Senstar Technologies Ltd (SNT) 2006 Q1 法說會逐字稿

Welcome to the Magal Security Systems First Quarter 2006 Results Conference Call.

[OPERATOR INSTRUCTIONS].

I would like to remind everyone that forward-looking statements with respect to the company's business, financial conditions 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 in 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. Helft of Gelbart Kahana, Investor Relations. Go ahead, sir.

Thank you. Good morning to everybody and good afternoon. On behalf of Gelbart Kahana Investor Relations I would like to welcome you all to Magal's first quarter 2006 results conference call. I would like to thank Magal's management for hosting this call today.

With me on the call 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 first quarter 2006 results. After that we will open the call for Q&A.

Kobi, would you like to begin please?

Good morning everybody. The first quarter as we say by definition is not a good quarter for our business as you know for many years. This year it was even worse and was affected due to many risks. One is the termination of a big order that we had from a European company which we announced about -- we made a press release and we announced it. I will comment to this in just a few minutes.

And also you read the orders that we were supposed to enter and we were supposed to work on were delayed by weeks, maybe a month. If you remember I told you 3 months ago that there will be some good news during the coming 3 months and all those good news has been postponed to the next 3 months to come, which I do really believe and hope that they will come through in the very near future.

Now those two things reduce the expected revenues that we had for the first quarter and we even were a little bit lower than the revenues of the quarter of last year. Usually we are always lower than the fourth quarter but this time we were also lower than the first quarter of last year.

So those, let's go ahead and maybe some detail. Those orders that have been postponed and we are waiting for them and were delayed some of them are almost in the procedure of signatures. There's only formal things that we have to wait to. But as you know that I'm personally very conservative and so is the company, we don't announce about any new orders before we 100% have it in our hands and we are sure that we are going to get the money for it. So this is why -- unfortunately we didn't give you any new announcements as I said 3 months ago. [Never we cancel work].

Let's go now with the projects that we had and was terminated by the clients with no reason whatsoever take us in a surprise. We didn't expect this to be and all of a sudden it came through. Once we heard about this we gave the first announcement and then we gave the second announcement about this so everybody will know what exactly was going on in the company.

We didn't waste too much time and the thing is already in court. There are two claims as we put. One is an injunction against realizing the guarantee that we gave to the client and which we had received, and separately injunctions for about a month and then the cost with [inaudible] besides. And the second we put into the court a claim asking the court to start determinations and to ask the client of ours to fill the contract as is.

Of course, it will not be -- if we will get it there will be the third claim which will be connected with the second claim covering us of all damages, expenses, loss of profit, etcetera that has been caused due to this termination of the contract.

At the end of the day I don't think, even in the worst case, I don't think that we will really lose money on this project, but of course we will not make money and we will not have the revenues from this project. I'm talking about the worst case. But it will affect us because of a decrease in the revenues that we planned to have in the first and the second quarter. It will hurt us and those as I mentioned already in the press release the first half-year will be affected by this terminations.

If you remember I was talking about Smart and I'm going to take some steps to reduce the expenses and reduce the expenses and reduce the losses in Smart Interactive. And we did it, and of course, the quarter -- our expenses have been cut more than by half and then we will see the real affect on the third quarter and the fourth quarter so we are progressing in that.

There is a lot of action in the market that is taking place right now -- right now and we hope that we will be able in the second half of the year to cover the gap that has been created according to our plans in the first half of the year so at the end of the year we will be able to show higher revenue than we had in the year 2005.

I will ask Raya Asher please why don't you have your remarks regarding the financials.

Hello to everybody. Revenue for the first quarter of 2006 reached $17.5 million which is a decrease of about 2% compared to the first quarter of 2005. The gross profit in the first quarter of 2006 reached $5.7 million compared to $6.3 million in the previous quarter last year -- in the second quarter last year.

The gross margin decreased [42.1]% compared from 5.7% last year. The range of the gross margin on a [normally] of our business and the changes in the gross amount is due to changes in the mixture of projects and the difficulty now with the business to compare quarter-to-quarter because the projects they are changing, of course, constantly. But we are in the normal range of [inaudible].

Operating expenses in the first quarter of 2006 were almost the same as last year. Therefore the operating income decreased to $479,000 compared to almost $1 million in 2005 first quarter because of the decrease in the gross margins.

The net income of the first quarter was 150,000 compared to almost 300,000 in the first quarter of 2005. I also would like to mention that the cash flow from operating operation was positive this quarter due to collections that we had from our trade receivables.

I would like to open it to Q&A.

Yes, Operator, we'll now take questions.

Thank you.

[OPERATOR INSTRUCTIONS].

The first question is from Jeff Kessler with Lehman Brothers. Go ahead, sir.

Hi, Kobi. Hi Raya.

Hi.

Hi, Jeff.

Hi, a question about the nature of the contract that was terminated and also the nature of the contracts that were -- that were delayed. I know you're not going to give us the names nor the exact contract but could you in general terms describe what these contracts are? Are they airport perimeter contracts? Are they commercial/industrial perimeter contracts? Are they government-related contracts that gives us some idea of the types of contracts that you might expect to be -- well to be announced later on and obviously you may or may not want to talk about the nature of the contract that was terminated?

The contract that was terminated was an airport.

Okay.

So that is it. The contract that we are waiting for is also an airport, not the same one, of course. We are also waiting for another contract for the DreamBox and we are waiting for a very nice contract for the PipeGuard.

All right, did you say PipeGuard was one of the -- one of the contracts that you thought -- that was delayed a little bit?

That's correct.

Okay.

Even though -- even though I said from the very beginning -- the beginning of the year that it will be around May, I still -- I still believe that it will be May/June or something like that.

Okay.

The Dream line we continue to work as usual. We don't have any problems on that and it was delayed and probably everybody heard that on the [same] line yesterday the government has declared it to speed up the work and also they decided that two lines will be about 750 kilometers out of which about 340 kilometers has been done here to date, but there's a long way to go.

Of that -- well you've just taken away my next question but I'll try to ask that.

It is nothing.

I didn't even ask you yet. And then that is of the -- of the 410 kilometers to go, what portion of that do you think Magal is going to get?

You know, here to date, here to date we did about 80% of the total. I cannot comment. It's already -- things are going on bid and all the time they're making new bids. We don't want bid. We are getting to bid so it's hard to say but if I will -- to be very, very conservative I will say actually we will do 60%.

Okay and the final question --.

By the way next year we are going to do about the same amount as we did last year.

Okay and the final question is regarding the gross margin mix. Obviously the gross margin was down on a -- on just a slight dip in revenue but nevertheless the gross margin was down and you mentioned that the mix -- does the mix have to do with more seam-line, less commercial work? Is that equal less gross margin? Or you get higher gross margins on the commercial and the airport work? And the DreamBox work that you do?

You are absolutely right. On the seam-line our margins are lower while on airports usually are higher and especially on product are again higher. So we will start to sell the DreamBox and the PipeGuard. Naturally the margins we cannot.

Okay, all right. Thank you very much.

You're welcome.

Thank you, your next question is from Robert Gordon. Go ahead.

Good morning Mr. Chairman. How are you?

Hi.

I'm very disappointed to hear about the contract cancellation. Can you give us an idea how big the contract was and how it's going to impact on the revenues and earnings?

It already had an impact on the first quarter because we did -- in order to be very conservative we didn't take any revenues, any revenues from this project into account. The product, the project was about on May 31st last year and it was for about $30 million.

Okay that was one of the two current tracks.

That's right and it was -- this one was big one. There were two contracts and the big one, was the big one that was [inaudible]. So it is going to have an affect on the revenues as you can understand. That's why I said it will affect the revenues of the first and the second quarter.

What do you feel the chances are of recouping some of the lost damages in court? I know you anticipate doing something like that.

We did.

I know I mean [inaudible].

I said it already we put already our case to the public court. You know I don't know what you asking -- when I'm asking my lawyers they said I have a very good chance. If I'm asking their lawyers they suggest you don't stand a chance at all. So [inaudible] to win.

Well how can they possibly say you don't have a chance in court. Are they claiming that there was something you did wrong or something?

You know what? It's very hard to say what they are planning because they every day they get another [claim]. They came up with another claim so it was very difficult really to understand what they want. The problem was that the whole management been changed and a new bidders came in which they didn't know exactly what it was that was wrong.

But I believe that according that our charges are quite to agree to cover our damages and loss of profit.

Well I definitely think where I come from if somebody enters into a contract and they don't follow up on it they're going to have to at least make good on some of those lost earnings that the other party anticipated. I mean you just can't walk out on a contract.

So I would that the company should be pretty confident that they're going to recover something.

I agree 100% with you. I'm coming from the same environment.

Now in a prior conference call you mentioned that you were hopeful that the company would do much better this year and hopefully double earnings from '05. Now keeping in mind we had this contract cancellation how is that going to affect that prediction?

First of all may I just correct you. What I said the the company will do much better this year I never said double earnings because we never say such things. So I think that it will attempt also higher income, earnings and not -- I never mentioned whereabouts.

I still believe that we will do better than last year. Of course, it will affect because if we had this project continue we will do so much better. But at the end of the day I believe we will do better than last year and our earnings will also be better than last year. I think very soon.

Now the US Senate last week voted for the appropriation for part of the fencing at the San Diego area, so the vote was 59 to 39, which indicates to me that the Senators are about to embrace the House of Representatives concept of fence in the southwest which I think they're calling for 700 miles and a double fence so it would actually be 1,400 miles. Now that would be about a $4 billion deal wouldn't it?

Well different conditions. We have about $7 billion but whether it would be $4 billion I don't think we will get all of it. But regarding the borders of Mexico and the United States this will be only what you were talking about will only be the [inaudible]. If you read the tender document that's already published you can see that they're talking about 2,000 miles and are also talking about the north border as well. And this will be only the first stage that we start with.

Now there will be only maybe four, maybe five big companies that are going to participate in this bid. And we are involved with both companies and we do believe that we will be part of their solution.

When you say part I think the prior conference call you mentioned that you were not going to directly bid. You were going to work through an integrator.

That is right.

Which is a big company like a [Bechtold] or a Lockheed Martin or something like that.

Lockheed Martin, like L-3, like Boeing, like Raytheon, what else?

Exactly. Now assuming that the company gets that deal what percentage would be Magal's?

It doesn't work on percentage because it all depends on the contract and what they are going to do. There are different concepts of protecting the border of the United States. First of all there is a lot infrastructure that has to be done and we don't have any part in the infrastructure like building roads and things like that.

The second part will be probably contains [and make records] and then airplanes and things like that which we don't have any part of. So let's put it in another way. About this 700 miles you are talking about is what we are calling about. I don't know, we -- I think it was 600 miles of fencing, 700 miles that we were talking about. We believe that our part will be $100 million.

Now would you get -- would you get that regardless of who wins the contract and only if --.

No, no, no, no.

-- only if that integrator gets.

I mean no, always it's only an integrator that can get it. There's nobody that did not integrate it that can do the whole thing and not be an integrator. And we know who are the integrators. Already we are pre-qualified. And we are in touch with them and they are in touch with us and they came to visit us and we visit them. Somebody is coming to Israel and visit me and he's arriving in the morning, go back in the second day. I know that he come for a trip, a tourist, but he came for business.

So he's cover over here a couple of teams has come over here. It's not one man it's the whole team. They're coming over here and see how can we be involved within their designing and their planning and their concept of how to contract the builders. Because we are of one of the few companies in the West that does have quite a lot of experience in protecting borders. Not too many companies like that in the world.

So people are coming to us and they want to work with us and I think it's -- I feel this is a big compliment.

I notice in the statement that the new prime minister made yesterday he seems to be and I'm speaking of the Prime Minister of Israel, of course, he seems to be interested in --.

In border, the Prime Minister yes.

I know hopefully Thursday they said that he'd be speaking.

Yes that's correct.

He seems to want to demarcate the entire boundary of Israel with fences. Does that seem to be your impression?

That's all the bottom of Israel are already with fencing, with our protection. All the borders are with the exception of the separation lines where there's no borders because borders haven't been finished. Now the separation -- the separation part of this is about 7 -- that's what I said 750 kilometers out of which 340 have been done, out of which 300 were done by us. So we are very well involved in it.

What about the Gaza fence that the Defense Minister talked about, about a year ago. He wanted to put a double fence with automatic machine guns.

There I again correct the information you have. Because we never ever declared by any officials that are going to make a double fence with automatic machine guns etcetera. There's where the media has talked about this. No official talk to, never ever talk about it. And as a matter of fact it was [inaudible].

I mean is it going -- is it going to get done or not?

No.

It is not?

No.

Okay.

It's really not needed because if today the systems that we put for protecting Gaza are so good that there was -- there's not one case that didn't and shoot through the fence into Israeli areas. That's why they didn't find any reasons why to put another one.

Okay very good. Well thank you so much.

Thank you.

Nice talking to you, take care.

Thank you our next question is from Ken [Liddy] of Wachovia Securities. Go ahead.

Yes good evening. How are you?

Very well, how are you?

I'm doing great. I just have a question with regards to an order that was announced on the US Government called Biz Opps. It's a contract that was announced last month with the airports for sensors. I was wondering if you could talk a little bit about that? Is that a promising contract perhaps that you're going through?

We don't know exactly what are you talking about. We do have contracts, one contract which is now every day work, so we're flying sensors to the airports, to the Navy, to the Army and to the different installers and integrators that are working with those entities. But I don't know what specific one you are talking about so I cannot refer to it. So I cannot tell you.

This one was for intrusion protection centers protection and evaluation by the US Air Force for ground centers.

I can tell you one thing. Probably, I don't know if this is the specific one you are talking about but we are a regular supplier of the Air Force for perimeter intrusion protection. That's Air Force so unless -- if it's one of something very big I wouldn't even know about it because this will be in the current work of the local companies wherever.

Understood. As far as this past quarter what percentage of revenues were from Israel's seam-line fronts?

Depending what year?

Not this past quarter.

By this quarter?

Yes.

This one is not quite high. It was almost -- it's let's say a little bit less than 40% was coming from the seam-line.

And going forward for the rest of the year do have a -- do you expect it to be around 20% of revenues, 30%, 15%?

We hope that we be the same as we had last year. Last year we talk about 20% of our revenues and this year we believe it will be a little bit less than 20% because we do believe that the revenues will increase not money-wise. So shall we say it's about 20% it makes sense.

Okay with regards to -- you talked that you're working with a major contract or contracts for airports. What -- what is the market opportunity for you in some of these contracts that you're -- were confident in? $10 million, $5 million, $20 million?

Nothing that's [inaudible]. We are talking about projects that are running $5 million to $10 million.

And about how many are there that you are --?

We are talking about three of them which we believe that one will be finished very soon. And yes that's answering your question?

As far as there was talk a few calls ago about the New York airports. Has anything been done -- has anything moved forward with that?

The New York airport as you know Raytheon has got the job. Raytheon got the job. Lockheed Martin won't go ahead with it. Raytheon got the job and the job was depending on designs and contracts. Now that is done -- the airport hasn't been finished as yet and has not been approved as yet and I don't believe anything will be done before the end of the year. So we are naturally involved in trying to put our product in the design and we do hope that it will be approved by the Port Authorities. Once this will be done then next year then we will see some revenues out of it.

Are you working with Raytheon often in the past?

Yes we do work quite often with Raytheon on small jobs because usually they have [weapons], very common in these type of jobs. Most are becoming more and more interested to work on those jobs so they are one of the contractors to the border of Mexico and Canada and the United States but we do work with -- we did work with Raytheon for some time in the United States.

We also used to work with this -- I think one job with them outside the United States. But Raytheon is such a big conglomerate that one group is different -- if you work with one group it doesn't mean that the other group knows about you. So you have to every time taking steps from the very beginning.

With regards to PipeGuard you talked about a project that you're trying to secure in the Americas.

[inaudible - microphone inaccessible].

Are there contracts that you expect will close in the next --?

They wanted -- we do hope to finish very -- as I said, before the end of May or maybe mid of June and there's another one that we are negotiating which I cannot tell right now when it will be finished, the negotiation.

And is this one larger than the ones that you had talked about before?

I'm sorry there's two. There's not one. There are two that we are talking about. And one of them is much bigger and another one is not.

And one last question, what -- what are the projects or the potential for PipeGuard in the next 18 months? You talked it was like quite a large opportunity. Do you still feel it's a big [inaudible]?

There's a little bit these opportunities but as you know we never give any forecasts. So for sure I will not give a forecast for a product because I don't give a forecast for the company.

Okay, okay well thanks, and good luck.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS].

There are no further questions at this time. Mr. Even-Ezra?

Yes just for to conclude this conference by saying and I repeat myself and usually I'm right, this thing will be better than a year -- than last year. For sure the second half will be much better than the first half. The first half will be disappointing as I mentioned before and I wrote in my press release but those things are happening and we do hope to overcome it and come back with stronger regular growth in the second half.

And we do hope to get the new job that we are working on very soon and then everybody will be very happy. And the only thing I would like to wish myself and everybody who is hearing me we have our Independence Day which is today of this happy holiday in Israel and I wish everybody all the best and this whole year.

Thank you this concludes Magal Security Systems First Quarter 2006 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.