Senstar Technologies Ltd (SNT) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Magal Security Systems first-quarter 2010 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.

(Operator Instructions).

As a reminder this conference is being recorded June 9, 2010.

With us on the call today are Mr.

Eitan Livneh, Magal's President and CEO and Ilan Ovadia, Magal's CFO.

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 risk 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.

I'd now like to hand the call over to Mr.

Livneh.

Mr.

Livneh, would you like to begin?

Yes, thank you.

Thank you all for joining us on the call today.

We were disappointed with our first-quarter results.

Even factoring in seasonality, sales were a bit lower than expected, reaching $10.8m (sic - see press release) for the quarter.

Coming into Magal 10 months ago, I saw a company with a superior product offering, but was concerned about macro -- market conditions in the near term, and Magal's ability to meet these short-term challenges.

We are still facing these challenging market conditions due to, in particular, to the slowdown we are seeing in the general European market.

Europe markets are about 25% of our sales, and right now a number of our customers are taking a wait and see attitude in the fact of the economic downturn.

In Germany, for example, we are seeing a reduction of about 25% in the number of current opportunities, as companies are deferring RFPs and orders to the future.

This reality is what drove us to implement the recently announced restructuring plan, which included a reduction in force of 34 people from our Israeli operation as well as the relocation of resources to support sales and marketing effort in the target markets.

We believe that this plan positions Magal for growth over the long term.

I would like to turn now the call over to Ilan for a few minutes to discuss the results, and then will return to discuss the opportunities for Magal going forward.

Ilan, please go ahead.

Thank you, Eitan.

Revenues for the first quarter of 2010 totaled $9.8m and gross profit for the first quarter of 2010 was $3.7m or 37.4% of revenues.

Operating loss for the first quarter of 2010 was $1.6m.

Financing expenses in the three months ended March 31, 2010 amounted to $0.8m.

As a result, the net loss for the first quarter of 2010 was $2.4m or $0.23 per share.

Sales by geography broke down as follows.

North America 27%, Europe and Middle East 49%, and the rest of the world amounted to 24%.

Total cash at the end of the quarter amounted to $7.5m.

Following the reorganization we announced last week, we anticipate that starting in the third quarter we will see a decline of $120,000 per quarter in our operating expenses line item, and $250 in our COGS.

That concludes my remarks.

I would like to hand the call back to Eitan for his view on Magal going forward.

Okay.

If I presented the gloomier side of the picture above, let me take a few minutes to discuss some of the potential opportunities that are out there for Magal going forward.

I believe that we are well positioned to capture some of these major opportunities.

Let me provide a few examples.

In the US where sales remain steady, new legislation, the CFATS, requires petrochemical companies to deploy a much higher level of perimeter security around their plants.

To date some 1,000 sites have been identified as category A and B which are all relevant for the solution that we offer.

This represents a large potential opportunity for Magal.

However, at present these projects have all been pushed into 2011.

We are seeing new activity in South Africa where we are engaged through a major distributor that is well positioned in this market.

In South America we have opened a new office in Colombia to meet the increasing number of opportunities in this country.

Brazil has several large opportunities in the future, including security requirements for the World Cup in 2014, and the Olympic Games in 2016, both of which will require outdoor security.

We are seeing steady state of activity in China and India, and are seeking the appropriate local partners to exploit these opportunities.

And finally, at home, the Egyptian border fence represents another large potential opportunity for Magal, but is another project that has been delayed until 2011.

Why I think that Magal is so well positioned to meet those opportunities, when I say that we are the leader in this market this is based on two recently issued independent reports on our market.

According to IMS, Magal is a clear leader in perimeter security market, with 10% of the global electronic perimeter security sensors market where the next similar player has only 5% in the market -- market share.

A recent study by Frost and Sullivan also listed Magal as one of the Tier 1 suppliers of perimeter security equipment worldwide.

This study, which provides independent verification of our market position, increases my belief that we are positioned to meet long-term opportunities throughout the world over the long term.

As we implemented our new strategy I have set a number of milestones for Magal over the next years.

First, we are planning to introduce an advanced fence mounted security sensor with the capability to pinpoint intruders in the second half of 2010, this year.

Second, we intend to appoint new distributors that will help us to grow our sensor sales in our current activity market, and we'll implement a growth plan to meet these opportunities in Brazilian markets.

Third, we intend to establish partnerships in India and China in order to capitalize on potential business in these territories.

I thank you all for your interest in Magal and firmly believe that we will reward your support as well as we build for the future.

I will now open the call for questions.

Thank you.

(Operator Instructions).

Your first question is from Fred Ehrman of BMI Capital.

Please go ahead.

Good morning, gentlemen.

I'd like to just focus on your top line.

December -- the year ended December 2008 your revenues were around $70m.

December 2009 they were about $54m.

Based on your first quarter you're now, if we annualize that, you're at about a $40m top-line revenue.

And it's kind of a precipitous drop, and how are you going to stabilize the ship, question?

Okay.

Compare the results between 2009 and 2008 is not on the same basis.

As you know, we have sold our European subsidiary, and we presented the 2009 numbers without that subsidiary which was included in the 2008 numbers.

So if you compare these two years on the same basis the numbers are almost the same between the two years.

Coming to this year the 2010, yes, we are showing almost or close to $10m of sales for the first quarter.

But even if you would look into 2008 first quarter, the sales were almost $10m also.

So seasonality and differences between quarters are relevant to Magal as well as any -- as well as many other companies and industries.

So it doesn't say that we have now a clear picture about the results for the end of this year.

But I can say that the $10m of the first quarter does not -- is not a linear number that will give us the $40m for the year.

All right, so do you anticipate having your year 2010 somewhere between the $40m and $54m?

Well, I anticipate it.

If you are speaking about anticipate, yes.

But where it will be I don't know.

I can tell you that in the first -- you know that we have won a project in Mexico.

And this project is not part of our first-quarter reports because it was not started and was not showing any revenues for this quarter.

Definitely in the coming quarters this year it will have an impact on our numbers.

So just taking that into consideration we expect to have a better quarter's -- let's say a small growth will come in the coming quarters, whether we will be close to the $54m it's still early to say.

Just getting to your balance sheet looking at the cash, your cash position from year-end went from $11.8m to $7.5m.

Do you anticipate any cash problems -- going at this rate you may run out of cash in the next -- by the end of the year, do you anticipate any cash problems?

If you will look at the cash flow situation in the first quarter you can see that our cash flow from operating activities is balanced, even.

And the change in the cash flow during the first quarter is -- part of it is loans repayment, and part of it is an advanced payment that we received in that project in Mexico that we cannot use until we started the work there.

So I think that in the coming quarters, we will not see such a decrease in the cash flow as it was in the first quarter.

We might see a small decrease in the rest of the year.

You say you reduced your debt; just looking, your bank debt is approximately the same, your long-term debt is pretty much the same.

Where did you reduce the debt?

We paid back loans in the first quarter around $2m.You can see it in the long-term liabilities, as well as in the short-term bank debt.

Okay.

I must not be looking at the right thing here, because I show at year end your long-term debt was $4.1m and at the end of March, it was $3.8m.

Which liabilities are you referring to?

Short-term bank debt.

It's --

Short-term bank debt went from $8.2m to $7.9m.

It went down about $200,000.

The short-term bank debt went from $10m to $8.6m.

All right.

I'm looking at your press release, so I don't know.

Your press release shows your bank debt on December 31 at $8.234m and on March 31, $7.955m.

Let me have a look at this.

We'll check and come back to you.

Okay.

Okay?

Yes.

All right, do you -- you owe the banks approximately $8m.

Are you having any problem with the banks?

Are they beginning to question your -- are they starting to make extra demands on you?

Are you getting close to violating any covenants with the banks?

So far there were no questions of covenants on the banks.

What is going to be in the future, we don't know.

Okay.

All right, that's all I have.

Thank you very much.

Sir, do you have any additional questions?

No.

That's it for me.

Thank you.

Okay, thank you.

The next question is from Ken Liddy of Wells Fargo.

Please go ahead.

Just a couple more questions on the cash.

During the quarter, this current quarter, the second quarter, you received $5m from that project in Mexico?

In the second quarter?

Yes.

No.

I thought you -- how much did you receive in your advance payment?

We received in the advance payment close to $4m, out of which $3m are pledged.

Okay, pledged.

So it's restricted cash but it's for the project.

Right.

Understood.

And then once you start recognizing that revenue and complete the project, that goes into your regular cash flow, correct?

Yes.

Okay.

You talked about some opportunities in South Africa.

What specifically -- what's the products for this or --

No, no.

When we speak about South Africa, we speak about appointing a distributor for our products, sensors -- a line of products from Senstar Company in Canada.

And this goes for the fence and the mounted sensors, as well as the buried cables.

Nothing to do with the Fortis, at this time at least.

Understood.

And in Mexico, in the past, we've seen some enormous opportunities there.

Do you see more opportunities after this recent contract?

Yes.

We think that our Mexican operation will get some more contracts later in the year, not necessarily the same magnitude.

But yes, we see more potential coming from Mexico.

And our operation is well organized to make them all.

In Israel, you mentioned about the Egyptian fence that's been proposed for, I guess 2011.

Do you have any type of time when bids will be starting to go out for that project?

No, we don't have any specific time.

We know that the Israeli government took a decision to put the fence.

And this is now in the hands of the Ministry of Defense.

There are still questions about the budget, whether it will come as a special budget or it will be allocated, at least partially, from the MOD regular budget.

But that's the reason taking into consideration the fact that the design did not really start yet; we think that the project will start sometime in 2011.

And for Magal it might be an opportunity late next year and the following one.

And what products would you say -- at this time, would you anticipate being in demand for that project?

That's a good question.

Under the assumption that this fence will be based on the same technology in the current, which is a fair assumption, it will be on the same technology as we did in Gaza Strip last year that is mainly based on Magal Israel sensors, fence-mounted.

And the new technology that you've mentioned in the press release with regards to the fence, do you think that's a product that has potential?

Yes.

We see more and more in the different specifications that we are facing from worldwide, the request for better ranging information about where exactly the fence was hitted.

And what we have developed is to really measure the specific sensor that was nearby that hit.

And that will give a better -- as we mentioned in the press release, we call it Pinpointer.

Actually, that's the name we gave to that sensor.

And you mentioned in the comments, the growth of the perimeter detection market is pretty remarkable worldwide.

How do you expect to maintain your 10% market share?

I think that by working more closely with system integrators in the world and with distributors.

And continue developing products that are relevant to the new requests we are facing and the fact that we are very well-organized in the world by having different companies in different countries.

I think that there is no reason not to keep our 10%.

And I would even say that we would like to see more of that, taking into consideration the reputation of Magal and Senstar with their -- with the current products, which are very reliable and very cost-effective to the users.

Now with the workforce reduction in Israel, if you start receiving some increased business in Israel, specifically the Egyptian fence, do you have the ability to increase your workforce to meet demands?

First, yes we can.

But it would not necessarily be the best way to do it, since even if we will have this project in Israel, we can subcontract some of the work and outsource some of the production, and do it in a more efficient way before we will hire again or back some of the people that we just laid off.

Now with the workforce reduction, you mentioned that it's going to have a positive effect on operating margins.

And I just wanted to see where you expect gross margins to be for the remainder of this year and going forward.

I think that we can see that in the first quarter, the gross margin is around 37.4%.

This low -- relatively low revenue level, this is the margin.

We do believe that as the sales will go up, we will see improvement towards the 39% more or less, gross margin.

Now your backlog, I know you don't give specifics.

But can we assume that it has grown since the end of the year?

The backlog grew since the end of the year by getting and signing the contract in Latin America, as we mentioned earlier and with some current -- ongoing businesses that we bring in.

Other than that, no major contract was signed.

Once we will have one, we will let you know about that.

Are you awaiting any awards in the next 60 days?

We hope.

Give you more specific information, I cannot.

But we have a funnel of opportunities.

Whether they will mature, then become an order in the next 60 days, I'm not sure.

The question of timing and the economy -- world economy situation and the factors I mentioned earlier, that many of our opportunities are on hold, let's say, and people are more reluctant to invest, that doesn't help us.

Understood.

With regards to the seasonality of your business, in the past, the first quarter has been anywhere from $9m to $12m or $13m, even in your best years.

Do you expect the second half to be generally weighted as it has in previous years, as far as revenues are concerned?

I can say that they will be better.

Whether they will be weighted as in the past, I'm not sure.

That still depends about the overall picture.

And with the workforce reductions, can we expect to see any one-time charges in the second-quarter earnings or --?

No.

Everything is already in the balance sheet.

So there are no special expenses.

Everything is normal and all the process went well.

And is that reflected at all in the first-quarter numbers?

No, not in the first quarter.

And there are no special expenses related to these 34 people involved.

So then do you expect -- do you see any type of benefit in the second quarter?

Or is it all going to be in the third and fourth quarter, and beyond?

All will be in the third and fourth quarter and on.

Second quarter is all -- is about to end in less than a month.

So the Israeli one-month advance notice as a standard will bring these people to the very end of this quarter.

Okay.

Well, that's all my questions for now.

Thanks.

Thank you.

There are no further questions at this time.

Before I ask Mr.

Livneh to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available in three hours on Magal's website at www.magal-s3.com.

Mr.

Livneh, would you like to make a concluding statement?

Yes.

I would like to thank you all.

And looking forward, we hope, to have a better picture and better numbers to share with you.

Thank you very much.

Thank you.

This concludes the Magal Security Systems first-quarter 2010 results conference call.

Thank you for your participation.

You may go ahead and disconnect.