Senstar Technologies Ltd (SNT) 2006 Q3 法說會逐字稿

Welcome to the Magal Security Systems' third-quarter 2006 results conference call. All participants are at 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 October 30, 2006.

I would like to remind everyone that forward-looking statements with respect to 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, produce demand, pricing, market acceptance, changing economic conditions, risks in product and technology developments, 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 not have 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 972-3-607-4717. I would now like to turn over the call to Mr. Ehud Helft of Gelbart Kahana Investor Relations.

Thank you. Good morning and good afternoon to everybody. I would like to welcome you all to Magal's third-quarter 2006 results conference call. I would like to take the opportunity and thank Magal management for hosting this call.

With me on the call today are Mr. Coby Even-Ezra, Magal's Chairman; Mr. Izhar Dekel, our recently appointed CEO of Magal; and Mrs. Raya Asher, Magal's Chief Financial Officer. Mr. Even-Ezra will begin with an opening remark; Mr. Dekel will follow with a short introductory statement; and Mrs. Asher will then discuss briefly the third-quarter 2006 results. After that, we will open the call for the Q&A session. Coby, would you like to begin, please?

Good morning, everybody. Good afternoon for those who are out of the United States. It looks like the third quarter was a very low quarter. A lot of events happened during this quarter. Everybody knows about the war that was in Lebanon that started in the beginning of the quarter, and was ending about towards the end of the quarter. It was a tough time here in Israel. But now everything is under control and everything is in order.

As a result of this war, there was a lot of damages along the border and along the perimeter security system along the border, which were made by Magal. Now we have received orders to repair them and put them back in excellent condition. We have received about a $5.5 million order to do the job, which will cover about half of the job. The second half, probably we will get the order soon. Everything else will be finished by the end of this year, according to the demand of the MOD. So this was quite an event that we have to take into consideration judging the result of this quarter.

During this quarter, we also received some big projects which we announced about -- one of about $4.7 million; and the other one, $1.4 million. Some more are going -- we are waiting. We expect some more to come in every day.

The other event that happened, as you know, we had a dispute with an Eastern European government regarding a project we did over there with the consulate. The real hearing didn't start yet, and it has to take place over there.

But the small hearing took place in Israel. As a matter of fact we -- according to the result of the court -- we had to recognize or reduce expenses in the third quarter of about $700,000, which we took into consideration -- that we put as a provision. We put a provision of $1.4 million on this case, on this specific, small case. We got back about $700,000 this quarter, which reduced the cost of sales by this amount.

The other big thing that happened this quarter was in the United States, when the authorities announced the successful bidder on the border project, what we call SBI project. It was Boeing. We went on the same agreement with Raytheon, and unfortunately came only second. They were second-best. But nevertheless, we still believe that we will be able to sell Boeing quite a lot of our product. Even though we will not be part of their team we will be, no doubt, part of their vendors.

Not less important are the appointments that we did this quarter. We appointed Mr. Jacob Jacob as Deputy Chairman of the company. Mr. Perry has been on our Board for quite a few years, and he served as a part -- he served as a chief of the Israeli General Securities Service, what we call Shin Bet.

The other appointment is Mr. Dekel, who has been with the Company since he started in 1984. He started as a Controller and then as a CFO, and thereafter as a President of the Company. Now he was appointed as the CEO of the group. I'm sure Mr. Dekel will bring the Company forward and will keep the policy of conservativity and the stability approach that I had during the years. But as a much younger fellow than I am, he will bring some youth into the Company and some new spirit. [No]? Maybe more aggressive spirit, and I do hope he will be successful.

I wish Mr. Dekel -- I call him Izhar, I-z-h-a-r, remember this name -- I wish him all the best. I wish them in my name and I believe in your name, the listeners, the ones who participate in this conference, we all wish him a lot of success. Because his success is our success. Please, Mr. Dekel.

Thank you, Coby. Hello, to all of you. While our Israel listeners know me well, the American listeners may not be that familiar with me, since Coby and I [split the role] presenting the Company to investors. So far, Coby has presented in the U.S. and elsewhere while I presented in Israel.

Therefore, because I have yet to meet many of you, I would like to take this opportunity to briefly introduce myself. I have been with Magal since it started in 1984, for over 32 years, working very close with Coby throughout the term. Since 1990, I have served as President of Magal and in the first two months as CEO. So the business of Magal is obviously not new to me, and I am familiar with all (indiscernible).

I have taken on this new role with a big sense of responsibility and with optimism. As someone that has been involved in all of the development of the Company over the past two decades, I look forward with great optimism for our future, and I am convinced that we will reach the goals which we set for ourselves.

As CEO, I tend to virtually take [orders]; Coby [rules] representing the Company to our investors, especially those in the USA. I look forward to meet many of you over the next few weeks and months.

Finally, as much as it is possible, given our business and client constraints, I believe in maximum transparency and therefore will make every effort to disclose and share with you as much as I can.

In the coming quarter, I hope to share with you our goals and how we plan to [win] them. I will highlight the opportunities and the risk in our markets. I want to ensure that you, as investors in Magal, have enough information which will enable you to analyze our Company and to rate the opportunity for yourself.

With that, I would like to hand over the call to Raya for a summary of Magal's financial performance in the third quarter. Raya, please?

Hello to everybody. In the third quarter we reached about $16.2 million of revenue, which is higher [about] 2.5% compared to the same quarter 2005. Our growth now generates 42.6% of revenue, which is $6.9 million.

Our operating income in the third quarter was $1.2 million, which is higher than if we [add] Q1 and Q2 of 2006, which means this is a very good quarter in 2006 compared to the previous ones. The operating margin was 7.6%; and the net income was $600,000 about, which is about [4]% of (indiscernible) revenue.

In the nine-months period, we increased our revenues by 4% compared to the same period in 2005. Over the nine-month period, revenue grew $44.5 million; operating income reached $2.4 million; and the net income $1 million. I would like to open for Q&A.

Operator?

(OPERATOR INSTRUCTIONS) [Robert Gordon] of (indiscernible).

In your earnings --.

I didn't get your name.

Robert Gordon.

Thank you.

In your earnings release this morning, Mr. Dekel stated that, based on current backlog and new orders, management believes that the year-end results will be better than those of last year. Now, [please] before the readjustment for the cancelled contract, correct?

No, it is after the readjustment of the [thing]. Because let's not forget that this year, we also lost revenues of about $9 million from the same contract that we were supposed to carry out this year. So we are comparing now only with those that are after the readjustment.

All right. Because you know after the readjustment, you should have losses. If you're going to show the type of income that you did last year or better, that would mean in fourth quarter you're going to show net earnings of like $0.14 or $0.15. Is that fair to say?

But this is only if you are not taking into consideration the readjustment. When I am talking, I am talking about the figures after the readjustment.

Okay, well, that is a little confusing. I can't even figure that out.

You are right, it is very hard to figure it out. But I think it is better. But I think that we have -- on the nine months, we have about net $0.10, right?

Yes.

I don't think that we will have another $0.14 in the last quarter.

Is that fair to say, though, that the fourth quarter will be better than the third quarter?

I believe that the [third] quarter will be better than the third quarter. Absolutely.

Okay, so that is a pretty good quarter, then?

Yes. That is what I am saying.

Projecting -- I mean, we are getting pretty close to the end of this year, and we had that bad experience with the contract being canceled. Let's project out into '07. Are we going to get anywhere close to your $100 million revenue target?

We will be on the way to the $100 million revenue. But I don't think we will get it in 2007. But we will be -- we will start -- I do believe that in 2007 and thereafter we will go back to our normal growth; that will be around between 14 to 17% per annum.

So, you can calculate how long it will take. I will take about two or three years till we reach the $100 million if nothing will happen for the best. Then of course, the time will be shorter.

Of course, any huge contract that comes along, obviously, will catapult that in a big hurry.

Absolutely right.

Now, there is a lot of speculation. In fact, as I am talking to you, I'm looking at my computer screen, and I have got here an article that appeared that this Company, Magal, may be a takeover target. That there is companies, funds looking at this Company for possible takeover. I mean, I know you can't talk about that too much if it is happening, but is there any truth to that at all?

As you said, I don't think it would be right for me to talk about it at all. But you can imagine that a company like ours or similar to ours are always in the projection of taking over [contract]. But I would not like to elaborate about this point at all.

Okay, thanks a lot. That's all I have.

(OPERATOR INSTRUCTIONS) [Ken Liddy] of Wachovia Securities.

I cannot hear the names when you are telling me because you are -- I can't hear. Can you repeat the name, please?

Sorry, Ken Liddy from Wachovia Securities.

I just wanted to -- if you could go through some of the opportunities that you might have with the SBInet at the U.S. border. You mentioned that you did think you could get some contracts.

SBI, as you know, as I said before, we went ultimately with one company that (indiscernible). It's Raytheon. Unfortunately they came second in the bid. Boeing got the bid. Our people are trying to convince and to [tout] -- they did it before it won; not only now, but also before the bid was awarded to Boeing.

We spoke with all the five bidders, trying to convince them to use our products. Because there are two ways -- you sell a chipset, and you sell products. We are working with the two agents. With Raytheon we went on chipsets. With all the others we worked with products.

We have no doubt, almost no doubt, that our products will be used in this project, even though the detailed design has not been yet done, and nobody knows exactly what products or what sensors or what chipsets will be involved by Boeing. Because the bid was on the general content and fixed price. Now, they are starting only now making the design and going through the details what they are going to use.

We have, no doubt that our products will be used in it. For what extent it is hard to say, because we don't know yet -- we don't know -- Boeing doesn't know yet exactly what is the detailed design. Only [when] the detailed designs (indiscernible) then we will know to what extent they will buy our products and how big orders will be. So we have to be patient with them.

Okay, the second question I have is regarding a notice that was on U.S. government websites for your Canadian subsidiary, for the deployment of terrain-following deployable intrusion sensors with the U.S. Air Force. A pending order. I was wondering if you could speak about this research and development contract.

You're talking about a project, an R&D project that was the done with with (indiscernible) the Air Force.

Exactly.

Yes, it is nice that we got it. We are happy about it.

What type of -- how long of a time frame is it as far as the testing?

I think there is a time frame, the first contract is for 12 months; and (indiscernible) thereafter depends what will be the result. Because it is an R&D project; it is not a supply project.

Right. What type of -- is this for eventual deployment, if it does well, at the U.S. border? Or is it for military facilities eventually, if it worked?

First of all, it is for the Air Force. It is not for the Army. Secondly, usually we try to talk as little as possible about the things that we're doing in security. Not because of the people that are listening now to our conference, but because some other people who may listen to the conference would like to get the many details.

Okay, the third question I had was with regards to the PipeGuard. Do you know --? You have talked a few times, Coby, about this PipeGuard contract that still hasn't materialized. Could you please comment?

You know, (indiscernible) [embarrassed]. Because every time I am promising; and usually I'm a man who keeps his word and keeps his promises. Unfortunately, in this case, it didn't work out. Not because of me, but (indiscernible).

The order we were supposed to receive about three months ago, on June-July, has been postponed. The reasons are not really interesting. But we will get it at the end of the day.

In the meantime, we believe that we will get very shortly another order from another client. Even though the order will be much smaller, it will be a few hundreds of thousands of dollars; but it is also something for the first order of the PipeGuard.

So I really don't know what to tell you. We are waiting. We were waiting every day. Not only that, our lawyers went to the country over there, sat with the lawyers of the client, discussed the contract. The contract has been agreed upon. Everything finished. Only one small thing signature is missing, and we are waiting for this signature.

But I believe that while waiting to this big order, comparatively big order, we will receive a small one -- maybe the baby of this order -- in the meantime. But this is not a client that -- I do believe that this client is not as big. But I also see that [his] organization is much easier and [goes through] it than the first one.

We will look forward to hearing (indiscernible) from you about that.

You bet. I'm waiting as well.

I wonder if you could comment about your sudden move to relinquish your role as CEO. What prompted that?

You probably didn't go into the details of our biography. I'm over 75, approaching 76 years old, and I do believe that things have to be transferred in order to the younger generation. I do believe that they can do more justice to the Company nowadays than we alte-kockers, if you understand me this expression. Hello?

Yes, you have the energy of a 50-year-old, though.

Yes, (inaudible). But the CEO has the energy of a 40. So this was the only reason, and it was done in good (indiscernible) and a good (indiscernible).

I think it is only natural that the new generation will come in, will step in, while we are still there in order to guide them and to work with them sometime. So [things] will work. The transfer will be done very smoothly. I think it is very clever to do so, in every way.

Well congratulations on your semi-retirement. And congratulations to you (multiple speakers).

(inaudible) [together].

One last question with regard to Smart. It looks to me that your changes really have helped the operating margins. Is that where we are seeing some of these higher operating margins?

Absolutely right. Absolutely right. As a matter of fact, in this quarter we almost, almost, practically we are breakeven. But we had, I think, something like 40,000 -- like 80,000, I'm sorry, $80,000 in the quarter of profits. But that is almost breakeven.

Could you comment on any things in the pipeline other than the rebuild on the Israeli border? But some of the things with regards to airports, (multiple speakers)?

We have quite a few things on [hand] that we are negotiating right now. Some of them are very big, as big as 50, $60 million projects; some of them are smaller, as 4 or $5 million projects. Once we will sign them and be sure that we get the money, only then we announce them.

You know there are different companies, but as I said in the beginning, we are very conservative in this. We don't announce when we are negotiating. Then we don't announce when we come into agreement. We only announce any order that we are sure that we will be paid, which means (indiscernible) a letter of credit I will not announce when I sign the contract; only when I am getting the letter of credit.

That is in order not to come to a situation when I have to say I'm sorry, we were supposed to get the order but we didn't get it. So we don't announce it and we don't [do]. But I do believe that there will be some good news in the very near future that will be -- that will make (indiscernible).

Okay. In the quarter, you announced a few new products that you launched. Are there any that we should be paying attention to a little bit more, as far as with the perimeter technology? Is there -- like the OmniTrax, is that going to be a big project, or XField?

I don't know which you are referring to, but we came out with a new product which is an upgrade of an existing product. Which is a buried cable sensor that not only can tell you within the range of 1,000 feet where the intrusion took place, but it can tell you on every single feet, indicating exactly the point where the intrusion took place.

In [many] (indiscernible) the border is not really so important but there are many other places. For example, in a prison it is very important to know exactly the point where the intrusion -- in this case, the escape -- of prisoners took place. Exactly the point.

This is a new thing that is quite a very complicated algorithm and technology that we are very proud that we achieved. We are the only one that can do it in this type of buried cable. We have it in the other product that we do on the fence. But as a buried cable, this was a new one.

The other new products that we launched about [two] years ago are working -- besides the PipeGuard that we already talked about -- are doing -- the FORTIS is doing very well. The DreamBox is under way to take off, but it is only on the runway. So that has only to get its feet in order to take off. And that's it.

Now, in your segment in the earnings, just wanted to get a little bit more clarification. You say that you expect to beat this quarter's revenues and earnings. Can we look for something closer to $20 million in revenue, or is that a --?

You know, I don't want to break our rule, that we never give a forecast. Because things are so fluid sometimes that I can get an order on the second of January and I cannot put it on the 31st of December, and the whole thing changes. So I am saying that it will be better than the quarter, the third quarter. The fourth quarter will be better than the third quarter. Let's talk (indiscernible).

It's good to see things are back on track. Thanks for taking my questions.

Thank you very much.

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

Thank you very much to all our listeners. There were a few questions, but each question was about 10 questions. So I do believe that I answered for the satisfaction of all the listeners. As I already said, the fourth quarter will be better than the third quarter; and the third quarter was better than the second quarter. That was [nothing] -- in spite of the fact that we lost about $1 million revenue that we were supposed to have this year from the East European project.

Which means that we are strong, we can get the hit, and come back on our feet, and (indiscernible) mentioned before, back on track. We are back on track. Our track had been [overrun] and I do believe that we are now running forward. So with the new CEO, I have no doubt that the Company will do so much better than it did here today.

I thank you. I thank every one of you. The ones -- there are people that I know that are on the conference call, that I know for many years. I will try to introduce them to the new CEO. In the meantime, I remain the Chairman of the Company, so you are not getting rid completely out of me. Have a nice day.

Operator?

Thank you. This concludes Magal Security Systems' third-quarter 2006 conference call. Thank you for your participation. You make go ahead and disconnect.