Senstar Technologies Corp (SNT) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magal Security Systems' fourth-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 April 11, 2011. I would now like to hand over the call to Mr. Kenny Green of CCG Investor Relations. Mr. Green, would you like to begin?

Thank you, operator. Welcome to Magal's fourth-quarter and full-year 2010 conference call. I would like to welcome all of you to the conference call and thank Magal's management for hosting this call. With us on the call today are Mr. Eitan Livneh, President and CEO, and Mr. Ilan Ovadia, CFO. Eitan will summarize the key developments, followed by Ilan, who will review the financial performance of the quarter. We will then open the call for the question and answer session.

Before we start I'd like to point out that this conference call may contain forward-looking projections or other statements regarding future events or the future performance of the Company. These statements are only predictions and Magal cannot guarantee that they will, in fact, occur. Magal does not assume any obligation to update that information.

Actual events or results may differ materially from those projected, including as a result of changing market trends, reduced demand and the competitive nature of the Security Systems industry, as well as other risks identified in the documents filed by the Company with the Security and Exchange Commission.

And, with that, I'd like to hand the call over to Eitan. Eitan, go ahead, please.

Thank you. I would like to welcome you all and thank you for joining us today. I am pleased with the results of the quarter, reporting a continued sequential growth in revenue, plus, most importantly, we have strongly reduced our operating loss and we are well on track to achieving our goal of returning to profitability.

In addition, we published our backlog figure today, reporting $50.2m at the end of the year, almost three times the backlog we only had a year ago, at $17.8m, and we believe this is a very strong sign for the future.

Revenue for the fourth quarter grew 13% over the prior quarter, reaching $15.1m. And we substantially reduced our operating loss to around $0.5m from around $800,000 last quarter and $1m in the fourth quarter of last year. While we also had some higher than normal financial and tax expenses, you can see that the overall trend is in the right direction. While I am pleased with the progress we are making we still have a lot to do and we will continue to work hard to bring the business to breakeven level in the coming quarters.

We ended the quarter with a good level of cash, at $16.6m, providing us with a more than sufficient level of working capital. With regard to the rights offering, for technical reasons we had to delay doing the deal until after filed our 20-F Annual Report with the SEC. We did this today and you can all find our 20-F filing on our website or at the SEC's website. We will restart the rights offering process and we expect to file the prospectus and provide you with an update on how this process will proceed in the coming weeks.

Note that the rights offering will provide us with financial stability and the capital for long-term growth of the business. As you can see by our recent business wins, which I will discuss shortly, we have a lot to look forward to and a strong balance sheet is important for building on this growth for our long-term future.

Our target markets continue to improve, especially the emerging markets' regions, including Africa, Asia and Latin America and I would like to focus on those regions today. I will start with our largest win to date, Africa.

In December 2010 we signed a $21m deal with the Port Authority of Kenya to secure the Port of Mombassa. We completed with -- we competed, sorry, with 19 other international companies in a tender to win this contract through a process directed by the World Bank, which will partially finance the project. This project involves the development of civil and communication infrastructure and installation of comprehensive security solution, commissioning, training and support.

The large scale of the project represents a significant business achievement and an important step in Magal's long-term growth. We have yet to begin delivery of the project and expect to start within the next few months. We have already generated further momentum in the seaport protection field in the region, winning an initial order amounting to $2.6m with the potential for more to secure another seaport in West Africa.

In Asia we won orders for perimeter protection for two nuclear power plants. We also won an order expanding a current project at the major international airport adding taut-wire fence and buried cable, as well as expanding the airport's communication and surveillance equipment. Proof that our Airport business is strongly global can also be seen by our win in Latin America, where we won a tender to protect two major hub airports. We also won a significant order of $3m for the protection of federal crisis management bunker in the region.

Within our local market, Israel, we saw robust business, winning a number of contracts. The major win includes a two-year contract for the support and maintenance of a major Homeland Security System, as well as a project to improve the video motion detection layer of a higher-protected site and an upgrade order of a perimeter fence of a high profile prison.

As you can see, the past few months have been one of the strongest in our history from business development point of view. This is, especially for Africa, a very important and strategic region for us. As the continent develop security becoming even more vital, as well as affordable, and we see significant future potential in the region supported by our already very strong references there.

We continue to compete in a number of tenders globally and our pipeline of potential deals and conversion of deals into our backlog continue to grow, as well as the average size and strategic importance of these deals.

I would like to take a few moments to mention two new products. We recently introduced our latest generation of microphonic cable intrusion detection sensor, the FlexPS. This is a fence-mounted sensor providing detection of any attempt to cut, climb or otherwise break through a fence. Already we are shipping a significant volume of units and we will be installing these products in European airports in second quarter.

We also launched a new generation of microwave intrusion detection, Ultrawave, which we expect to start delivering in third quarter. Ultrawave is our volumetric perimeter intrusion detection system, creating an invisible detection zone that alert when unwanted intrusion occurs. We continue to invest strongly into our R&D, ensuring that our technology lead in the market, building our competitive edge.

In summary, the building blocks of our Group -- of our future are in place. While it will still take at least one or two more quarters for our strong recent growth in backlog, which includes our current wins, to feed through into our results, we can truly say that now we are at the inflexion point and look forward to a strong future growth -- We are a leaner, more efficient and more focused Company than we were only a few quarters ago -- and to continued sequential improvement that we will see in the statements to date.

I will now hand the call over to Ilan for the financial review. Ilan, please.

Thank you, Eitan. Revenues for the fourth quarter of 2010 totaled $15.1m, slightly higher than the fourth quarter of 2009 revenues of $15m. We also increased our revenue 13% over the $13.4m reported in the prior quarter. Sales by geography in the quarter were as follows; North America 18.5%; Israel, 16.5%; Europe, 25.5%; South and Latin America 31%; and the Rest of the World amounted to 8.5%.

Gross profit for the quarter was $5.5m, or 36.6% of revenues, compared with $6.2m, or a gross margin of 41.7% in the fourth quarter of last year. The change in gross margin is due to a change in both -- change in product mix between the periods. Operating expenses in the quarter amounted to $6.1m. This is an improvement compared with the $7.3m reported in the fourth quarter of last year, primarily due to our strong focus on reducing costs over the past year.

It is important to note that we've strongly reduced our G&A expenses by approximately $300,000 in the quarter compared with last year, a demonstration of the effectiveness of the cost control plan. The operating loss for the fourth quarter of 2010 was $562,000, compared with an operating loss of $1m in the fourth quarter of last year.

Financial expenses were $405,000 for the fourth quarter, compared with the financial expenses of $503,000 in the fourth quarter of last year. The net loss for the quarter was $1.5m, or $0.14 per share. In the fourth quarter of last year we reported a net income of $1.7m, or $0.16 per diluted share, which included an income of $4.3m from the sale of our European subsidiary. Excluding this $4.3m income the loss for the fourth quarter of 2009 would have been $2.5m, or a loss of $0.25 per share.

For the full-year summary, revenues for 2010 totaled $49.7m compared with $54.5m in 2009. Sales by geography in the year were as follows; North America 31%; Israel 20%; Europe 20%; South and Latin America 20%; and the Rest of the World amounted to 9%.

Gross profit for 2010 was $18.3m, or 36.8% of revenues, compared with $21.1m, or 38.7% of revenues in 2009. Operating expenses in 2010 amounted to $23m, below the operating expenses of $24m reported in 2009. The operating loss in 2010 was $4.7m compared with an operating loss of $2.9m in 2009. Net loss for 2010 was $6.2m, or $0.60 a share, compared to a net loss in 2009 of $1.1m, or $0.11 per share, which, as I said earlier, included the one-time income from the sale of our European subsidiary.

Earlier today we published our 2010 Annual Report and it is filed on the 20-F form with the SEC. In our Annual Report we released a number of additional financial parameters and I urge you to refer to it for more information.

In terms of backlog, which we reported today, as of December 31, 2010 it stood at $50.2m, compared to $17.8m on December 31, 2009. Cash, short-term deposits and restricted cash as at the end of the year amounted to $19.3m.

That concludes my remarks. We will be happy to take your questions now. Operator?

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. (Operator Instructions). The first question is from of Gregg Hillman of First Wilshire Securities. Please go ahead.

Yes, good morning, gentlemen. I'm a little bit new to the story but, anyways, my first question was what are you doing to improve -- on the human resource side what are you doing to improve recruiting, retention, training and management development?

Eitan will answer you. Thank you very much for your question. In the human resources, in order to improve our level of mid management, and I will start with that, is we are preparing different training seminars. We have a process of coaching that we work with a special external advisor that helps us to build the teamwork both in the top management as well as in mid-management level and, in parallel, we bring some experts to improve our team management project managers to improve their skills on the professional level.

Apart from that, we think that bringing the Company, after the crisis that we have faced 12 and 18 months ago, we are willing to improve the morale of the employees. And we have round-table processes where I personally sit together with different groups, whether a different management level or a vertical type of round table with different people from different department within the Company. So, all in all, we are trying to communicate better with our employees and to listen to the employees in one hand, and to improve the professional skills and general understanding of our business.

Okay, thank you, and just one follow-up question. What are your constraints to growth?

What are our what?

Constraints to growth.

What are our constraints to growth? I assume that the improving that we are seeing today from different regions in the world, mainly Africa at this point, Latin America and the Far East, we will be more exposed to opportunities and this will allow us to grow. So I don't see any real reason that by achieving those targets, by being more exposed to those opportunities, we will not grow. So, to me, the fact that we are about to grow is not a question but a challenge which we are now working towards and, hopefully, we will achieve it.

Okay, thanks very much. I'll get back in queue.

Thanks, Gregg.

(Operator Instructions). The next question is from Ken Liddy of Wells Fargo. Please go ahead.

Congratulations on the recent wins.

Thank you.

Where would you estimate -- based on your backlog and your pipeline, where do you estimate gross margins will be in the coming quarters?

We assume that in the next six to nine months, by the end of the year, we will be in a higher-growth margin, in the high 30s.

In the high 30s?

Yes.

And, just to clarify, do you have a backlog of just under $51m?

$50.2m [to begin].

50 -- okay. And, of that $50.2m, how much do you expect to -- that business to bill in the next 12 months?

I assume that most of it is for the next 12 months, even though part of it, as you know, the large contract in Mombassa is a contract that was signed for 18 months, so definitely some part of this backlog will -- takes us 18 months ahead.

In recent calls you talked about some opportunities in India. Have you had any success in -- any clarification of those opportunities developing?

In general we are still in hold and waiting for those to happen. I can tell you that none of them are projects that we have lost and all of them are still undergoing. And, to be practical, I assume that some of them will happen in the next three to six months. India is a very, very slow-moving market. But the good part of my answer is that all of those that I refer in our last conference are still valid.

Good to hear. Now, since your last call the Middle East has gotten much more volatile and I just wanted to know how that may affect your business and, perhaps, some opportunities at your southern border.

First of all, you are right. Without referring to the politics side of the events we also have the understanding that those developments will make the southern border of Israel an opportunity to us. It is not yet something that I can report about or give you any information. It is under design between the Israeli Ministry of Defense and different contractors. We don't know yet at what time and what part of it will be relevant for Magal.

In other calls you talked about the opportunities in Latin America and Mexico. Could you talk about some of the things -- some of the opportunities and give us a status update?

Yes. As I mentioned in my brief, some of our latest win in Latin America are coming from Mexico and we still have -- and those were reported. So part of our backlog today is based on those projects. Other than that, there are more to come but it's too early to say because, as always, we are under competition. And we will see what success rate we will have, hopefully the same as we did in the last 12 months, which will also improve our next year and more than that.

Given your backlog and your expectations of other wins do you believe that the second half year you'll be at an operational profit?

We believe here that if we will get the project and we will be able to execute them on time as we plan, I believe that towards the end of the year we will come to a positive operating profit, yes.

For the year or for the second half of the year?

I would like to be a little bit conservative and say towards the end of the year.

Understood. That's my questions for right now. Thanks.

Thank you very much.

The next question is from Gregg Hillman of First Wilshire. Please go ahead.

Yes. For your business is any of your business for maintenance or so-called re-occurring revenue?

Yes, part of it is on a maintenance contract. I assume that about $5m in our revenue is coming from recurrent revenue of maintenance contract.

Okay. And I don't know how much you can talk about it but, for the rights offering, what are you trying to accomplish with your balance sheet in general with this rights offering? And maybe you could talk about whether there's any bullet maturities coming up, or whether there's any -- whether you're in violation of any loan covenants. And if you could just address that whole question; what you're trying to do.

Well, we have declared the rights offering in a general assembly last summer, so we are following the general assembly resolution. And the idea is to improve the equity situation in order to allow the Company to improve its working capital as well as its flexibility towards new projects and maybe some investment in technology. So that's the idea behind it and that is the aim of this rights offering.

Okay. And have you indicated how much money you're trying to raise?

Yes, we are about to raise $15m.

Okay.

This was published.

Okay. And it would be available to the existing shareholders?

Yes, of course.

Okay, then that's interesting. And then in terms of your relationships with your banks, do you have any unused lines of credit? Or what's the situation with your banks right now?

We are working in Israel in our subsidiaries with local banks. We are currently not using all the credit lines that we have. And this is the situation for the moment.

Okay. In the most recent quarter were you cash flow breakeven, for the fourth quarter?

Well, I think that for the fourth quarter the operational cash flow from operating activity is negative -- slightly negative. And that's it.

Okay. And I take it you're the leading firm in the world that does this kind of perimeter security and pipeline security. Is that correct?

We are considered to be leaders as long as the perimeter sensors for different technologies and, yes, on that part we are considered to be leader worldwide. When you speak about projects, we are very well known in the world but we are competing, as I said earlier, in the Kenya Port event with different 19 companies coming from all around the world. So that is the situation.

We have many competitors on projects. Some of them are giants, like American companies that you all know, some of them are in our size, I would say, and some of them are even smaller that are trying to bid and to participate. So it's a competitive arena.

And are you the leaders for sonar sensing for ports underneath the water and beaches and what not? Are you leaders in that realm too?

No, we are not dealing with underwater sensors.

Okay. This is all more or less on-land type sensors?

Yes, this is all on-land type sensors. You are right.

Okay, fine. Thanks very much.

The next question is from Mike [Kistler] of [INEX Holding]. Please go ahead.

Yes, good morning or good evening, gentlemen. Congratulations on the recent win. Just two quick points. I've been a shareholder; the firm has for a long time. I just wanted to point out a couple of items in terms of the worldwide push toward natural gas.

I was just wondering, in terms of your pipeline protection services, if you have contacted in terms of looking at smaller companies that you just referred to, whether domestic in the US or worldwide, when they get orders for pipe that perhaps you could seek to be -- grab a firm hold of their hand and find out where those orders are going to so that you could offer your services in terms of pipeline protection.

And, two, the same would be in terms of cathodic protection companies that are providing those services to the pipeline layers. So that would -- there's a number of small companies domestically in the US, Friedman Industries, [the Lectrus] Corporation etcetera, but there are a number of worldwide large ones. Just in general, because of the terrorism issue, the greater push towards natural gas, if that would be an area where you would seek to pursue and just put a person on it and just try to find out where the order flow is coming from and if you could just jump on that as an opportunity. Thank you.

First of all, you are right. The pipeline protection is a growing market to us. We are trying and working different places in the world with different oil and gas companies. As you can see in our latest PR we've just won, not a large contract, but we see that as an important one from a US authority in New York to develop for them special algorithms that will allow our product to be more sensitive and to be able to help them protect existing lines from third-party damages.

Right.

So we are very much aware and looking forward for this growing market as another challenge for ourselves.

Okay, thank you. Keep up the good work. And I'll go back to the queue.

Thank you very much.

Thank you.

There are no questions at this time. Before I ask Mr. -- we have a follow-up question from Ken Liddy of Wells Fargo. Please go ahead.

With regards to the recent win with PipeGuard, that contract, how long of a period of time do you expect to be in the -- I guess the development stage?

I think that we are speaking here about a few months, so the process is for this year. I do not remember the exact timeframe, but this is the best I can tell you at the moment. And the tests are -- and the design reviews are already scheduled, so we are in the process.

And, as far as if you are successful, do you have any -- can you tell us how large of a potential revenue producer this could be?

No, I cannot, because this will make us the standard sensors for different use in the third-party damages prevention, I would say, with the New York authorities, so that will start the process. So I don't know at the moment what part or what numbers are there.

And if you are successful will you be able to use this development bit of the algorithms with other providers, or only with this gas utility?

No, we will be free to use it everywhere.

And do you have any other PipeGuard orders in the pipeline?

We do have other tests running, which I, for good reasons, cannot go into details, but not yet firm orders. The order that we got is to present the product into tests which are financed by the customers in one hand. In the other hand, PipeGuard is also used to protect safe deposit rooms in different banks in Latin America and for that we do have some small orders.

Now PipeGuard previously had been a product that previous management was very, very high on. Have you changed -- but never had any success. Have you changed how you're marketing this product, or has just the time gone by -- enough time that the education of the client's higher?

I do think we enjoy both. We are more active in presenting the pipe work to different customers and encourage them to take it for tests. And we enjoy also the fact that the education or the needs that those companies are aware about is growing as the time go by.

Do you foresee opportunities still in the oil pipeline industry?

I do see. I said earlier we are in discussion with different oil and gas companies and we are trying to push them and present them the potential with our product.

Okay, great. Again, congratulations on the recent win.

Thank you very much.

(Operator Instructions). 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, www.magal-s3.com. Mr. Livneh, would you like to make your concluding statement?

Yes, thank you very much. On behalf of the management of Magal I would like to say thank you all for your continued interest and long-term support of our business. I would like also to thank my staff for their hard work over the past few quarters. If you have any questions please feel free to call me or our Investor Relation team, whose contact details are on the press release. I do look forward speaking to you and updating you again next quarter. Thank you again and have a good day.

Thank you. This concludes the Magal Security Systems fourth-quarter 2010 results conference call. Thank you for your participation. You may go ahead and disconnect.