren't giving us the breakout I guess between Road Track 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 that business?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [31]

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We -- actually, most of what you described is right because of course, we said it in the last 2 quarters because we changed the model working with our ICS (inaudible) Ituran (inaudible), which is the Ituran -- let's say, 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've shown in the past. It will take us a few more quarters to be in, probably, hopefully, in the highest numbers, but we are now in a positive trend of losing less subscribers and growing more.

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Operator [32]

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(Operator Instructions) We have a -- the next question is from [Hickey Lamanon], private investor.

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Unidentified Participant, [33]

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Yes, it's interesting to now see in a fully transparent way the effects of Road Track, and congratulations on that. My question is that I feel that the valuation is somewhat slightly low compared to kind of the transformational step that you have taken forward. So have you considered maybe bringing this new Ituran to the 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 paid any thought to maybe starting doing some share repurchases in the future?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [34]

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From time to time, the board is considering issues regard the equity of the business, which is a discussion regard our dividends, share purchasing program, the debts that we are using et cetera, currently, the situation stayed as continued with the dividend policy and continues to serve the net debt of the company.

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Unidentified Participant, [35]

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Exactly, maybe an add-on. So I understand that there is the debt that you have incurred to purchase Road Track, but still, you are now generating very healthy cash flow. So what do you see that increasing the dividend in the future, I guess, that might come into play during this year?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [36]

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The company, they do or discuss what is the Ituran policy regard all these matters. We always need working capital. We always had our policy regard how the balance sheet it looks 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 how our board taking the decision. Of course, we did it from time to time, every quarter.

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Unidentified Participant, [37]

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Exactly. And maybe then a couple of operational questions. You mentioned in the press release that you see a lot of promising potential for 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 cost side, I think the business is very scalable, but you are now combining 2 different businesses, and they have been operating in slightly different geographies. So do you see a lot of synergy potential also on the cost side?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [38]

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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 to entering OEMs or other OEMs in those geographies. On the other hand, geographies that was very focused on OEMs has the platform to offer services and solutions also to the aftermarket. This is something that we will try to create, but it's not something that happened from day 1 to 2. It will take time. And we believe that the move and the things that we will do will contribute in the future to this solution or to this results of the cross-selling. We start with is this, but it will take time, of course.

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Unidentified Participant, [39]

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Exactly. And maybe one further question, then -- I understand that the management find here 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?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [40]

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You're right. We are counting on India for the longer terms. We -- 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, a 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 a market, 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 the -- this platform, this business. And we see very positive reaction. We see -- we believe that we have a good reason to be optimistic. But again, this is a longer-term market. When we entered the Brazilian market in the late '90s, we start reaping the profit fruits only after 5, 6 years. I hope that it will be earlier, but we are talking about market which is significantly larger than the Brazilian. And now it's in a phase -- India is in a phase of becoming from emerging market to more industrial market. More people are transferring from rural areas to the municipal areas. And it give us the confidence that in the future, we should do our best to be the dominant of the telematics market in India.

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Unidentified Participant, [41]

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Exactly, and let's hope that it goes faster. And maybe one question it's -- I think that hasn't been discussed in the calls, if I may. So the electric cars are really growing fast from a low base, but -- growing fast, and for example, Tesla, as we all know. And kind of Tesla for example, it's a different kind of car compared to what the oil and gasoline and so have been. So how do you see the transformation into electric vehicles? What kind of opportunities does it present for Ituran? And is it -- for example, could it be easier to install your harness of the electric vehicles? And also do you see any threat, like is there a move from new entrants or so due to easier access maybe in electric cars?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [42]

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The way the engine is working has no influence on the services and even the hardware that Ituran is providing, whether it's electric car or whether it's a car based on a regular engine with 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 is the telematics. And this is an upside and not a downside by, for example, managing energy for cars, whether we are talking in fleets, whether we are talking about groups of cars, et cetera. But generally speaking, there is no difference for telematics services, whether it's in fuel engine or it's in electric.

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Unidentified Participant, [43]

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Yes, yes, it's fluent, it's -- I was exactly looking after that kind of a business, and so they are in a way smart cars compared to what may be the gasoline cars have been. So there's a lot of more monitoring and different sensors and so on as you mentioned. So -- but glad to hear that you're also looking at it. I guess I will let others ask questions as well.

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Operator [44]

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(Operator Instructions) Next question is from Daniel Topaz of Alpha LTI.

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Daniel Topaz, [45]

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One simple question about future margins. Obviously, the Road Track acquisition brought operational net margins down. Would you expect future margins to improve as you bring Road Track closer Ituran's older margins? Or current margin levels is a steady-state margin in -- from your perspective?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [46]

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I would consider our fourth quarter result as the right margins to consider. Yes. Current margins are -- should be the representing margins that we should show.

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Operator [47]

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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 at Ituran's website, www.ituran.co.il. Mr. Sheratzky, would you like to make your concluding statement?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [48]

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Yes. I would like to thank all Ituran'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.

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Operator [49]

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Thank you. And this concludes the Ituran's Fourth Quarter 2018 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.