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Edited Transcript of ITRN earnings conference call or presentation 25-Nov-19 2:00pm GMT

Q3 2019 Ituran Location and Control Ltd Earnings Call

Azuor Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Ituran Location and Control Ltd earnings conference call or presentation Monday, November 25, 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

* Udi Mizrahi

Ituran Location and Control Ltd. - Deputy CEO of International Operation & VP of Finance

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Conference Call Participants

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* Abba Horovitz

Yahk Capital

* David Lee Kelley

Jefferies LLC, Research Division - Equity Analyst

* Sasha Karim

Inflection Point Investments LLP - Partner & Portfolio Manager

* Tavy Rosner

Barclays Bank PLC, Research Division - Head of Israel Equities Research

* Kenny Green

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Presentation

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Operator [1]

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Ladies and gentleman, thank you for standing by. Welcome to the Ituran's Third Quarter 2019 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've 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 would now like to 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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Thank you, operator. Good day, to all of you and welcome to Ituran's conference call to discuss the third quarter 2019 results. I would like to thank Ituran's management for hosting this conference call.

With me on the call today are Mr. Eyal Sheratzky, CEO; Mr. Udi Mizrahi, Deputy CEO and VP Finance; and Mr. Eli Kamer, CFO.

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 statements in today's press release also covers the contents of this conference call. And now Eyal, would you like to begin please?

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

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Thank you, Kenny. I'd like to welcome all of you, and thank you for joining us today. 2019 has indeed been a transition year for Ituran. This year, we've been -- we've seen more challenges and headwinds than we normally see, but we've been working to overcome them.

I will spend the next few minutes diving into the details of both the aftermarket business as well as the OEM business as our overall consolidated financial results cloud the actual details of what is actually happening. In addition, starting from our full year 2019 results next quarter, we will aim to provide you with the financial breakdown of the 2 main segments of our business to give you more tools on which to analyze our performance.

Starting with the aftermarket business. The aftermarket business in Israel has remained good in 2019, and we are pleased with our continued positive performance in this market. Our leading market share has remained stable now for many years. New car sales in the country are at similar levels, almost at similar levels to what they were in 2018, and while there are some shifting trends within, the market itself is stable.

Our Ituran SVR products remain at attractive proposition and has been a key driver towards our net subscriber goals in the market for a number of years.

We expect the aftermarket business in Israel to continue to grow, subject to the new car sales trend in the country. But as always, we continue to consider strategy for penetrating additional segments.

A few months ago, you may remember that we signed a new and innovative agreement with Harel Insurance, one of Israel's leading insurance company to become Harel's provider of location-based services for its Usage Based Insurance service.

This insurance policy is built around Ituran's solution for taking into account a driver's accumulated mileage and behavior relative to safety. So insurance premiums can be directly related to usage, which is fairer for the driver and better for the insurance company in terms of managing risk.

Since then, we've also signed on another insurance company in Israel, Shlomo Insurance, which have been launching primetime TV campaign, selling our white label product and we should expect to start to see a contribution from this growhether engine in 2020.

Beyond that, we see strong further interest throughout the market as others do not want to be left behind. We see these products as a real advance for the car insurance market, providing a more accurate risk assessment and personalization of insurance policies, lower costs and providing an innovative and fully digital service for the customer.

We see this as a potential strong growth engine, and in the coming year we expect that other insurance companies in Israel will begin to offer UBI policies based on the Ituran solution. Longer term, once we prove success in our home market of Israel, a synergy from the fact that we are now operating in a number of countries is that it will be much simpler for us to leverage these solution into our other markets.

Looking at Brazil. As we discussed over the past few quarters, the aftermarket business faced significant growth challenges starting from the second half of 2018. We met and solved those challenges and made changes to our Brazilian business model and system. As of mid-2019, as you can see from our net subscriber adds returning back to 20,000 and over per quarter. And moving forward into 2020, we have successfully completed these transitions.

We should expect the improvements made to filter throughout into our financials throughout next year. I would like to spend a few moments talking about the aftermarket in Mexico, which is a new initiative for us.

We are building our new ICS, which stands for Ituran con Segura (sic) [Ituran com Seguro] program Mexico, taking the product, which has been successful in Brazil, reproducing and tweaking it for the Mexican market. We are in discussions with the local insurance companies there. We are also planning and building a marketing campaign and preparing the infrastructure. We expect to launch, and will start selling the product during the second half of 2020, which we expect will have an increasingly positively impact in 2021.

Now I will talk about -- elaborate more on our OEM businesses. You may remember that our OEM business in Mexico was another challenge we had in this year, which we discussed over the past 2 quarters.

As you remember, it was announced that the 2G networks in that country are being discontinued.

Our OEM customer in Mexico, which uses a 2G telematics systems, decided to deplete inventory of its existing systems before starting purchases of our upgrade 3G-based system. The good news is that as of October, the customer, despite its existing inventory of 2G systems, and has started using its inventory of our next generation 3G systems.

Looking ahead next year, we expect purchases to resume their normal level, which will improve our result next year.

And now to our OEM business in Brazil and Argentina. As we have already discussed, because of the weak economic situation in Brazil and Argentina, this major OEM customer of ours has been looking for ways to reduce its cost and increase its margins. Early in the year, they cut their subsidized free trial period for new car buyers, from 6 months down to 3 months, and this had an immediate impact on the number of subscribers in those countries.

I should add that they continued to look to further reduce their costs. Amongst other things are considering reducing the free trial even to only 1 month. We are in discussions with them on implementing the further changes.

In light of the reduced revenue from this customer, we are also making changes to improve our margins in this segment. We are doing this by implementing our plans to extract synergies. In particular, we are looking to eliminate costs that can be shared with our existing operation in the country.

In summary, while Ituran in the past was focused on the aftermarket business in 2 main geographies, Brazil and Israel, today, the results of the acquisition of Road Track, we've added a number of new geographies. In these new regions, we are looking to take our existing successful aftermarket business model and transfer them to the new geographies. Furthermore, we are working on extracting cost synergies to improve the margins within each of the various regions in which we are operating.

Looking at the big picture, Ituran should seek continued long-term and steady growth from our traditional retail aftermarket subscriber adds in both Israel and Brazil. Beyond this, we are seeding a number of initiatives that will begin to propel us forward in 2020 and beyond. Such are the synergistic opportunities I just mentioned, as well as our agreements with insurance companies in Israel and ultimately elsewhere to provide telematics for the Usage Based Insurance services.

Finally, Ituran is the leading mobility technology industry in Israel, seeding new business in the space that has potential to become leaders in the decades to come.

My overall goal is that Ituran will always create value for its shareholders by remaining at the forefront of technological advancement, in an ever changing ever-changing consumer-oriented mobility market.

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 the results I present will all be on a non-GAAP basis, including adjusted EBITDA, which excludes revenue and cost related to the purchase price allocation. We believe this will provide a better understanding of our ongoing performance. For further details with regard to the reconciliation between the non-GAAP and the GAAP results, please see the table published with the press release.

Non-GAAP revenues for the third quarter 2019 were $70 million, representing an increase of 31% compared with revenue of $53.4 million in the third quarter of 2018.

In local currency terms, third quarter revenue grew 33% year-over-year. Revenue breakdown was $51.2 million coming from subscription fees, a 31% year-on-year increase. In local currency terms, subscription fees grew 32% over the same period last year.

Ituran added 20,000 net aftermarket subscriber during third quarter and there was no change to the number of OEM subscribers.

Product revenues were $18.7 million, which were a 31% increase over the same quarter last year. In local currency terms, product revenues grew 31% over the same period last year. The geographic breakdown of revenues in the third quarter was as follows: Israel, 40%; Brazil, 34%; and rest of the world, 26%.

Non-GAAP operating profit for the third quarter of 2019 was $13.7 million, slightly below when compared with an operating profit of $14 million in the third quarter of 2018. In local currency terms, the non-GAAP operating profit was unchanged year-over-year.

Adjusted EBITDA for the quarter was $18.7 million, an increase of 10% compared to an EBITDA of $17 million in the third quarter of 2018. In local currency terms, the increase was 18% year-over-year.

Non-GAAP net profit was $7.8 million in the third quarter -- in the quarter or fully diluted EPS of $0.37, compared with a net profit of $12.5 million or fully diluted EPS of $0.60 in the third quarter of 2018.

Cash flow from operation during the quarter was $11.5 million. As of September 30, 2019, the company had cash, including marketable securities, of $56.5 million and debt of $74.5 million. This gives a net debt position of $18 million or $0.86 per share. This is compared with cash, including marketable securities, of $53.3 million and debt of $73.2 million, which is a net debt position of $19.9 million or $0.93 per share as of December 31, 2018.

I note that uses of cash in the quarter were $3.5 million for the buyback of 121,000 shares as by the end of this quarter and $5 million for the dividend announced in the second quarter.

For the third quarter, a dividend of $5 million was declared. The dividend's record date is December 24, 2019, and the dividend will be paid on January 9, 2020 net of taxes and levies at the rate of 25%.

And with that, I'd like to open

(technical difficulty)

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 Tavy Rosner of Barclays.

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Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [2]

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A couple of questions here. Firstly, if you could talk a little bit about the OEM in Brazil? And generally speaking, so you mentioned that the net number was 0. Does that mean that the granularity of this number is a decrease at your large OEM in Brazil, mitigated by increase somewhere else in terms of positive sales? So net-net, it's a 0 number?

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

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The situation in Brazil, as I said in my speech, is that our customer is -- I think, is in a declining situation. And we have discussions. We assume that in terms of our numbers of subscribers, we are not expecting a strong decrease but the ARPU per subscriber probably will be dramatically down.

We don't know yet to evaluate exactly how the new relationship will look like, but as I said, based on the ARPU and based on the number of subscribers, we are started to create synergy and to cut most of the expenses in order to keep the margins high. But the numbers of subscribers, we are not expect that it will grow. Because if you remember, after the free trial, most of our subscriber base comes from renewals. So the renewals depend on us, and in the renewal portion, we have a very success rate, which is more than 35%. But based on the, let's say, captive customer base comes from the free trial, is something that declined as you saw last quarter and it's probably will continue to decline in the future.

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Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [4]

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Yes. My second question was going to be about the successful retention rate, so you touched on that. And do you guys disclose how many subscribers this OEM adds?

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

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You're talking about the OEM subscriber, I assume?

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Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [6]

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In Brazil. Yes.

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

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By the OEM subscriber. So after the free trial, this is the strategy and this is the way we are operating this segment in Brazil, is that we are do a push calls on a campaign in order to renew, but don't forget that when the customer is renewing his subscriptions, which he got for free, after the free trial period, he now has to pay. So the retention is not 100%, and as I said, is even above 35% which compared to other companies in the industry, is a very successful number.

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Eli Kamer, Ituran Location and Control Ltd. - Executive VP of Finance & CFO [8]

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The subscriber base is the same as last quarter, meaning 5 almost -- approximately 500,000 subscribers, 508,000 for the OEM.

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Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [9]

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Got it. And one last one for me, if I may. Just talking about the margins a little bit. So in the press release you talk about non-GAAP margins, 56% for subscription fees versus roughly 62% last year. So you touched on the impact of the OEM but you also talk about lower margins in Brazil and Argentina. So I guess the second part, it's lower margins for your aftermarket customers?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [10]

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Udi?

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Udi Mizrahi, Ituran Location and Control Ltd. - Deputy CEO of International Operation & VP of Finance [11]

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I will say that, as we mentioned, Brazil had a slowdown last year, and of course, as a subscriber-based model, which depends on the number of adding subscribers, if we are going down or decreasing the subscriber base, and of course, it relates -- it will affect also the margin as we have a fixed cost and the additions are affecting the margins. So due to the slowdown that we had, this affect also the margin in the aftermarket, which as we mentioned, due to the fact that since the second quarter of this year, we added the -- we came back to the same level as before of approximately 20,000 net added subscribers, I believe this effect will be shown in next year, meaning that the margin is supposed to improve.

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Operator [12]

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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 [13]

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The OEM customer that reduced the free trial period, was that impact on Q3 ultimately in the $1 million range that you have previously expected?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [14]

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Yes. Absolutely. The main impact was the change between 6 months free trial to 3 months, which happened in Q2, and we showed decreasing of a one -- almost onetime of 40,000 subscribers. But we said last quarter that we expect that it will appear in our financials of Q3. It was more than $1 million or we said around $1 million and it was more closer to $1.5 million. But most of this declining are related to, yes, to Q2 change of the free trial period, absolutely.

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

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Okay. Got it. And regarding your push into Mexico, you noted expectations of aftermarket volumes beginning in the second half of next year ramping into, it sounds like, 2021, how quickly can that business grow for you? How would you size up the addressable market opportunity in the next couple of years?

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

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Okay. So first of all, and it's very important to mention, this is the -- after a few quarters, almost 6 quarters, we succeed to show growth of more than 20,000 subscribers, it's the highest point of our expecting range in Q2 as well as in Q3. And this is very important, I think, to explain that we back to the numbers and back on track for the 2017 numbers, which in the end, integrate to the financials of 2018. Now in 2019, we start ramping up again in the aftermarket in Brazil mainly and also in Israel, which will integrate, even without Mexico, to the numbers of 2020.

This is the operating leverage model. When you are declining in subscribers, it's appear almost a few quarters later but it is the same what you are growing in subscribers. So you are -- see it year later or few quarters later. This is why I am very optimistic regarding the quarters that we should -- we will see in 2020.

Now regarding Mexico, Mexico is now in a stage where we are putting all the marketing, all the contractual, all the IT, all the synergies that the Ituran com Seguro slash it to one aftermarket solution requiring.

We do it very carefully. We do it very conservatively. In order to launch the commercial stage with a highest rate of success, with a potentially success rate. Now regarding market, we wouldn't do it and by the way, we wouldn't -- we would consider differently the acquisition of Road Track if we wouldn't find that the Mexican market and as a beginning, Mexico City, has not the same characteristic and the mentality.

And the insurance industry has the same characteristic as well that we can copy successfully. Once we will succeed, and nobody knows of course, that's what we believe based on our assumption, it might be much bigger than the entire OEM businesses we acquired, but it will take time because it's a market education. We will be the first to do it in Mexico like we did in Brazil. In Brazil, it took us something like 2 years to become dominant and Ituran com Seguro become a very -- a known name in São Paulo. I want to believe that since we already had experience and since we know what was the mistakes on the -- that we did in Brazil at the beginning, we will overcome it faster in Mexico. So I believe that at 2021, 2022, it should be much more faster growth, much more material. 2020 of course will be the first year of doing it. I wouldn't expect still something material on our numbers, but it's important also to look longer terms and I -- we really count that if this will copy the Brazilian business, so we are talking about major business for Ituran.

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

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Okay. Got it. And one quick follow-up and I'll pass it along. I guess, how should we think about the cost to build out that infrastructure in Mexico next year?

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

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So as I said, and this is part of the DNA of Ituran, maybe others will do it in 3 months and we do it in 9 months to a year since we started it but we do it and it's a very conservative. I wouldn't consider the cost that integrating to this buildup it's -- are material. It will be integrated to the regular or the regular operational results of Ituran. That's the way we are doing it. It will be spread and it's already spread. Of course, it's part of the cost that we are already see in our results but it's not something that is material by itself. So I wouldn't consider this as something material.

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Operator [19]

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Our next question is from Sasha Karim of IPI.

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Sasha Karim, Inflection Point Investments LLP - Partner & Portfolio Manager [20]

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I have a few questions. First one, just to clarify on the services gross margin, which declined about 110 basis points in the third quarter versus the second quarter. Given that you had a rising number of aftermarket subs and flat number of OEM subs, normally, would expect the GM to rise because of the positive mix effect. So is it just the onetime impact from the second quarter, which was lagging and hit the third quarter that caused this to decline?

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

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Yes. As we mentioned, you know the decrease from GM Brazil from our OEM in Brazil of the $1.5 million actually all of it is -- most of it is coming from the service and the service is affecting, of course, the margin. So this is the main explanation between Q2 and Q3.

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Sasha Karim, Inflection Point Investments LLP - Partner & Portfolio Manager [22]

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And any thoughts in Q4? Could -- would the gross margin now -- provided that subscribers in the aftermarket segment keep growing? Or will the gross margin keep growing? Or are there more headwinds from the OEM that will hit the gross margin?

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Udi Mizrahi, Ituran Location and Control Ltd. - Deputy CEO of International Operation & VP of Finance [23]

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I would say that if we are talking about -- and again we do not give at this moment the breakdown of the financials between the OEM and non-OEM and we are aiming to provide more of financial information next quarter after advising with our auditors. But in the end, in the aftermarket, the answer is yes. As long as we continue to increase our subscriber base in the aftermarket, there is no reason for the gross margin in the service segment not going up.

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Sasha Karim, Inflection Point Investments LLP - Partner & Portfolio Manager [24]

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That's very helpful. Another one, you mentioned that the ARPU in the Brazilian OEM division would vary significantly down. As I understand it, you currently -- when you're on a -- when a customer is on a free trial, you do get paid something by your OEM partner but it's not a huge amount and it's low margin. And it seems like that's the part of your revenue which you should be losing. So it's the lower ARPU stuff you should be losing. So I would've thought the mix would cause the ARPU to go up. Why is ARPU going down if you're losing the lower mix stuff?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [25]

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No. I talked about the ARPU specifically for the OEM when I mentioned it. I didn't talk about the overall ARPU. As Udi mentioned few minutes ago, once the aftermarket will continue at this trend, which we assume and believe that it's going to be, so the main gross of subscribers, which will come from the aftermarket, will allow us not to decline the ARPU but when you combine the total location-based services with the OEM, and the OEM is declining, so the OEM ARPU by itself, I just gave a light on the OEM situation when I talked about it. The overall ARPU is not expecting to drop.

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Sasha Karim, Inflection Point Investments LLP - Partner & Portfolio Manager [26]

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And can I just clarify, has your partner in Brazil renegotiated what your take rate is on any OEM subs? Is that part of the headwind? Or was it just the reduction in the free trial length?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [27]

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No. It's mainly reduction of the free trial. Second, it's hardware sales which they looks for solutions with different type of services in order to decrease their cost of the hardware. And as I said, they are looking for how they can continue with providing some tool to their customers in one end, but on the second hand, reduce their costs. I just want to repeat what I said a few months ago. This specific car manufacturer suffered from the economic situation. They fired thousands of employees, they get rid of buildings. They changed the models of the cars that they are launching and as the suppliers of course, they -- we are -- we hurted by this situation as well and I thought that it is important to mention it with the shareholders and to the investors to understand the clear picture about the OEM and the potential of the OEM for us, specifically in Brazil and specifically with this customer.

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Sasha Karim, Inflection Point Investments LLP - Partner & Portfolio Manager [28]

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Last one for me and I'll step out. Could you give us an update on the prospects for new OEM wins, if this was part of the rationale for acquiring Road Track. Is that now more difficult in light of the problems you're seeing?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [29]

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First of all, it's a good question because it's important for me maybe to use this stage to provide some more clear information about the acquisition of Road Track. When we acquired Road Track, don't forget that 50% of the group -- of the business in Brazil, Argentina, we already had as a partner. It was a joint venture.

So practically, the damages that happened is something that we already assumed and expected as a full partner, full part of the Board of Directors of this joint venture. So this wasn't the first reason that we decided to acquire Road Track. This was part of the reason how we know them. And this was part of the reason that we know their business and we felt more confidence. But the main reason was because if Ituran wanted and still wants to expand our business to other geographies and try to create more and more places where -- when we use platforms in order to start from scratch, this was the right horse to ride.

The main markets and the main business is now to create synergy mainly in Mexico, to leverage the Ecuadorian and the Colombian market, and of course we saw that Brazil and Argentina business, it's solid enough to make this acquisition. But we knew that the Brazilian customer is in a very bad shape. It's one of the reasons that we acquired Road Track for a price which integrated this risk.

So economic wise, even without Brazil and Argentina, it's all from economic point of view, as an investor, this is a very, very good economic acquisition.

From a strategic point of view, it gives us 2 things. One thing is platform to new markets, mainly Mexico; and second, of course, having more OEM capabilities even if we, of course, as we face nowadays a declining in Brazil and Argentina, and don't forget that we have a different customer in Mexico, which we had some problems not because of the customer situation; because of something objective, which is changing of communication technology to 3G. But now we back again to the horse and in Mexico, we're expecting that this will be a very good relationship, very good business and a very good segment, which we more count on expanding the business with the customer in Mexico than the one in Brazil. This is different car companies, but those in Brazil is in bad shape. So what can we do expect -- except of maintaining this situation. But in Mexico, we also have an OEM, I would say, leg, and this leg is running and I expect that we will expand this relationship to a better contracting in Mexico. So I hope I made it more clear regarding acquisition.

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Operator [30]

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The next question is from Abba Horovitz of Old School Partners.

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Abba Horovitz, Yahk Capital [31]

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I was wondering if you could talk a little bit about the Road Track acquisition and the pluses of the acquisition. Do you still feel that it was the right acquisition to make because of the Mexican arm and the various other arms? Or was it something that it would've been better not to do? I'm trying to understand if the return on investment here on the acquisition, whether it was positive or negative for the company? Or is this too early to know?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [32]

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I think that I just give a very long speech about this acquisition. I can repeat it but...

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Abba Horovitz, Yahk Capital [33]

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You don't have repeat it. You don't have to repeat it. I'm just trying -- today, if we were to calculate the return on investment on that, would we be able to even do that?

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

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Okay. So practically, it's very difficult for you because we have fully consolidate those numbers from Q4 last year. And we are not providing specific data about Road Track as a subsidiary. So it's integrated in our consolidated numbers. We tried to give more details about segments. We tried to give more segments -- and more details and breakthrough between OEM and non-OEM, but this is -- will not give you a full and clear view about Road Track numbers.

But based on the transaction that we reported, which was September 2018, you can see what was the payment. You can see what was the historical pro forma numbers. Although the numbers declined, still the return on the investment is, I think, from -- again from an economic wise, it's even amazing. I mean if I have to pick now money and I'm an investor, I'm not talking about anything which is strategy, because in strategy, and synergy sometimes, it can buy a company, which has a lot of losses and in few years, you convert it based on the synergy.

It's something that I'm surely believe that this is happening but will also bought a profitable business. So we could know exactly only result any synergy and any new businesses that we integrate what will be our return. And this return, based on the economy today in the world, is a very good investment.

I don't know or I don't want to get into details because I'm not allowed, but here is dramatically good.

But this is not the main reason we acquired Road Track. This is something that give us secure or give us confidence that even if we will not succeed with the synergy, even if the OEM business will not grow, even if it decline, still, the current profitability of Road Track as a standalone is a good business and is a good return on our investments.

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Abba Horovitz, Yahk Capital [35]

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Okay. The -- I guess what I want to understand here is, this is the third quarter that the company has missed numbers and clearly, I mean, a lot of it has nothing to do with management, it's not in their control. But I want to understand is, on a certain level one could say that Road Track decreased the visibility of the business as the OEM side. And I'm wondering, at what point do you feel will be Q4 that your visibility to meet the numbers that are out there will become easier for you? I'm trying to understand at which point will be next year when you start to lap easier quarters? Or will it already be now in Q4 with a lot of the, let's say, problems that you've had to deal with are behind you?

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

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Okay. So I started my speech today with that 2019 has been a transition year for Ituran. Transition, I think, includes many things. First of all, it includes consolidating Road Track. Second, it include a year of executing synergy plans, synergies, also gross expenses that we can save. But when you're talking about thousands of people is taking time to create the synergy. So -- and third, we had or we have in the company that have more than 7 geographies with the full operation and officers and people. And every small change a little bit hurts your visibility and I can just mention 2 of them. One is what we faced in Mexico and it happened in one day in February, around February if I remember clearly, that we get a notice that they want only 3G. So when you sell thousands of units per month and you based your budget on it and this thing happened, only next quarter or even the analyst can't know it and we missed the numbers. It's -- when we talk about missing numbers, we're talking in money, million dollar. Million dollar in this situation happens more than a million dollar in a quarter and this is something that happened in a day.

So of course, this situation of OEM a little bit hurt our visibility. But since we believe that we overcome or we know we overcome the Mexican situation. We know that regarding Brazilian situation and I said it, we are not as optimistic. I'm pessimistic. I think that the numbers will decline but except that since we learn it already few quarters ago, we are now do the right steps to cut, I would say, cut the declining or keeping margins.

So I think that this transition here and in the transition here we have less visibility, I think that compared to the analyst numbers, we miss them. I believe that we also, in the transition period, learn how to create a new visibility let's say and I believe that we can be more visible, more clear data regarding the next quarters. I'd say in Q4 is still -- because of the situation in Brazil with the OEM. So maybe the visibility is a little bit not 100%. Also, creating synergy, as I said, for example if you decide to have 100 people less in a specific control center, sometimes you believe it will take you 3 months and then you have to pay, you have to arrange, you have to do it and it takes 4 months and you skip one quarter and you then not meet the expectation of the market, but this is exactly how a transition period looks like. I really believe that we are in the end of it. And I believe that in 2020, we and the market will be with a much higher visibility and I hope or at least we do the best not to miss those numbers midway.

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Abba Horovitz, Yahk Capital [37]

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I appreciate that. I wanted to also know, will you become more aggressive with the share buyback down here? I believe it's $25 million you allocated for share buyback?

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

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We got approval of the Board for $25 million. Until the end of 2020, we are already executed a portion of it. We will execute in the future. Of course, we will do it subject to the market conditions, subject to the cash flow of the company. And I just want to make it clear, I don't know if we get to the $25 million or less or with some moment, we will need approval of more, but these days, we are execute it, I would say, everyday.

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Abba Horovitz, Yahk Capital [39]

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Okay. And one final question. Could you update us on the investments in your private portfolio?

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

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Yes. I think that the most advance investments is with the company that we hold. We are the largest shareholders, which is Bringg. We hold something like today after round C that already executed a year ago. We hold about 23%. We have to understand few things. Bringg, last round, which was less than a year ago, was in a market cap of $200 million. Just to remind people, we invested 4 years ago for $4 million. We hold at the beginning 50% and we are very satisfied, first of all, with this number.

We expect that this number will continue to grow as this tech market with the VCs involvement would allow Bringg to continue to the next round with a much larger market cap.

We still currently, as I said, have 24%, probably will dilute in the next round.

The shareholders or the investors, except the Israeli VCs, the other investors, our sales force and the venture capital of Siemens, which they are also become major shareholders, not as the size as we. The others are the founders, and this company is growing. They are always growing but of course, we are not consolidated.

But since this kind of company in the SaaS business recquired a lot of resources, if you look on our financial, only this quarter, we added about more than $1 million, our part in their losses.

So when, for example, we go to the meeting the expectation of the EPS, this is something that now is growing but this is not -- it's not a cash influence. It's because we own 24%. But the company needed, in order to become, I hope one day a billion-dollar company. And one day, I believe that we will enjoy from it.

The other investment that we did are in a more early stages companies. All of them are in a good shape and they are continuing to use the proceeds that they raised in their last rounds. But they are still smaller compared to Bringg. Of course, when we have more data to report or something more material will happen, so we will do it.

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Operator [41]

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

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Sasha Karim, Inflection Point Investments LLP - Partner & Portfolio Manager [42]

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Just one follow-up. We haven't heard much on the connected car front for few quarters. Could you give us an update there, please?

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Eyal Sheratzky, Ituran Location and Control Ltd. - Co-CEO & Director [43]

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Yes. The connected car includes many applications. Some of the application are allowing the dealers, mainly in Israel, to support diagnostics, support accident notification in the real-time when they want to tow the car to their garages.

This is something that part of the growth of subscriber in Israel. One of the nice things that we did in Israel, I think and in the future we will integrate it also in the other markets, is the -- all application, which are not pure and only SVR.

We learn that the SVR potential growth is good but it's very integrated with the car sales and since we are having a very large market share in very mature market, the only -- the SVR wouldn't allow us to continue to grow the subscriber base in Israel.

So the connectivity of the car allowing us to offer other services. And this is the main growth of subscribers, the net subscribers today in Israel. In the other markets, we are using it mainly for fleet management, less for the consumer market. But since we are operating many in emerging markets, I believe that gradually, those markets also will be more mature to integrate those kinds of services. But currently, it's only in Israel and this is the main source of growing subscribers in Israel and it includes UBI, roadside assistance, accident notifications and also some multimedia and the diagnostic for cars. It's very -- and it includes various of customers, whether it's dealers, whether it's leasing companies, whether it's insurance companies, whether it's fleets or whether it's governmental and this is our main source of growth in Israel.

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Operator [44]

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(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.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 [45]

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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. We will be presenting at the Needham conference in January 2020 and we hope to see some of you there. I look forward to speaking with you next quarter. Have a good day. Thank you.

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Operator [46]

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Thank you. This concludes Ituran's Third Quarter 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.