Senstar Technologies Ltd (SNT) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magal Security Systems First Quarter 2008 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.

(OPERATOR INSTRUCTIONS)

As a reminder this conference is being recorded May 5th, 2008. I would like to remind everyone that forward-looking statements for the respected Company business, financial condition and results of its operations are subject to risks and uncertainties, which 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 972-36-0747-17. I would like to now hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Yes. Thank you, operator. Good morning and good afternoon to everybody. I would like to welcome all of you to the conference call and thank Magal management for hosting this call. With us on the call today are Mr. Izhar Dekel, the CEO, and Mr. Lian Goldstein, VP Finance and CFO, for Magal. Izhar will summarize the key highlights of the quarter followed by Lian, who will review Magal's financial performance in the first quarter. We will then open the call for the question-and-answer session. I will now hand over the call to Mr. Dekel. Izhar?

Good morning, everyone, and welcome to the call. The first quarter 2008 was another strong quarter for Magal. We generated 86% revenue growth in [overhead] reaching $26 million. This quarter we also generated a healthy cash flow from operation of $3.6 million, including our ending to over $38 million, up from $32 million at the end of September.

Gross profit for the quarter was up 52% close to $10 million, while operating profit including 43% to $1.3 million. Our profit margin this quarter was effected by three main factors. One, the ongoing weakening of the U.S. dollar against two of our main operating currencies, the Israeli Shekel and the Canadian Dollar. During the last quarter, this caused a $1.2 million decline in our net income. Also during the quarter, we undertook some hedging activities and managed to partially offset the impact. We will continue to edge our cash reserves to the best of our ability in quarters to come.

Two, the second impacting factor are several one-time items announcing -- amounting to about $1 million. And finally, the non-cash amortization expense was about $1 million relating to the accounting of the recently acquired European integration company. As mentioned in the past, Magal growth is being driven by a three-part strategy. The first targeting larger scale projects, the second expanding the targeted new geographies, and the third acquiring complementary companies.

In the third quarter, we acquired the European integrator and have since started to take active steps to integrate the company into our business. We are currently in the advanced integrative stage of this new company and feel the acquisition was very well suited for the Company.

The integration is challenging to us, requiring substantial management attention, but we believe that we are nearing completion of the successful combination. This acquisition has already proved itself as a total-value driver, enabling us to immediately target larger scale projects.

During the quarter, we won a contract to protect international airport in Central Asia. And we are also competing for another international airport in this same region and we hope to win it soon. Looking ahead to 2008, we intend to continue to drive top and bottom-line growth by primarily seeking ways to enable our top-line growth to translate it to our profitability.

We remain committed to our long-term goal of bringing our operating margin to about a 10% level and doubling our revenue within four to five years. I would like to turn the call over to Lian to review the financial performance of the first quarter 2008. Lian, please.

Thank you, Izhar. I would like to present now, for the first time as the CFO of Magal, the results of the first quarter of 2008. Revenue for the first quarter increased by 86%, reaching $26.3 million compared to $14.4 million last year. Israel represents 16% of the revenue, North America 15%, Europe 11%, and the rest of the world 58%.

Gross profit for the quarter increased by 52%, totaling $9.7 million compared to $6.4 million last year. Gross margins for the quarter were 36.8% compared to 45.2% last year. The gross margin for the quarter was negatively effected mainly by the following factors.

The sales [strong] is changing revenue mix with an increasing larger scale integration project. The second is the impact of ongoing weakening of the dollar. It is important to note that as our reporting currencies, U.S. dollar and the larger -- and large portion of our expense, mainly level, are in Israeli shekels and Canadian dollars.

We were effected at all levels of our financial result by the weaker dollar. Operating expense for the quarter totaled $8.4 million compared to $5.5 million last year. Operating expense as a percent of revenue improved to 31.9% this quarter from 38.8% last year.

The [other] operating expense in the dollar turn was mainly driven by three factors. First, the amortization of intangible assets related to our recently acquired subsidiary. Second, $600,000 negative effect of the weaker dollar of our operating results and several one-time items this quarter, which includes $400,000 in post-employment benefits to several employees.

Operating income for the quarter increased by 43%, reaching $1.3 million compared to $900,000 last year. Financial expense for the quarter totaled just under $1 million compared to $300,000 last year.

Out of this, we recorded approximately $600,000 in exchange rate losses, mainly as a result of the weakening of the dollar against the Israeli shekel and Canadian dollars. Net income for the quarter from continuing operation totaled $12,000 compared to net income of $450,000 in the first quarter 2007.

Net loss for this quarter, including the discontinuing operation of the Smart business, was around $240,000 compared to a net income of around $300,000 in the first quarter last year. This presents a basic and diluted loss per share of $0.02 compared to basic and diluted earnings per share of $0.03 last year.

Operating cash flow for the quarter totaled $3.6 million. This contributes to an increase in cash, cash equivalents, market securities, and bank deposits as of March 31, which reached $38.1 million. This compared to $32.3 million at the end of December 2007. And now, we would like to open the call to questions. Operator?

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS). The first question is from Ken Liddy of Wachovia Securities. Please go ahead, sir.

Hi. How are you? Just had a question with regards to the large increase in revenue. What do you attribute that to?

What is the question?

What would you attribute the large increase in revenue to? I mean, you had an 86% increase in revenue year-over-year. Is this from the recently announced $45 million order or is it a bunch of other orders, which you are working on?

Good morning. The new acquisition of the European company contributed meaningful to our income and that is the main reason. Besides that, we also increased our sales through that company to our traditional product. So that is the main reason for the increasing in the sales.

You mentioned gross margins were down. What do you feel is the sustainable level for our gross margins of the new company with the integrator? Is 40% somewhere where we should be expecting or level at this level?

So there is one technical problem. Yes, now it's okay. You could answer the margin estimate will be around 40% quarter to comes.

And you mentioned you had currency charges-- currency loss, some one-time charges, which are related to the integration of this new company and some other accounting charges. Am I correct? Does that add up to $3.2 million of charges, or did I get that wrong?

The one-time expense for this quarter and we don't believe it -- sorry. We don't believe, we estimated it [not being] our quarter to come is around $1 million and the currency expense this quarter is around $1.2 million.

And you mentioned you had other one-time charges. There was three different charges?

No. We -- no. We -- that expense was only one time for that quarter.

Okay. So I want to get this clear. You had three factors that hurt your profits in the quarter. Correct?

Yes. You are correct.

And those were the $1.2 million from the currency, $1 million in one-time charges, miscellaneous one-time charges in $1 million in accounting charges for the integration of the new company. Am I correct?

The expense of the -- sorry, one moment. The integration of the expense of the integration of the Company, it is -- we didn't calculate it as a one-time expense.

Okay.

It is not effect on the cash. It's not effect on the cash, but the expense, based on a certain formula, will continue to depend on the level of the sales.

And you generated $3.6 million in cash flow in the quarter? Positive cash flow?

Yes.

Now going forward, looking at the second and third quarter of the year, do you expect to be able to sustain revenues at this level, give or take a few million?

That level of sales this quarter was very high. We estimated previous conference calls that we will increase. We will double our sales four to five years with an average 15% to 20% in the period. It was very difficult to same now -- it will not continue the same level of sales. In average, it will be according to the figure that we said.

Okay. So something closer to around $20 million, give or take a few million is a more realistic target.

Can you repeat, please?

Somewhere closer to $20 million is more of a sustainable number per quarter to quarter?

We are not, as you know, are not providing the exact figures of those. We are -- when we are saying, when we are talking, we're talking about an average figures average gross [billion]. So it's very difficult also to distinguish from quarter to quarter on an average basis. We believe it will be something around 15% to 20% gross.

Okay. And do you expect any other one-time charges in the second quarter, one-time accounting charges for -- miscellaneous charges for severance pay?

No, don't see any one-time expenses small quarter to comes. No, we don't see that.

Do you see net profits improving in the next quarter, in the second quarter year-over-year?

Yes, we see the profit and we are hoping that the profit will be improved and will reflect more the growth in sales.

And one more question, then I'll go back into the queue. I noticed you had about a $6 million increase in your cash. What is that attributable to?

We have a positive cash flow from our activity, from our provisional activity. [Not]the reason why the cash is higher.

Okay. Just a -- that's a dramatic move from $9 million to $15 million. And one last question. Have you -- has the board considered using some of that cash to buy back stock and reward long-term shareholders?

Regarding your last question, the board -- our board discussed the issue of buybacks and decided that, at this point, it is better for the Company to keep its cash and to use it for supporting the growth of the Company internally as well as our full acquisition, which we are always examining. But please keep in mind that also we have access of $38 million in cash. Our net cash is around $12 million since we have outstanding debt of $26 million.

Right. I understand. Okay. I'll get back in the queue. I have some more questions, follow-up questions, later.

Thank you. (OPERATOR INSTRUCTIONS). The next question is from Gary Markoff of Smith Barney. Please go ahead, sir.

Izhar, can you give us some sight in terms of where your new business is coming from, what industries?

Hello, Gary. Gary, do you hear me?

Yes.

Our main business is expect to come from the oil industry, from airports, and from seaports and borders. That are the area we are focusing to bring our business.

Can you tell us what you're doing with the oil industry?

Gary, can you repeat, please?

Can you tell us more specifically the kinds of projects you're doing with the oil industry, and how well -- the potential that may be there?

Regarding the oil industry, the oil industry become, for the last few years, one of the big potential clients to our business all over the world and I cannot be more specific more geographically. But in many places, the security is a strong need. And that's the reason why we focusing our efforts to that niche. Oil and gas refineries, pipes. I'm not talking about the pipe downs. I'm talking generally about reasons on, the reason why we focus in that industry.

And what geographic area is taking up the biggest demand? You've got 58% of the business coming from rest of world, but that's not specific enough for me.

There are areas that we cannot -- that we cannot disclose more for obvious reasons. And in the area that we would prefer to work and not to disclose public with other places.

Okay. And how much potential business is sitting out there relative to current business from the oil industry?

The potential in the oil industry is hundreds of millions of dollars. We are now in tenders -- not in tenders and negotiation of few tens million dollars. And we believe that in that area we can achieve much more. We are now participating more tenders and we hope to own at least part of them.

And part of your acquisition strategy, would it become to fulfill the needs in the oil industry or not?

When we -- when we decide to acquire a company, the main factor is the access of that company to a new -- not just to new, to a base of clients. And one of the main base of clients is the oil and gas industry. And it is a really important factor when we consider to acquire such a company.

How many situations do you have on your radar screen at this time?

We have a few, but we are other times searching as clearly in the market. We have under our radar now one company, which is relevant to be acquired, but that business and that area, it is very dynamic, very dynamic situation and other time we have talk with many companies.

Okay. And should we be anticipating if the Company, at the board level, doesn't want to be buying stock, that we'll be seeing individual management and board holders buying stock personally?

Regarding the managers of the Company, you can look and find in the Internet files -- SEC filing in the Internet. And you can see from them if they're buying or not.

Am I incorrect to see -- to have observed it's about 175,000 shares of stock bought in the last 30 to 45 days?

Can you go again, please?

It looked to me like it was somewhere between -- somewhere around 175,000 shares bought by the largest shareholder in the last 30 to 45 days.

Yes, that was to me, too.

Okay. Thanks. I'll step out for a second.

The next question is a follow-up question of Ken Liddy, Wachovia Securities. Please go ahead, sir.

Hi. Could you talk about, a little bit more about some of the business that you're looking to close outside of the oil and gas industry? Are there other airports besides the one you mentioned earlier?

Yes, as I said before, we see the oil and gas industry as very important kind of client for the future. Besides that, I talked also about the seaport and airports, borders, also prisons in some area, and strategic facilities. That is our main potential clients for the near future. And we are working -- we are working with and in that area and we believe we'll achieve more business in that kind of client.

How about the U.S. border? Are you optimistic that you'll be able to close any significant business there?

U.S. border, about the Mexican border, as you probably know Boeing]are the prime contractor for that business. As far as we know, it is not -- it is not run very fast. Let's say it's understatement --

Yes.

-- if, at the end of the day, they will decide to use the kind of sensors that we have, for example, on total. or a vibration sensor, or a [underneath] cable, then I believe we have a good chance to participate and to take part in the job. I know there is a preliminary consideration or reconsideration regarding the using sensors similar or like we have.

Could you talk about some of the opportunities in your immediate pipeline? You've talked about FORTIS in some European cities, some opportunities there. Is there -- are you still looking to close a significant amount of business for FORTIS?

I guess, regarding the pipeline, you mean to the PipeGuard, our product to protect pipes. With that product, there is not any advance, which I am -- which there is any benefits to report. We are trying to penetrate this product, we are in negotiation or contact with a few big oil companies and it takes much more time than we expected. Regarding the FORTIS, there is a big advance in the FORTIS mainly -- meanwhile in Israel cities.

There are many tenders in Israel, which that product the FORTIS products is the relevant product of that. Many big cities are on the agenda like Tel Aviv, Jerusalem, Netanya and other cities, which they consider to protect or to establish a protection. In the city, which our product will tender, will come out our product, FORTIS product, will be relevant to that. Besides that, in other cities in the world in a few capital cities, which I cannot disclose, also this product is considered.

Could you talk about -- is there a possibility that you could start disclosing your backlog borders in the near future?

Regarding our backlog, we are not providing a [big amount], but is the first, let's say, the other we announced last quarter of 2007 regarding the $45 [million] orders. From that you can understand that our backlog today is much higher than in the past. Also we started and we implemented part of that big order.

Do you -- have you heard anything more on the seam-line fence or the proposed fence with Egypt?

Regarding the seam-line in the Egypt border, meanwhile, it is a budget problem which stopped them to -- that's the reason why they are not continue to implement that border. The foundation is ready in many parts of the border. Now they are preparing, or waiting, or in the decision process how to continue to implement the rest of the seam-line. In the seam-lines, the rest of the seam-lines, we have about between $20 million -- about $25 million more to accomplish that project which is relevant for Magal.

Regarding the Egypt border, they are preparing the [body], they are preparing the plans. I know they design, now in the design stage. But meanwhile within [parts] of Magal when this project will be executed, I'm sure they [are a part of the purchase].

Do you have any update on your dispute from a couple years ago with the project with Poland? Is there anything you can tell us?

Not any further update. We are in legal steps against that with PPL. And it will take time. It will take time. I'm very optimistic with the results, but it will take time.

Could you talk -- so I guess one of the things I want to be clear about here is, in the quarter, you had a large amount of revenue that came from the integrator that you acquired. In that business, was that a much lower margin, gross margin than your traditional business? Is that correct?

The gross margin with that activity is a little bit lower than our normal gross margin. But as I said before, I believe quarter to come, so a gross margin would be about, in average, would be about 40% on the sales.

And the gross margins on this $45 million contract, are they around that 40% level, would you expect?

A little bit less than 40%.

A little bit less. And when would -- when can we expect to start seeing the impact of those revenues in the income?

Part -- a small part of that revenue is already included in our first quarter. I believe the main part will be accomplished 2008 and the rest of it 2009.

Do you think that you could have the majority of the revenues in this year?

I believe so. Yes, I believe so.

And you mentioned about hedging against the falling U.S. dollar. What steps are you taking?

We are manage our cash and we are doing a few hedging activities forward linked to or linked to the shekel, or linked to other country and we are taking into account that we are a company, which reports in dollars and the shekel is the main reporting currency.

Okay. I'll go back in the queue and let someone else ask some questions. Thank you.

Thank you.

There are no further questions at this time. Before I ask Mr. Dekel to go ahead with his closing statement, I would like to remind our participants that a replay of this call is available in three hours on [Vdon's] [website at www.vdon.co.il]. Mr. Dekel, would you like to make a concluding statement?

Ladies and gentlemen, on behalf of the management of Magal, I would like to thank you ...

Sorry for the interruption. There's a question from [Robert Lucas]. Would you like to take it?

Okay.

Okay. Sorry about that.

Yes, I just, on this currency issue, you mentioned a one-time charge. But presumably the currency runs through the total income statement in terms of the different operating lines; revenues, cost of revenues, gross profit, et cetera. So first question is to what extent do you think you were hedged in the first quarter and will you be more fully hedged going forward? The second part is could the overall impact on the income statement have been greater than the one-time charge you mentioned?

We are doing a hedging activity, but Magal is covered only the part of the risk, not 100%. We are trying to do all this in order to -- in order to hedge as much as possible.

Okay.

Okay.

Would you like to continue with your concluding statement?

Please. Ladies and gentlemen, on behalf of the management of Magal, I would like to thank you for your continued interest in our business. Some of you I will see you in the coming weeks in New York and Boston. And the rest of you, I look forward to speaking to you again next quarter. Have a good day, ladies and gentlemen.

Thank you. This concludes the Magal Security Systems First Quarter 2008 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.