Senstar Technologies Ltd (SNT) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magal Security Systems third quarter 2005 results conference call. All participants are presently in a listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded, November 7th, 2005.

I would like to remind everyone that forward-looking statements for the respective Company's business, financial condition and results of its operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated. Such forward-looking statements include, but are not limited to product demand, pricing, market acceptance, changing economic conditions, risks and product and technology development and the effect of the Company's accounting policies, as well as certain other risk factors, which are detailed from time to time in the Company's filings with the various securities authorities.

If you have not received a copy of today's release and would like to do so, please call Gelbart Kahana Investor Relations at 1-866-704-6710 or 972-3-6074717.

I would like to turn the call over now to Mr. Ehud Helft, of Gelbart Kahana Investor Relations.

Thank you. On behalf of Gelbart Kahana Investor Relations, I would like to welcome you all to Magal's third quarter 2005 results conference call. I would like to thank Management for hosting this Magal conference call.

With me on the call today are Mrs. Raya Asher, Magal's Chief Financial Officer and Mr. Jacob Even-Ezra, Magal's Chairman and CEO.

Mr. Even-Ezra will begin with opening remarks and Mrs. Asher will follow with a short description and discussion of the third quarter results. After that we'll open the call for a Q&A session.

Hi, everybody. Good morning to my friends in the United States. Good afternoon to my friends in Europe. Good evening to my friends in Israel. Anyhow, everybody have a good day.

I'm really glad about the results of the third quarter. As you can see, they are the best results that we had this year, compared to other two quarters. With EBITDA we started, shall we say, slow with that in the first quarter or poor results in the first quarter. We are coming up every quarter and probably we will continue this way.

If you remember, in my first conference call, after the first quarter and after the second quarter I said that the year 2005 will be better than the year 2004 and I'm still saying that, as you can see from the results that the year is almost finished, that we are going to achieve a better year in 2005 compared with the year 2004.

The third quarter, a lot of our work was with the same lines, the separation line between the Palestinian and the Israelis, which we announced about the orders that we have received as of the second quarter, but in the third quarter we did quite a lot of work on it.

We still have a lot of work to go on. And we believe and hope - depends on the weather and it depends on the infrastructure that the MoD will prepare for us, that we will achieve the same amount that we have done in 2003, of the seam-line, which was somewhere around the $12 million. We hope to do that or to be near to this result through the whole year.

The seam-line is only, again, it's not finished, even if we would do the whole work that we have and we accept in the year 2006 to have again a lot of work on the seam-line. Probably, we already know that on the first quarter--on the second quarter of 2006, we are going to do a lot of work on it.

With the other places we are continuing to work normally and as you can see, that quarter to quarter our revenues raised by 17%. This is the magic number we are always talking about, that we want to increase our revenue by 17% on a multiyear base.

If you look all about our revenues since our IPO, 'till the year 2004, December 2004, you'll see that compound average growth of the revenues was 17%. This is why this is our magic number. I don't know if we will achieve it on a 12-month base, but a multiyear base, for sure we will do that.

We are working now in the very final stages on a couple of big projects, which we hope to finish before the end of the year. But those projects, of course, will be the base for next year. I wonder whether to tell you the numbers, because if I tell you the numbers, first of all you'll run and buy the share and then I'll have to fulfill and be behind the numbers.

But we are negotiating a lot of projects - not a lot of projects, but big projects, but quite a few of them and we believe that before the end of the year we'll be able to announce about one or two of them already.

With the Homeland Security in the United States, we are still slow. Even the bid for the New York Airport, this is not finished and [Italy] was announced only lately, and we believe that it will be again something for the year 2006.

The DreamBox is very, very slow in sales, but with big, big hopes and big, big future. We just finished two tests that we have been carried by the US Navy, very successfully, compared with any other of our competitors. But 'till we will get the order - and you know the Navy, it will take quite a few months. So, be patient and bare with me.

Regarding the PipeGuard, we still didn't install any test sites at the customer place, but three of them are on the agenda and we do believe that we will do them, maybe before the end of this year. I know I promise it before. I know I said it and I know that I am late. But, be patient again. If I am patient, you can be patient as well. They're also verified that it will be in the very, very near future.

Regarding Smart, I would like to say a few words before you're asking me, so I'll tell you what's going on. Smart is producing very well. Just to remind you is that in the year 2004, we [lost a lot] of Smartware, about $2.2 million. The losses this year, by the end of the year will be around $1.2 million.

Just that you'll understand what I'm talking about, in the last quarter it was only around $270,000, which means we are progressing very, very nice and the trend shows that in a few more quarters we will break even and then we'll start to make the money.

I know, again, that I'm late and my assumption was that we, in the first quarter 2006 will break even, so again, be patient with me. It might take another quarter or two.

I think I will ask Raya to take over and explain a little bit the results and then we'll hear your questions.

In the third quarter of 2005, revenues increase 17%, as Jacob mentioned. The mix between the projects and the products has changed and in 2005 we'll have significant production of the seam-line projects, which we didn't have it at all in 2004.

As the gross margin of the seam-line project is lower than our product sales, therefore the gross margin decreased to 44%, compared to almost 45% in 2004. But as they said in our press release, we're still in our normal margins, which was expected.

The R&D expenses increased by 12% in the third quarter, compared to 2004. This is due to increasing development of additional new products and developing and expanding the [turn] products that we have.

The big increase in the operating expenses was in the selling and marketing expenses. The main reason is investing in marketing and selling the facilities of our new products. This is the main reason for this major increase.

The G&A more or less stayed the same, even slightly decreased.

By the way, the reason it was decreased is that the result of mergering the two companies that we had in the United States, which decreased G&A in the United States.

Operating income reached 1 million, compared to 1.2 in 2004, as a result of the expenses that I discussed before and dropping the gross margin.

Financial expenses were decreased by half. This is due to the public offering that we completed in 2005 and therefore the interest expenses were decreased.

In net income, we see that we reached 600,000, compared to 663,000 in 2004, which is a decrease of 9%.

In the 9-months, I want to remind you that the 9-months of 2004 included 1.2 million award that was granted by principle shareholders from their own resources and that also only affects the P&L, not the cash flow and not the balance sheet.

I would like to mention also the increase in the number of shares, due to this public offering, by 19%, and therefore, the EPS decreased to $0.06 per share, compared to $0.08 per share in 2004.

Okay, Operator, we'll now open the call for Q&A.

[OPERATOR INSTRUCTIONS] Ken Johnson, Private Investor.

I wanted to know, concerning the press releases, I know you wanted to keep things confidential, but since you do release the revenue anyway, I was wondering if you do get contracts some time during the quarter, can you at least state the amount if you don't want to say who and where?

I think it's a good idea and I think we will take it into consideration and maybe we will do a press release all the time that we have received so much orders of totals so much. This time I think - is this what you have in mind?

Yes, that would be great, because you know, we go months and months and the stock prices just kind of twists in the breeze without any news.

Okay, it's a good idea. Thank you very much, Ken--.

One more question, please. I don't know if we're going to have any analysts or financial company calls today, but I was just wondering if there are any prospects on any kind of analyst/stock broker firms that are going to follow the stock and give some sort of, you know, calling or recommendation on it?

The lack of analysts [we put it] very well, unfortunately. We are now talking with two analysts and maybe at least one of them will decide to cover us. I think this is one of our weak points, lack of analysts, and we hope that in the very near future it will be overcome, this problem.

Okay, well, looking forward to even more good news.

Steve Morris of [Dika] Management.

Congratulations on a great quarter. I wanted to ask, can you quantify the exact amount of the seam-line project during the quarter and also how much is still left on the balance of the year?

'Till the third quarter for the whole year, we did about $7 million and we believe we will reach 12, which means we still hope to do - we will approach 12. We still hope that we will do somewhere between $4 to $5 million this quarter.

Okay. What is your expected average gross margin over time?

Our expectation depends, of course, on how many projects we will do. The more projects we will do, the margins will come down. But our goal is to be around the 45%.

Okay. Also, what's your expected tax rate in the future?

About 30-34.

Okay. And lastly, your SG&A costs came in a little bit below my expectations. Could you speak to that and also what your expectation is for that number in the future?

As you can see that our G&A is almost constant, a little bit is coming low. We don't intend to increase it by no means. We only hope to decrease it after we will finish with Sarbanes-Oxley. Because you know, Sarbanes-Oxley is part of our G&A and no doubt that it is going - it's already cost us a lot of money. It's going to cost us so much more, but as a foreign company, we have to be ready next year to all the regulations of [Sarbanes-Oxley '06] and this, of course, might affect the increase in the G&A.

How much do you expect to spend in Sarb-Ox in 2006?

As little as possible. I have a big fight. But we have quite a - in a way, we have a problem, because we have to include all our subsidiaries in the same rules. And as you know, we are working with Ernst-Young, when they are not the cheapest company in the world. And I hope it will not be over or even less than $200,000. But I hope it will be less than that. And if I will achieve it, I think we did a great job.

Okay. And lastly, Coby, we had some discussions regarding the groundswell of activity here and talk about a border fence along the US-Mexican border. Can you discuss that at all? Have you been reading the same articles that I have and--?

There are a few articles lately in the newspapers, especially I forgot one of the Senators for one of the States over there - I forgot his name - trying to convince the government to be more serious about it and to put some money in it. Because very little has been done so far.

If you ask me if it's serious, if it's something that will be done in a year or so, no, I don't believe so. In any case, we are involved in the whole procedure. We are following whatever act is done. But I don't believe that anything will be done in the year 2006.

But you are seeing more talk about that than you had in recent years, correct?

No, it was already - if I remember right, about 8 or 9 years ago, there was a lot of talk. This was before September 11th. But this was because of drugs and smuggling of cheap labor, or illegal immigration. But this was what I call smuggling cheap labor. And there was a lot of talk at that time and we already put some means--some detection devices over there for testing and all kind of thing like that and then it went down, down, down, down.

Now it's coming up again. But the thing we have at the border, is we are involved in it already with the different agencies of the United States of America for about 20 years. So maybe I will be retired before something will come up. I don't know.

I hope not. All right, thank you.

Robert Gordon of Robert S. Gordon.

I've had the pleasure and privilege of speaking with you on a few prior teleconferences. On those occasions you made a statement, which was that 2005 will be a good year and that 2006 will be a very good year.

Now in terms of bottom line net earnings, I'd like to know - I think we'd all like to know, what is your concept of a very good year? Is it $0.50 a share or $1.00 a share? What would make you happy? What would satisfy you that yes, we have achieved a very good year? What kind of number are we looking at?

And I'm not asking you for specific guidance, because you may think a very good year is $0.50 a share and you may feel that we're going to do even a lot more than that, but you would still be satisfied in any given year that $0.50 a share, for instance, is a very good year. But I would just like to know in terms of defining terms, what you feel is a very good year?

A very good year is at year-end doubling my [earnings]. That's a very good year.

To double the net earnings we have. So, in other words, whatever we have - if we have 25--?

We don't have yet the whole year, so I cannot tell you. I think if I will double it in the year 2006, it will be a very, very good year.

Okay. So, for instance, if we do $0.25 to $0.30 for 2005, then next year, you would be hopeful of doing at least $0.50 to $0.60?

Yes, but I don't think we'll make 25 to 30% this year.

I said $0.25 to $0.30 a share?

Yes, I'm saying, so it would be, philosophically - you asked me from philosophical point of view what I consider very, very good year. I said double. I don't want to give any guidance about the figures. You can transcend them as you want.

Because you know, there is very, very, very good, there is very, very good, there is very good and there is a good. But if I'm talking about very, very, very good, I think if I double that, it's a very, very, very good. But [unintelligible] don't consider it as a guidance.

That helps us a lot. Believe me, it does. I want to thank you for that answer. But lastly, you mentioned - you were teasing us a little bit about one of these couple of contracts that you're hoping to announce by the end of the year, that it's a really big number. I'm just wondering, can you give us a little tease here about what kind of number you're talking about?

I don't I'm in position to give it.

Okay. Thank you.

Neil [Walton] of Fortress.

Can you just elaborate a little bit on some of this airport business in New York? My understanding is that there had been a large RFP or a $200 million preliminary approval of a piece of business in the New York airport. Can you elaborate a little bit on that and where we stand [inaudible]--?

Sure. First of all, it's very interesting the way it's working over there. And you as an American, for you it's even more important to know how these things work. There was a pre-qualification - 10 companies have been pre-qualified. I'm sorry, 8 companies have been pre-qualified, then another 2 tried to enter and they were entered and then there were all together 10 pre-qualified companies. All of them are what we call the giants of the United States [integrate].

After 2 or 3 months the [tender] of the bid has been published. And the terms were so tough, almost impossible to fulfill that as far as we know, as of today, only 2 out of the 10 intend to submit bids. Maybe another 1 or 2 will come onboard later on. But we already know at least 4 that have decided not to go on the bid at all, because they say such a bid is only a way of losing money. Because everything was open and everything was not really defined, etc.

Now, of course, we are working with all the [tenderers], I mean those who are going to participate and also [unintelligible] who are not going to participate, now we know that are not going to participate, but we still in good terms with them and good friends and we shall see it. Because I think [unintelligible] closed for another month or something like that. I think the date was somewhere on November then it was prolonged at least to December or maybe beginning of next year. This is not really - this is integrators have to know about it. And then probably it will take about 2 or 3 months to evaluate it, then we will know who got it.

So are we particularly aligned with one integrator?

We are not with 1. We are offering all our equipment to all of them. Because we are not going to make the integration anyhow. So we are going to sell equipment. We couldn't be pre-qualified for this other program, not integrators. We are not operating as integrators in the United States, as you know and therefore, we couldn't participate in this bid. We only can stick with - we can talk with integrators that participate, to use our products and with a big hope they will use it - they will prefer our products on our competitors. But probably depends who is going to win with them. With some we have better connections, with some we have not as good connections.

Okay, great. And also, can you elaborate a little bit on what's happening with PipeGuard?

With PipeGuard, the position right now that we are now waiting every day to finalize a Memorandum of Understanding with 3 different sites, 3 different companies for test sites at their own environment. It's easy to go and say, okay, I put you a test site, if it does work, it does work. I want to make sure that I put all the effort, but if it works, that there will be a continuation and we will get the order. And this is what is the Memorandum of Understanding is all about.

Unfortunately, it takes much more time than we expected. I thought that by now I will have at least one contract ready. Which, I don't have it yet. I am waiting. And I hope I will be able to surprise you one of - in the very near future.

Okay, great. And last question, the market opportunity in Europe overall, last time we spoke, sounded pretty interesting. Can you just kind of talk about how you see the market overall within Europe developing and what the real market opportunity is, big picture? Like there is, you know, remaining airports or you know, you name it.

We did already cover those airports into Europe. And talking about [East and West] all together. As you know, we have received EUR30 million [and there's $30 million] that we announced about 2 months ago in one of the European countries, which really couldn't discuss, because we are under confidentiality agreement that we will not announce not the country and not the type of the project. But I can tell you it's in Europe. And we are progressing with this job. We already started to supply and eventually we are going to start to install. We're already [in charter] to supply the product and we are going to start to install. We are negotiating another 2 of them in Europe.

Do we have anything more besides those 2 that [unintelligible] were speaking? Yes. There are some smaller projects, mainly for the [unintelligible] in 1 of the European countries that we hope to get maybe within 2 weeks time.

Mr. Eric Green of Prescott Group Capital Management.

Hey, at the end of the first quarter, back in May, you let us all know that your pipeline value was at about $120 million. Could you give us an update on what the value of the pipeline is now?

I never said we had a pipeline 120. I said we are negotiating $120 million projects. It don't mean that I had them already in the pipeline. If you are dating 5 girls, you are married only with 1 of them. That's about the same in business. When you are negotiating with 5, you hope to get 1. That's about the same situation.

That's what I'm saying. We do hope that we will be able to announce shortly, before the end of the year, [at least] 1 or 2 projects.

Okay. Colby, did you give an update on the Polish border project? Did I miss it?

By the way, I want to grab your attention. You know me already for years. I'm very conservative. Even if I have an order and I'm not 100% sure about payments, like LC or down payment or something like that, we don't announce that we have received the orders.

There are too many companies in the stock exchange that are announcing the same project 4 or 5 or 6 times. Once when they heard about it. Once when they started to talk about it. One when they submitted it. One when they thought that maybe they got it. And maybe at the end, also when they are getting it.

I am not doing this here. You've known me for years. I'm only announcing orders that I know that I'm going to supply and get paid. Because in some countries, it's not enough to have an order if you don't have the guarantee for the money. And I am 100% sure. This is why I never ever - it happened during the last 12 years that I am in the stock exchange that we announce about an order that we didn't fulfill. Because we are very conservative about it.

Fair enough. How about putting it this way, are you dating more girls now than you were back in May?

Yes.

That's good. The Polish border project, have you--?

There's a one that is a blonde.

I'm not going to touch that. What about the Polish border project? I didn't hear you give an update on that.

There is nothing to give an update, because the whole project has been postponed. You remember the stories about everybody that was disqualified besides one company that was a Polish company. And then of course, people went to the court, not only us, but other companies as well. And as far as we know, the whole thing was postponed and they are talking about coming with a new bid. So let's wait and see. This is the Polish way. It's not a Polish joke, it's a Polish way of living.

Okay. All right, Colby, one final question. We've been talking about pipe yard for a couple of years. How do you feel about the overall potential size of that market now, versus a couple of years ago? I mean, have your views of it changed for the good or bad after--?

You know, the market, there is no doubt that the market is there. I feel as strong as I said before and maybe even stronger. Every day I am getting - not every day, but once a month I'm getting a list. Maybe I will bring it with me the next time I'm going to see the people in the United States. A list of several targets that has been done to oil pipes and gas pipes. And I believe that the last one I saw was on July or August, where there were over 30 in 1 month, over 30 incidents of people that try to break into the pipe. Some of them have been killed. But this is not a big noise in the newspaper, for the very simple reason, because it wasn't a catastrophe of hundreds of people that has been killed, but only 5 or 6. Who cares whether in these places, in Columbia or in Russia 5 people has been killed? It's not a big deal. So, there are all the time - and it's coming more and more. And the more expensive the oil becomes, the more attractive it is to steal it. Because it's worthwhile. It's doing much more profit to the thieves to steal it than it was before. If the [value] was before $30 and now it's almost double, then of course, even more than double, then it's more attractive to steal the oil right now. So we can see that in the last few months since the increasing price of the oil, more oil has been stolen in some countries.

All right, Colby, I appreciate your comments and good luck with that blonde.

Jeff Kessler of Lehman Brothers.

[Inaudible - technical difficulty] seam-line project. And I came in late. Could you just reiterate what hurt your gross margins this quarter?

You asked what caused the drop in the gross margins?

Yes, that's one. And then the other, just on the seam-line project, did you spend a lot on that revamping--?

That's exactly the reason is the seam-line, because the Israeli MoD our margins are lower already [4] years. It's not something new. And if we are doing in one quarter a lot of work for the Israeli MoD, in this instance, for example, it's the seam-line, the margins are dropping.

All right. And also, can you give us an update just on your focus, projects that you have going?

We never give a forecast, you know that. On the focus?

Yes.

Okay. We just finished to do 1 [nice] job, which was the first time that we did it in a city in Israel, covering the whole city, protecting the whole city and managing the whole city. This is exactly a typical job for FORTIS. We are going to install some more cities like that in the near future. We are waiting to get - now that we already done 1, to get more orders. And this of course will increase our scope of work with the FORTIS. That's besides doing the normal work with Israeli MoD and besides doing it in the project that we are carrying out in other places. We have only, shall we say, something like 25 installations right now of the FORTIS all around the world and everybody is very happy and very enthusiastic about it.

By the way, I'm going to talk about it in the conference on Wednesday.

Yes, that's fine. That's all the questions I had. I guess I'll see you guys next week.

Ken [Nadi] of Wachovia Securities.

Could you give us an update on how much more business in dollars there is left for the Israel seam-line fence?

Israel will do all the - when Israel will finish the whole job, I mean, according to what was decided in the Israeli government, Israel will finish the whole job. It's today only less than half of the job has been done. And if you want to know in dollar-wise, I've still to do somewhere between $30 to $40 million of work.

Great. And also, could you give us an update on--?

That's to count the orders we have in hand, of course.

Okay. Could you give us an update on what's happening with the Gaza Strip fence?

You read in the newspapers that they're going to put a new fence over there. Fortunately or unfortunately, we don't sell fences to the media. We don't sell it to the newspapers. No doubt that if any decision will be made about it and we will get the job, we'll announce about it. The news are not very accurate, to say the least.

What's the potential for you, dollar-wise if that does--?

The potential, it all depends what type of means that we'd like to add on. People, you have to remember that we did all the fence and all the perimeter around Gaza. It's our work. We did it and we finished it already few years ago. And from time to time we make some upgrading and things like that. But if they will decide to do what some of the people think has to be done - it's not decided as yet. That's why I have to repeat it so many times, to be careful that people will not ask me why you didn't do the job.

If some people believe that in order to get so much better systems all around, you have to have somewhere around - I'm making the calculations - about $12 million to $15 million. Whether it will be done, how much it will be done, or maybe they will decide only to upgrade by $2 million, that not yet has been decided. It's still in the hands of the engineering department of the MoD and they didn't make any decision [ever now].

Thanks. Now, as far as opportunities, do you see a big opportunity for [traveling] security in the United States and Europe for your products?

We believe that we do have a big opportunity in the airports. We do believe we have a big opportunity in the Underground. We do believe we have a big opportunity all around. It all depends whether the budgets will be spent or not. This is the big question.

We opened an office in Washington recently and we talk to people in Washington on doing this job of Homeland Security with the Homeland Security agencies. So we do believe that this will come out. It all depends - shall we say, we have no doubt it will come out, it only depends when.

Are you working to secure business with the New York Transit Authority for their large project they're working on?

We are not doing it directly, because we cannot be integrators. So we are working or giving or using our products through the big integrators. We are not working at integrators in the United States. We cannot compete with Honeywell or Lockheed Martin or companies like that [OS3], so what we are trying to do is to join them and try to convince them to use our products. So that's what we call teaming-up.

Right. Have you worked with them in the past?

Oh yes.

Also, just a suggestion. I've talked to several of the analysts that would cover your company and it seems that there's an image problem. I think the Street largely views you as a company that has built a fence in Israel. They don't view you as a company that has such a diverse product mix and such potential.

I don't think so, because at least the people that are in the trade, know exactly what we are doing and even sometimes they think much more about ourselves than we think about ourselves. And I don't think this is the problem.

What do you see as far as the problem as far as getting coverage?

Maybe I let the IR people tell you.

I think the coverage issue is mainly a matter of size and willingness of analysts to actually pick up coverage [in respect or view] of any other business they may do or may not do.

I'm going from my personal conversations I've had with 3 or 4 of the Homeland Security analysts that cover companies your size. And they basically have voiced to me your view that your company is viewed as a company that built a fence in Israel and you know--.

Okay. I would appreciate if you would be able to email to me the names of those analysts, so I'll be able to contact them.

We are in the States every quarter and we're quite happy to meet everyone who's interested - anyone who's interested. Okay?

Okay. Well, good luck.

Operator, I think we'll take last question. Is there any?

I have no further questions at this time.

First of all, I thank everybody that was on the line and were listening to our conversation. And I still believe that we are on the right track that we are growing, we never stopped to grow, we continue to grow. And it's correct the bottom line is not as it is supposed to be. We believe and we hope that in the future it will be so much better.

I thank everybody, and have a good day.

Thank you, sir. This concludes Magal Security Systems third quarter 2005 results conference call.