Senstar Technologies Ltd (SNT) 2011 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Magal Security Systems second quarter 2011 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 August 31, 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 second quarter 2011 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 line today are Mr. Eitan Livneh, President and CEO and Mr. Ilan Ovadia, CFO. Eitan will summarize the key highlights followed by Ilan who will review Magal's 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 and other statements regarding future events or the future performance of the company. These statements are only predictions and Magal can not guarantee that they will in fact occur.

Magal does not assume any obligation to update that information. Actual results or events 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 Securities and Exchange Commission.

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

I would like to welcome all of you and thank you for joining us today. We are very happy with the results of the quarter, and particularly with the success of our strategy which has led us to our third consecutive quarter of improvements and led to our return to profitability.

Magal continued to make progress. We present today a very strong year over year improvement in revenue which is at the first highest level in 10 quarters, as well as improvement in gross margin and regain profitability.

Combined with our now exceptionally strong backlog, which includes our large recent wins, we see our progress as a very solid base for the remainder of 2011 and beyond.

I would like to first summarize our financials before providing you with a general business update.

Revenue for the quarter grew by 37% over last year reaching $15.7m. We also improved our gross margin to 40.8%, our highest since the end of 2009. We return to profitability with an operating income of $398,000 (sic -- see press release) and net income of $102,000, compared with a net loss of $1.5m last year.

A number of projects contributed to our revenue with no one project contributing more than 17% to our overall win revenue in the quarter, which demonstrates the diversification in our revenue stream.

Our margins were also strong due to the higher volume during the quarter. The mix of projects contributing to our revenue as well as our focus on being more efficient in executing our projects.

Our marketing and sales expenses, while flat compared with last quarter, were increased compared with last year and was primarily due to the recent increase in projects.

We ended the quarter with cash, short-term deposits and restricted deposits amounting $30.1m. The rights offering that we completed in August increased our cash position by a further $6m net. Our current net cash level are more than enough for all our working capital needs and enable us to pursue new opportunities. I am also pleased to say that our rights offering was a success given the broad participation across our shareholder base and I want to take this opportunity to thank many of you for taking part.

While a portion of the cash raised was used to repay all the outstanding debts owed to our controlling shareholders, the cash raised significantly improved our working capital level. As we now can show a much stronger capital structure, this will benefit us by also enabling us to compete for larger scale projects.

Today, we also announce the listing from the Tel Aviv Stock Exchange. We believe that maintaining one listing in the United States will benefit the trading volume of the stock by consolidating in one place, save us money and benefit all our shareholders.

Moving onto our projects and market summary, our business continued to see a lot of positive momentum. Our backlog remains very strong amounting to over $80m as of the end of the quarter. We still see potential for more and we are chasing a lot of opportunities in our pipeline for potential businesses.

Africa continued to remain strong, and is one of our major target markets. It's portion of our revenue is growing and we expect it to continue to grow in the coming quarters.

Latin America remains an important target market for us. We are seeing a high level of activity which we hope will translate into orders and projects in the coming months.

In Asia, apart from Japan, business continues to be robust. Japan remains slow flowing. The Tsunami earlier in the year and our nuclear power station projects there understandably all remains on hold.

In Eastern Europe we received two recent orders totally approximately $10m. The orders are for extending existing Perimeter Intrusion Detection Systems and both orders are with customers that have ordered with us in the past, which demonstrates their satisfaction with our previous installation and underscores our proven experience in this market.

Within our local market, Israel, we continue to complete -- compete sorry, in local tenders especially safety tenders. We also recently received an order from the Ministry of Defense for additional border protection. The product is part of our ongoing business activity with them.

Overall, the past few months have been very strong from a business development point of view, leading to our highest backlog level of all time and continual trend of improving financials. And we believe that we will continue to see the fruits of our efforts over the coming efforts.

We are now at the inflection point where our business is lean, profitable, cash generating, efficient and focused, while looking forward to strong continued growth from our recent wins as well as those to come.

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

Thanks Eitan. Revenues for the second quarter of 2011 totaled $15.7m, 37% higher than the second quarter of 2010 revenues of $11.4m.

Sales by geography in the quarter were as follows. North America 19.5%, Israel 16.4%, Europe 14.4%, South and Latin American 13.3%, Africa 21.4% and the rest of the world amounted to 15%.

The gross profit for the quarter was $6.4m, or 40.8% of the revenues compared with $3.6m, or gross margin of 31.7% in the second quarter of last year.

Operating expenses in the quarter amounted to $6m. This is higher when compared with the $5.3m we reported in the second quarter of last year, and was primarily driven by additional marketing and selling expenses due to the current large portion of projections.

It is important to note that at the same time, we have strongly reduced G&A expenses by around $0.5m in the quarter compared with last year, while not satisfying our investment in R&D; a demonstration of the effectiveness of the cost control plan.

The operating income for the second quarter of 2011 was $399,000 compared with an operating loss of $1.7m in the second quarter of last year.

Financial expense was $243,000 for the first quarter compared with financial income of $110,000 in the second quarter of last year.

The net income for the quarter was $102,000, or $0.01 per basic share. In the second quarter of last year we reported a net loss of $1.5m, or $0.15 per share.

Cash, short-term deposit and restricted deposits as at the end of the quarter amounted to $30.1m.

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

Thank you. (Operator Instructions). The first question is from Fred Ehrman of BMI Capital. Please go ahead.

Good morning gentlemen. Congratulations on a very nice report. The Israeli Government has announced that they are going to accelerate the building of a fence between the Sinai and Southern Israel. Is Magal involved, or will Magal be involved or possibly involved in this project? And if so, any idea what the size of it would be, the dollar amount in size?

Thank you for the warm words at first. Second, the current work, the current decision of the Israeli Government is to build a barrier in the Sinai border. Not yet an electronic fence in the terms of Magal, which means we are not involved at this point.

And we hope that in the future, in the coming -- within the next month and the -- the situation as you all know with the terror threats coming from Sinai will speed up the decision to install the Magal type of sensors in this barrier.

Okay. Do you have any idea approximately what the cost would be to erect a Magal type sensor barrier?

It is involved with a few tens of millions of dollars from end to end, means for the whole border. But it's still a quite open question whether they will decide to do it in one time or in few steps. These are things we don't know yet.

Okay. When you said they intend to put up a barrier now but not one with sensors, this seems to be something that anyone can climb over. I mean we -- I think that's the kind of thing they have in certain parts of Southern United States between the United States and Mexico, and people climb over those fences all the time. It seems to be a very inefficient type way of trying to keep people out.

I share your view, and I am trying and I would like to see the decision come earlier than later to put those sensors in order to improve the alarm and the fact that this border will be better closed.

Right, okay. Thank you very much and we look forward to an improving second half.

Same as we.

Okay.

The next question is from Sam Rebotsky of SER Asset Management. Please go ahead.

Yes, good morning, good afternoon Eitan and Ilan. Your $18m backlog June 30th, what is that compared to the previous year and what is it as of August? And what kind of jobs, what dollar amount of jobs are you bidding on?

And what do you -- you were about $16m sales made you profitable. Is that -- do you get a chance to reduce your costs to be profitable say on $13m? Could you talk about your breakeven and where you go forward?

Well to give you an idea about our last year backlog it was on the level of $20m. We'll speak now about $80m, so it's a major change. It consists mainly with the project that we have announced. If you look into -- if you saw our PRs you know that we have gained two major projects in Africa. We gained some projects in Europe and we do also have projects in hand in Latin America.

So all in all, are there the question about what we will see in the revenue. Definitely these projects will contribute to the revenue in the coming quarters. And I -- we are competing and we are proposing for new projects, but these are early to talk about.

Yes, but do you think Eitan that you have $30m of projects you're bidding on, or $10m or could you sort of give a range of the kind of projects you're bidding on?

And, for example, the $18m will that be completed within one year? And also address have you reduced your breakeven? Is your break -- can -- does your -- is your breakeven where you did $15.7m can you be profitable at $13m now?

We compete on project in different size. Some of them are small and modest some of them are large. Some of them in the level of $4m to $5m and a few of them are over $10m.

But generally speaking, the backlog in hand, taking into consideration that part of our business comes from product sales, where we have much shorter cycles between order and delivery and very little of that is in the backlog, we think, or we see, the current backlog serving us for the next 12 months at least.

Okay, good luck.

Thank you very much.

The next question is from Ken Liddy of Wells Fargo. Please go ahead.

Good afternoon. Congratulations on returning to profitability.

Thank you very much.

Thank you.

Of the $80m in backlog, what percentage do you expect to bill in this fiscal year?

I don't have the exact number. I can not tell you exactly, it depends on the different situation with different sites in the world. As you know, the major project that we announced is the African Football Cup which is on January next year. So if -- and this was $35m project.

Most of it will be this year and some of it will go for next year, the remaining. At the same time, we are working on the large port in Africa and others in Europe. Naturally, some of it will be this year and part of it next year.

Is at least $40m reasonable?

That sounds reasonable.

And typically, the fourth quarter you've got the revenues are back-weighted in the fourth quarter and the second half. Do you expect the fourth quarter to be your largest quarter or just the second half of the year to be much larger than the first half?

The second is going to be -- the second -- the coming -- this quarter -- this half sorry, the second half will be better than the first half. How it will be divided between the two quarters it's as it goes and yes, the fourth quarter used to be better coming from the budget release in the world. Mainly for us, it comes from the products.

And do you have a target operating level that you'd like to reach and percentage wise of revenue?

I am not sure I understand the question.

A target operating profit.

I hope that we will be in the highest $30m. Ken, usually when we discuss it, we are -- we say that we are aiming to be at the highest $30m gross margin. As you see our OpEx margin, they are constant between the quarters, a little bit decreased.

This is the trend in the last, say, I think I didn't check it now, but I think in the last few quarters the trend is a little bit decreased. So you can calculate easy understand what we see as our OpEx margin.

From the pay-down of your debt along with no longer being listed in both the US and in Tel Aviv Stock Exchange, how much money do you expect to save annually?

The money that goes with the Tel Aviv Stock Exchange is not significant. The overall attention and the -- for management, and a little bit of the fees and the legal expenses will save us some money out of pocket, but this is not the major reason for the decision.

How much do you expect to save from the pay-down of your debt annually?

How much we expect on the -- for the (multiple speakers) do you mean?

Yes, on interest expense.

As you know, the loan for our major shareholder was paid back as I said once we got the rights offering in-house. So actually there is no more involved with that.

And how much was that annually?

Per year it's supposed to be something around $400,000 more or less. I didn't calculate it now. So, per year that should be, but this is not the case. In this year we paid it back in August as we said, so it's only partially.

In the past you've talked about trying to pursue possible acquisitions. Are you still looking at any potential opportunities out there?

Yes we do, we do. We look towards potential acquisitions and as we said in the past, the money that we have raised will help us, we hope, will help us to acquire companies that will fit into our business, will give us some technology, some market share. And this is still in our focus.

Understood. As far as regions of opportunities, I missed what you said regarding Asia.

I said that in Asia, business is stable at this point other than Japan, because in Japan we see some decrease. Part of our business in Japan comes from the nuclear power plant that was hurt in the last Tsunami. So -- and we expect to have 10 years upgrade on those sites and this business will not happen. But other than that, the business in Asia at the moment is stable to us.

Okay. And in North America, have you seen any other new opportunities in the US border with Mexico or Canada?

No, no specifically in the near future. So we see some improvement after a very slow period that we saw in the first quarter as well as in the second. We believe that this half will be better.

You announced that PipeGuard had a very successful trial recently. Where does that stand? Are you expecting to get some more orders from other utilities?

Yes, we had a very good test in Latin America which is now under evaluation for a full scale project.

How large of an opportunity do you see for that product in the next 12 months and over the next three years?

Well for the next three years I can not tell you. For the next 12 months it depends on the decision in that country, Latin America. It can create a few millions and in other we still see opportunities with -- as you know we use the PipeGuard also to protect banks safe and this is something that is ongoing business. And for the next 12 months, I believe a few millions.

Okay. In the last couple of years you've got some success with some utilities like water utilities and how is that business going with those customers? Do you expect to expand out your role with those customers?

Still with PipeGuard?

No not with PipeGuard with like Fortis and --

Okay yes, we do see additional business coming from water utilities, from chemical industries in North America. So basically that goes with our perimeter security products as well as Fortis and video.

In the United States there is a major initiative to protect chemical sites. Do you expect to benefit from that initiative?

Yes, definitely. We are following. We are already in contact with some of the integrators that work directly to this initiative as well as with the designers that are preparing the sites.

Just to refresh our memory, where is backlog after the end of last quarter?

About the same level.

Okay. And right now it's just above $80m.

It's at the level of $80m yes.

Okay. Okay, well thanks for taking my questions and again congratulations on the return to profitability.

Thank you very much.

(Operator Instructions). The next question is from [Fred Marcus]. Please go ahead.

Yes. Relative to the $35m African project, football, project that you've referenced, how far along, what percentage of that project has been done? And since it's supposed to be completed by January, is that moving forward on an aggressive basis?

The second quarter was just the initial part of this project. We built up the team. We did the first steps in the site, so it contributed very little part of the project in the first -- in this quarter, in the second. And as I mentioned earlier, most of it will come in the second half.

But you feel the project is on very firm solid ground?

Yes.

Thank you.

Thank you.

There are no further questions at this time. Before I ask Mr. Livneh to go ahead with his concluding 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?

Thank you very much. On behalf of the management of Magal I would like to thank you 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 my IR team whose contact details are on the press release. I look forward to speaking with you and updating you again next quarter. Have a good day. Thank you all.

Thank you. This concludes the Magal Security System's second quarter 2011 results conference call. Thank you for your participation. You may go ahead and disconnect.