Senstar Technologies Ltd (SNT) 2006 Q2 法說會逐字稿

Welcome to the Magal Security Systems second quarter 2006 results conference call. All participants are present 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, 31st of July, 2006.

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 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 1-866-704-6717 or 972-3-607-4717. I would like the turn the call over now to Mr. Kahana of Investor Relations.

Thank you. Good morning and good afternoon to everybody. I would like to welcome you all to Magal second quarter 2006 results conference call. On behalf of Investor Relations, I would like to welcome you all to Magal's second quarter 2006 results conference call. I would like to thank Magal's management for hosting this call. With me today on the call are Ms. Raya Asher, Magal's Chief Financial Officer, and Mr. Jacob Even-Ezra, Chairman and CEO. Mr. Even-Ezra will begin with an opening remark and Ms. Asher will follow with a short description and discussion of the second quarter 2006 results. After that, we will open the call for the Q and A session. Mr. Even-Ezra, you may begin.

Good morning, everybody in the United States. Good afternoon to those who are in Europe and in Israel, and I would like to start with the most actual saying that we have issue, we have now in Israel which is the war in Israel on the north borders and in Gaza Strip. I would like to let you know that in Magal itself, the factory itself which in the center of Israel, so far we were not affected by the war nor in the north nor in the south except of course that we worry and everybody and every workers worry about what's going on on the border. The production is in full capacity, and we are delivering all the that we do have to ship our freight our orders we do have abroad, and we do continue our work as normal.

The fact that we have this war in Gaza and in the north part of course raise the question whether we are going to get more work or less work in Israel. Answer is that we are going to have more work in the future once the war will be over. First of all, because we have to, no doubt will have to reconstruct and rebuild the primary security systems which are used on the north border and also in Gaza Strip. All of them are produced by ourselves and have been supplied for many years by Magal. We already know that we are going to have work over there.

Besides that, there are other places. We know that the MOD in Israel is planning to increase the security which means for us more sets of systems and products. Regarding the Seam Line, or the separation line between the Palestinians and Israel, which we are the main constructor over there for the electronic system, so far we continue to work as normal. We don't believe or we don't see any disturbances in the near future. We hope that everything will work according to the schedule until the end of the year, and probably next year we do hope to get more orders in this particular item, and we don't see any effect of the war on it except that it is our work for the MOD we do believe will grow.

Regarding -- I would like also to let you know that a few weeks ago on primetime in the main television station in Israel, division number 2, station number 2, primetime the weekend 8 p.m., one of the reporters give an introduction or he showed a tape regarding the FORTIS, how it is protecting a civil village [indiscernible], which is a small town not far from the airport, and it was so positive that the next day we got already few telephone calls from other mayors of towns in Israel that are interested in this particular system which is managed by the FORTIS. You will also be able to see that on our Web. In a week, you will be able to see that. It takes a few days to prepare it because we have to put subtitles in English because otherwise some of you won't understand the Hebrew of this program. I advise you to look at it. Within a week, it will be on the Web and you will be able to see this movie, and it shows how we are protecting the town and what is the most important sentence which I believe that the Mayor said is this program was that the criminality in the village went down by 57% which is unbelievable, very effective. Nothing to talk about terrorists, nothing to talk about terror, etc. but only to reduce the criminality by 57%, and probably it will be more in the near future. It is a big achievement that proves that the system really worth the money that the people invest in it.

Regarding Smart, as I promised in the beginning of the year, we are going to reorganize the whole thing in order to bring it to even, to breakeven point, and I am glad to announce that already on the second quarter, we almost break even. We had still $10,000 loss, but we break -- we can say we already break even, and at least from point of view of cash flow, it will be positive and we thought to be negative, and which will help us a lot in the future of Magal, and at least I am happy that the management achieved the goals that were put in front of her to bring the whole thing to break even which means that in the near future we might even expect some profit coming.

I cannot speak the problem of the East European order that was canceled. As we announced already in our F-20 that was published on the 17th, I believe, of July, two weeks later and I explain in a minute why it was two weeks later, and we showed we had to reduce the year 2005 $7.3 million of revenues, and it affects the bottom line by something like over $4 million which brought income, the net income of, the net loss of last year to something like 1. to 3.2 million instead of 1.5 which we announced on February. In the last minute, just before the day before we were supposed to publish the F-20 which was June 30th, just the day before the East European customer asked to take or to realize -- I am sorry -- a day before the 15th, or the 11th, July 11th, he asked us to realize another guarantee, I think I use that word which is what conditions guarantee, and unfortunately or fortunately, the client agreed to note or the bank to realize the guarantee that it will be held in the quarter, and I think the hearing will be somewhere towards the end of August. But a conservative approach as we do all the time, we already put it as an expense which was about $1.4 million. We already put it as an expense on this project, so there will be no more surprises, we hope there will be no more surprises for these projects. In the meantime, the hearing in this European country regarding this project where we put the claim against the client is progressing, and we believe that it will start within two or three months. In about two or three months, the hearing will be started, and we hope that we will win. We start the process in two or three months and we hope that the court will. People are trying to help over here, and we hope that it will be good for us at the end of the day. I think I spoke too much already, and I let you ask the questions and before that, I will ask Raya to give you the figures of the second quarter. Please, Raya.

Hello, everybody. In the second quarter of 2006, revenue was $14.9 million compared to 13.2 in the same quarter in 2005, which is an increase of 12%, and an increase of 10% compared to the first quarter of 2006. The gross margin, which about 42%, which is in our normal range of gross margin. Operating expenses were $5.6 million, and we see that a decrease compared to the same quarter of 2005 in 8%, by 8%. The operating income was 645,000 compared to an operating loss of 1.7 million in 2005. I would like to remind you that a quarter in 2005 was adjusted to reflect this cancellation of the project in eastern Europe as Jacob explained before. The net income in the second quarter of 2006 was 270,000 compared to a loss of 1.6 million in 2005 as adjusted. I would like to open to Q&A.

Operator, we'll open the call now.

Thank you very much. [OPERATOR INSTRUCTIONS] First question is from Gary Markhoff of Smith Barney. Go ahead, sir.

Can you review the source of the drop in the sales and marketing? Is that specifically sales and marketing percent specifically related to the Smart business?

Gary, good morning to you. It is long time that we talk. Yes, the reduced expense in marketing mainly is regarding Smart.

Is that going to be structural?

Yes.

Okay. How does that business grow if you're contracting the selling and marketing effort?

We change the whole system. Instead of having our salesforces running around and to make the installations, et cetera, we are just doing the monitoring. I think I explained what we wanted to change in general on last conference call, but nevertheless I will repeat it. We are now only doing the monitoring. The sales is all concentrated with one sales manager, and all the sales is done by Dimas and by Integrated.

Okay.

The dealers are doing the sales, and we are doing the monitoring.

Okay.

We are going still to grow, but we will not have the expense of the sales of the systems. Not only that, but also change, that change that we are in contract with that continue to give us more and more sites to put in, and that of course also will increase the sales. Of course it will not be a big break through, but it will keep us over the water. It will bring us probably in the near future some profit. Hence we will feel that the market is ready and that and we can start again with all full steam to make sales and grow the Company.

Okay. Could you give us an update on PipeGuard, the last quarter's conference call you had promised a starter order in order to get bigger. Can you give us light on what's happening right now?

If I will give you the same answer I am getting from the client that I am sure you will not be happy. The answer is tomorrow. Every day when I am calling the customer, they say tomorrow you will get the order, but it is the nature of our businesses. I really have to admit that the mistake in estimating how long it will take to get the order, but again I can tell you tomorrow because I was promised within two weeks this was the last promise I got yesterday from the customer that everything is ready, and we can sign the contract because the contract already has been approved, not signed, but all the wording with all the lawyers, their lawyers and our lawyers and everybody agreed and everybody is happy, and we already also drank the time. But the contract that was not signed, yes, because the board has to do this and that and all the formalities to be done, and we do all that really, really, really this time we'll have it contract and we did it.

You expect it in two weeks or whenever it hits?

Yes.

Which geographic region of the globe is it right now?

We don't want to publish it now.

You mentioned the Americas last time.

I don't remember that I mentioned it,.

You said the Americas. I asked if you wanted to make it North America or South America, and you said the Americas.

Keep it as is.

So that's the same situation?

Same one, yes.

Okay. Could you also shed some light on the balance sheet regarding the difference between June 30th and December 5th, the flip-flopping of the trade receivables and unbilled accounts receivable?

I will answer that, Gary. Hi. In May -- December, we announced that in the second half of 2005, we did a lot of progress with the same line, and the customer is Israel, the Minister of Defense, which pay back in the beginning of 2006. This is the why the trade receivables went down by a lot, and this is the answer from that.

Okay. And the unbilled accounts receivable is back -- is also with the Israeli government?

It is again, most of it they are new and streamline the project that we build in May 2006.

Okay.

Gary, the system was MOD every time we get a new order. (multiple speakers). Whole streamline. Every time we get a new order and start a new account.

Okay. Could you go back and touch upon the story you're talking about regarding the towns also inquiring? Is that the FORTIS product?

Absolutely, yes. Look at the web within a week and tell me your opinion about it.

For sure, I will. Could you tell us what the experience has been for the first town that went for utilization?

It's already for six months, and the mayor said it on TV that 57% of one village and criminality has been reduced by 57% and (indiscernible) and criminality has been reduced. I think it speaks for itself.

You talking about shoplifting, murders? What are you referring to when you talk about criminality?

Absolutely what you're mentioning. It is done by teenagers or what you we call over here juvenile criminality and now we don't have so many in these parts. We cannot say anything specifically, but a lot of thieves have been caught due to the system, and once they are caught, stopped killing, stopped going to the shops and factories and warehouses and things like that.

Okay. Could you also shed some light on what's going on right now regarding possibilities in U.S. airports and U.S. borders?

The U.S. airports, as far as we know, they are now designing and making a different design of airports in the New York area, so we don't know yet how many of our products will be included or not included. The other airports, we don't see a big move because it didn't come yet to tendering, but already a lot of parts that we are at least in airports where we are giving information about our products and systems, and they are very interested in. Regarding the, you know in the United States it is almost like in many other places like customers are saying tomorrow because since September 11th it is almost six years, and the borders, as far as we know, the winner of the bid, the successful bidder, will be announced on September or maybe after September. Not before September.

The U.S. borders?

I beg your pardon?

You're referring to U.S. borders announced?

U.S. borders. Did you inquire U.S. borders.

Yes I did.

I am talking about the Mexican border.

Yes.

Yes. The authorities have been, the administration has been said that they will give an answer September, but I don't believe they will do it, so it will be a little bit after September. In the meantime they are checking the different site, site company that participated in this bid, and they are making all kinds of demonstration of different products, including our product, of course, quite a lot of our products, and as far as we know so far so good, but you can never tell because the successful bidder was not announced yet. We know already that some of the, some company has been announcing that they were chosen, but as far as I know their only work chosen by some of the bidders to demonstrate the system, so we don't announce that thing, but we are in this picture as well.

Okay. Thank you very much. I will get back in queue, and I wish you all safety there. Thank you.

Thank you very much.

Thank you. Next question is from Ross Kohler of Diker Management.

Hi, Jacob, how are you?

Hi.

Can you talk about the pipeline of new opportunities on both the perimeter detection and the DreamBox?

The PipeGuard, you're talking.

The pipeline, the interest level of new customers in both those product lines.

Oh, what we have in the pipeline.

Yes.

As I already mentioned for PipeGuard, I already mentioned. What is normal there, it will be quite a few million dollars that we -- I cannot say that we have it in the pipeline, but we hope to have it in the pipeline before the next conference call, much sooner but who knows. We as you understand from the customer in the east Europe, the order was for about 15 or 16 million U.S. dollars. 7.3 million we wrote off of last year so we wrote off close to $8.5 million this year which we have to cross out. Now we are trying to get the new orders as quick and fast as possible and we are working very hard, and our people are working very hard to fill the gap that came due to these unfortunate events. Quite a few orders that we hope to receive very soon. Some of them are bigger, some of them are smaller. This is not including the border of Mexico. This is not in our prospect for this year, but this year we have some other orders which we hope to announce shortly about them. Orders of about $0.5 million, things like that we don't announce, usually we don't announce them at all. You can see that we still working very nice in the second quarter, but not good enough. We do hope that in the next coming quarters, in the third and the fourth quarter we will do so much better.

How are things going with the DreamBox?

We have received some new markets. We have okayed. We still didn't have a breakthrough in the American market which we believe is the main market for us. By the way, one of the main products that we suggested to the bidders of the Mexican border is to use the DreamBox as one of their systems over there. In the meantime, we are working very -- we are close to finish in three other countries, new orders which we hope we will be able to announce shortly, but it does stand as I thought it will be.

In terms of the perimeter detection market, Cobey, are you getting any traction with respect to port from the U.S.?

Yes, at least two ports are negotiating with us right now about putting us in the spec of the bid in the United States, at least two, and which are, shall I say in the more advanced, much more advanced stages and from all that we have been invited to introduce our systems. I would be glad to announce today that we opened a new office in Washington. Officially it will be open in beginning of September, but it is already operating, and we have over there a beautiful demo room and a beautiful place where we can demonstrate all of our systems to potential customers, so this also we believe will help us with the DreamBox and with the other, so I think that opening an office in Washington after so many years, it is a big step forward in marketing our product.

Sounds great. Keep up the good work.

Thank you.

Thank you. Next question is from Robert Gordon. Go ahead.

We all feel bad about the current hostility in Israel. The events were precipitated by people being tunneled under fences and things like that. Do you honestly believe that as a result of this conflict and hopefully this will resolve in the near future that the Magal will get some huge contracts for fencing? I know that they had discussed the Gaza fence, the double fence. We discussed that ourselves last phone call. What do you think? What do you think is going to happen? Do you think it is going to be like major, major projects like the Seam Line, very, very huge projects to protect things around?

I think that I can talk about what type of -- whether it will be a double or triple. I don't know how many or whether this type of --. Excuse me for not answering this specific question.

Okay.

I don't want to go through the detail of the design of the fence.

Okay. I appreciate the fact.

The fact that there are already people in the MOD and in the IVA that are already sitting today and preparing papers on what they do believe should be in the future. Nothing will be done before the end of the war. This is for sure. Nothing will bounce through the war, but after the war, and we believe the war probably you have today, the Minister of Foreign Affairs suggested that there will be ceasefire today, and that the United Nation forces will come in between, et cetera, et cetera. It is very hard to say what will be the end how this border, how this perimeter of security system will look like before we know what will be the political output of the whole thing.

Can you answer --

If I finish.

Go ahead.

We anticipate and we know. We anticipate and we believe, and we have a good reason to believe, that a lot of things will be done in order to protect the borders by upgrading the systems like roofing systems. Let's not forget that all the borders in Israel are protected. Now we are talking about upgrading and recontracting the systems that are on the borders. So we do believe that a lot of work will be done. The question again of course will be the budget, and we believe -- I think I already said that they are talking about also for example also about protecting the border between, according to the newspaper so I can talk about protecting the borders of Egypt between Gaza Strip and the like. There is a lot of work, but I don't think anything like that will be done before they will finish the Seam Line. The Seam Line probably will be finished next year. It will not be finished this year. It will be finished next year, and then it will continue on. Regarding upgrading the borders in the north part and Gaza Strip, there is a lot of talk about it.

Do you anticipate a similar type of fence that was anticipated for Gaza would now be put in the Lebanon border as well? That would be a huge project, would it not?

The fence east in Lebanon is the same fence that is in Gaza already. We did it in the last seven years. It was reviewed the last seven years, and we did a big job over there. It will be upgraded. It has to be upgraded furthermore, same with the fence in Gaza.

Just as a matter of information, had the double fence with the automatic machine guns that was originally proposed for Gaza, had that been in place, could they ever have dug that tunnel underneath or would that have been found out?

I never heard about a system reported in the newspapers, about automatic machine guns and things like that. In the news and the press and the media, this has to be -- you have to approach the media who announced it because we don't know anything about it and we are not going to talk about it.

Let me revise my question. Could a Magal fence with the appropriate security measures prevent what happened in Gaza?

What happened in Gaza? I don't know.

The digging under the tunnel?

The digging under the tunnel.

Right.

Tunnel looks to protect against digging a tunnel. It is a different means and system that has to be protected. It has to be protected, nothing to do with the double fence or triple fence or things like that, but if you put forth and you make the tunnel longer, and you go under that. This is a very different system that we are working on it right now. It is not a major solution that can stop it right away.

One last question here. Raytheon recently got a very huge $1.2 billion contract. Is Magal any part of that?

What?

This was a big contract involving security. I believe it might have been ports.

I have to check on it because I don't know. I have to ask our American companies about it, whether I am involved in this project. It is the first time I am hearing about 1.2 billion. Regarding security systems, maybe on defense and not on security systems, but it is to say I will check on it. I don't know.

Okay. Thank you.

Thank you. If there are any further questions, please press star followed by 1 on your touch tone phone. There are no further questions at this time. Mr. Even-Ezra.

I would like to summarize and talk a minute about the future. We have to remember, as I mentioned already on one of the questions, that we lost off of our order book $8 million of East European country that was supposed to be done today. We hope we will not reduce our revenues by $8 million, but we will fill up the gap with other orders that we work very hard to get right now. At the end of the year, if I compare it with formal statements that we gathered in July, after the adjustment of the figures, no doubt that we will be better in the revenues and much better in the income. Compared with the figure that we get on the February, we do hope, even on those figures, to be better off in spite of the fact that we lost $8 million of orders for the year 2006. So again I very optimistic and I do believe that management believes that the second half of the year will be much better or better, I would say, than the year -- first half of the year, and we will achieve our goals in the income as we are going to achieve it in the revenue. I thank everybody for their patience, and thank you very much for having you with us. Good morning and have a nice day.

Thank you. This concludes Magal Security Systems second quarter 2006 results conference call. Thank for your participation. You may go ahead and disconnect.