Senstar Technologies Ltd (SNT) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magal Security Systems third-quarter 2011 results conference call. (Operator Instructions). As a reminder, this conference is being recorded, November 29, 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 third-quarter 2011 conference call. I would like to welcome all of you to the conference call today 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 highlights, followed by Ilan who will review the financial performance of the quarter. We will then open the call for question and answer session.

Before we start, I'd like to point out that this conference call may contain projections or other forward-looking 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 the 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 documents filed by the company with the Securities and Exchange Commission.

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

I would like to welcome you all and thank you for joining us today. We are very proud of our achievement over the past year, reaching these record results.

While we have shown gradual improvement over the past few quarters, the $80m plus in project wins that we have announced over the past year, as well as our execution on these projects, was the main contributing factor leading to our strong growth in revenue profit and cash generation. This was due to our successful transition to a new path we initiated in the past two years and the fruits of these efforts are finally clear from outstanding results of the quarter.

Additionally, we generated a strong positive operating cash flow in the quarter. This, combined with our successful rights offering to shareholders has provided us with a very healthy balance sheet and a strong financial position to continue our path.

The market demand for our products and services remains strong, particularly in the markets that we are currently focused on, namely Africa, Asia and Latin America, and we believe our momentum will continue into coming quarter and beyond.

I would like to first summarize our financials, before providing you with a general business update. Revenue for the quarter more than doubled over the last year and we present a Magal record of $27.7m in the quarter.

Our gross margin of 47.2% is also our highest ever and reflects the higher volume during the quarter. It is also a function of the product mix a well as the mix of projects we are currently executing on.

In addition, we have placed significant focus over the past year on careful management of our cost and expenses and the improvement in gross margins also reflect an increased efficiency of our business.

We are showing increase in G&A as well as marketing and sales expenses in the quarter. This is primarily due to the recent strong increase in projects on which we are executing, but importantly shows that we are able to widely invest our cash, increasing our scale and generating business.

Our net income of $7.1m representing a net margin of 25.6% is also a record to us, and this is true even if we exclude the one-time income from the arbitration award of $2.3m.

We ended the quarter with cash and short-term deposits of $33.8m. This cash level is more than enough for all our working capital needs and enables us to pursue new opportunities. This balance sheet strength also place us in a very strong competitive position, enabling us to continue to win larger scale projects and pursue new opportunities.

Moving on to our project and market summary. Our business continued to see a lot of positive momentum. Our backlog remained very strong, amounting to over $60m at the end of the quarter. We continue to pursue many further opportunities in our pipeline of potential business.

Africa continued to remain strong and is one of our major target markets. African countries are generating significant and growing portion of our revenue. We are executing according to plan on the African Cup project, which should be completed by early next year. During the quarter we won some additional orders for protecting the airport, which will see a jump in passenger traffic during the games. With regard to the Seaport project in Mombasa, we look forward to a long -- large portion of the revenue in 2012.

Latin America remains an important target market for us. We continued to see a high level of activities and during the quarter we announced the win of the project for the installation of a multi-layer perimeter intrusion detection system at the high security prisons in the region. This order is a demonstration of how the investment in our relationship with customer, especially in the region, has been successful and is currently generating returns for us. I believe we have built significant credibility in Latin America and I look forward to sharing with you more successes there.

In Asia, business continued to be robust. During the quarter we announced the win of two repeated orders to protect nuclear facilities. As you know, nuclear power safety has become a very important topic in Asia. And perimeter security protection is a critical part of this. I see more potential for additional business in the coming quarters and years.

Within our local market, Israel, we continue to compete in local tenders, especially [safety] tenders. We also believe we will see additional border protection products as part of our ongoing business activity with the Ministry of Defense in Israel.

With regard to (technical difficulty) Europe and North America, we are seeing the economy -- the economic weakness and it's impacting the budget allocation for new projects. As a result, it is also affecting our product sales in those regions.

In summary, this past year has been a very strong from a business development point of view. This has led to our current highest quarterly results of all time. We are at a point where as a company we have graduated to the next level. We have now achieved our goals set over the past two years, and have become profitable. We look forward to setting new targets for the coming years.

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

Thank you, Eitan. Revenues for the third quarter of 2011 total $27.7m, 107% higher than the third quarter 2010 revenues of $13.4m.

Sales by geography in the quarter were as follows. North America 14%, Europe 14%, Israel 8%, South and Latin America 7%, Africa 53% and the rest of the world amounting to 4%.

The gross profit for the quarter was $30.1m or 47.2% of revenues, compared with $5.4m or gross margin of 40.4% in the third quarter of last year.

Operating expenses in the quarter amounted to $7.2m. This is higher when compared to the $5.4m we reported in the third quarter of last year and was primarily driven by the additional marketing and sales expenses, due to the current large portion of projects.

We also reported an income of $2.3m in the quarter following a lengthy five-years arbitration with an Eastern Europe customer arising from the unwarranted cancellation of a contract.

The operating income for the third-quarter 2011 was $5.6m, compared with an operating loss of $812,000 in the third quarter of last year. Financial income was $1.3m for the quarter, compared to the financial income of $97,000 in the third-quarter 2010, due to gains from exchange rate fluctuations.

The net income for the quarter was $7.1m or $0.51 per basic and diluted share. In the third quarter of last year, we reported a net loss of $781,000 (sic -- see press release), or $0.08 per share.

Following the rights offering offered to shareholders in the quarter, the number of shares outstanding increased to 15.8m shares, versus the 10.4m a quarter ago.

Cash, short-term deposits and restricted deposits at the end of the quarter amounted to $33.8m or $2.14 per basic share, compared with $22.4m or $2.12 per basic share as of June 30, 2011. The increase in cash was due to the positive operating cash flow of $8.5m plus the proceeds of $60m from the rights offering less the repayment of the loan of $10m to the company's largest shareholder.

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

Thank you. (Operator Instructions). The first question is from Fred Ehrman of Brean Murray Carrett & Co. Please go ahead.

Good afternoon, gentlemen. A very big congratulations on a fantastic report. Your cash position is at over $33m. Do you see this cash in the next year increasing or decreasing? Are you going to be cash flow positive or negative in the next year?

We believe that next year we will be able to maintain this level of cash flow due to the projected revenues that we see now.

All right, so over $2 a share you see maintaining over the next year.

You mentioned the, in Israel I think you said it was 8% of your business is in Israel and you were having discussions with the Ministry of Defense. There's been a lot of publicity given to the fence being built separating Israel from the Sinai. To this point, Magal has not succeeded in getting any part of that business. What is the outlook for that?

First of all, Magal has not succeeded up to now, but doesn't say and that for our view we have lost any opportunity here. The Defense Ministry of Israel has decided to build a barrier and not yet made any decision regarding the electronic side of the fence or the barrier with the fences as we did with many in other sides of our borders. So for the time being this is not yet decided and we do not have any better picture at the moment on any change in the near future for that.

Okay. After this report, the company has a very good story to tell. Are you planning any changes in your PR budget and how you're going to bring your story to the investment public?

We are changing our, I would say it's not a strategy. But very clear we are making our public relations based on recent events. Apart from that, I personally, and Eitan is speaking, I am going to attend an investment conference in the homeland security business next - the following week on December 12 and 13 in Manhattan in New York. That is something that is a major difference from what we have done in the last two or three years.

So yes, we are approaching the investment groups and markets in a different way. And we will manage on different way of meeting people in the market, and we hope it will create a change.

Okay, thank you very much.

Thank you.

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

Congratulations on the solid results.

Thank you, Ken.

As far as your backlog is concerned, you said it's over $60m, is that correct?

Yes.

Of that backlog, what percentage would you say would be built over the next six months?

On that backlog I assume that roughly 30% to 40% is related to the next six months, if you refer to the six months. But as always, backlog is at the same time, growing by having new orders and new projects, which we hope we will have in the next six months as well. So it's a (technical difficulty) number.

Understood. And as far as meeting some of your year-end targets for these large projects, do you expect to finish them on time?

Yes. There is one large project which has a very definite deadline. It's not by the end of this year but very early next year. It's the African Cup which has a very specific date. It is on January 20 and the games will continue about three weeks or four weeks. So sometime by the end of February, this event comes to its end.

You mentioned that revenues in Israel are about 8%. That number at one point was much, much higher. Do you have any reason to believe that that will begin to grow again?

Well, as much as we will be able to grow our business worldwide, this number will stay low. Hopefully that will be the case. Israel is a small market, even if we will do more business in Israel or the same level that we have done in the last two years, which is good, not again excluding the potential project in the Sinai border which is not yet decided as I said earlier. But other than that, the business is very solid and the numbers are there, but percentage-wise it's decreasing, fortunately I may say.

Okay. With regards to where you saw the Company a year ago as far as opportunities, how does that compare to right now? Do you see more opportunities today than you did a year ago, before you landed some of these big projects? Or is it about the same, or less?

Definitely it's not less. I believe that by doing this project that we are running these days, we are opening a new market, and we expose ourselves to additional opportunities, whether it's in Africa, whether it's in the Far East as well as Eastern Europe. But knowing the economic situation in the US and the Western world, we do see problems compared with what we have expected last year. If you would ask me a year ago is that the forecast, nobody can even imagine the situation we are facing today. So with that we are in a good shape.

With regards to Africa, do you see other opportunities with repeat orders with that client?

Well, repeated orders directly from the same type not immediately, it will take years. But the event of the sports event are very large business in the world, not necessarily in Africa but in other regions as well, and the ports business as well. So having these two major projects successfully done, which we are hopefully be able to announce in months ahead, this will give us a good references for any additional opportunity either in Africa or any other region in the world.

Good to hear. With regards to your net equity, your book value, where does that sit right now?

By the balance sheet of September 30, it is almost $48m.

Okay. I may have some more questions. I'll get back to you in the queue. Thank you.

Thank you.

Your next question is from Gary Markoff of Morgan Stanley. Please go ahead.

Eitan, this is a fabulous-looking quarter, and I want to publicly state my congratulations for delivering everything that you said you were going to do, fixing the backlog, fixing the business momentum, fixing the nonsense from the internal side of things, recapitalizing that debt. The balance sheet looks phenomenal. The opportunities are starting to turn, and it's really a testimony to your and your team's success and ability to execute and I want to publicly state that.

Can you give us a sense about how Magal is operating now with regard to going about earning business that it wasn't doing before? And is it a new way that you're approaching the market? Or is the market in -- are you finding now the equivalent of a wild cat or as benefit where you've finally found an oil well and you're developing around that specific location in multiple ways?

First of all, thank you. Second, it is a mixed whole. There is no one story that I can tell about the change in Magal. First of all, there is a change in the last two years of management and managers in most of the positions. And at the end of the day I think, and this is something you have heard more than once from me, that we are dealing with people, whatever it means. And we create better relations with different people, different customers and different regions in the world. We set a strategy and we discussed it earlier, and I presented or I elaborated on that when we discussed our marketing approach in different regions in the world. And we are working following that strategy. And we believe that there's still a lot to do.

No doubt the success in Africa, and understanding that Africa is a promising continent was part of the understanding that we have had in our strategy. Telling you that we aimed to these specific projects a year ago and more than that will not be the real story. But when they arise, we were there, and we were with the right team and the right pricing to take the job. And that is a combination. I believe that we are -- as long as we will continue and we will stick to our focus in our core business, we will be able to keep the momentum, as I said earlier.

Can you give us an example of any -- of something that you can discuss?

I told you in previous conference calls that we are looking for presence in different regions in the world. I cannot tell you now any specific success. But I can tell you that we are focused on those territories. And we are moving forward and improving at this point in time the chances that our presence in the next six months, coming back to the previous question about six months, we will be able to really create presence. And it's a long process, as you all know, getting to the right people, the right opportunities, and create a presence. But we are going forward, and the strong balance sheet and the cash position that we have in hand will help us to execute.

Are we talking about oil-generating countries, or terrorist-fearing countries?

Well, we are not aiming to a specific market, vertical market, oil-generating. We are in Mexico already and we have presence there. And we are in Colombia, as you know. There are a lot going on in different countries in the world. And some of them are promising, not necessarily the United States of America this time, and not necessarily West Europe.

Okay. It looks like you were able to really get a hand on the gross margin line, a significant jump to 47.2%; the nine-month average is 43.8%. That's way up from last year's number. Can you give us some guidance in terms of what we should be expecting going forward?

This is Ilan. As we said in the earlier conference call that we had, we feel (inaudible) in the high 30s. This is where we believe that we will be -- but we believe that in the coming quarters we still see higher margins a little bit more than 40. And that's for the coming year.

Okay. And with regard to product development, could you tell us, is there ever a future with PipeGuard? Or is that done? What's happening on that front?

First of all, if you will ask me, I do see a real opportunities in front of the PipeGuard. It's a way from being done. Is there anything that we can announce at this point? Not yet. We have referred in previous, or even before the conference call to specific investment coming from NYSEARCH, New York research organization, that is investing with us in order to make the PipeGuard applicable for presenting third-party damages in New York. So we are in the process, and we are working on some additional development with the PipeGuard.

But generally speaking, on product development, we continue our effort. And we will continue developing sensors, products, keeping ourselves as the leaders of the market. And we are trying to close some gaps in technology. We are investing in that. R&D is in high priority.

Could you give us also a sense of where headcount is versus, let's say, year-end 2009, year-end 2010?

Compared to the year-end 2010 I can tell you that we have about 4% or 5% change, that's all.

In which direction?

Growing in headcount. But that is in very specific regions where we have a lot more to do.

Okay. And do you expect to be adding more headcount?

Not significantly. But in specific positions, R&D for example, yes, we do want to improve. But generally speaking, we are not growing.

Growing headcount?

Yes, we -- we do not plan to grow in headcount in general. There are specific positions in sale, maybe, if we will get to a specific territory and we will establish presence definitely we will have to put people there. But other than that, R&D and sales might grow, a little bit.

Okay. And on a balance sheet question, you've got under your current liabilities a customer advances line that goes from $2.4m to $10.3m. Could you explain what that relates to?

In this case, these are customers' advance for project that according to the contracts we will manage to get advance payment instead of financing the project. This is part of our risk management in the projects.

Why is that a liability?

Because we manage to receive more [confederation] out of the project, then we proceed in the project itself.

I got you.

So that is an advance payment.

Okay, thank you. I hope that -- thank you, guys. Keep it up.

Thank you very much.

Keep it up.

We will try.

The next question is a follow-up question from Ken Liddy of Wells Fargo. Please go ahead.

Hi, actually Gary asked a couple of questions that I was going to follow up with. Just want to again congratulate you on a solid quarter, and look forward to hearing great results for the end of the year. Thanks.

Thank you very much, Ken.

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?

Thank you very much. At first, one thing which is not written in front of me, I really thank you all for the fact that you are staying with us, at least with me, in the last two years every quarter in this conference. And I'm very much on behalf of the management and Magal for continued interest and long-term support of our business. I'd like to thank my staff on the hard work. And believe me, really hard work was done in the last year, bringing us to where we are today. If you have any question, please feel free to call me or IR team, whose contact details are on the press release. I do look forward to speaking with you and updating you again next quarter. Have a great day. Thank you all.

Thank you. This concludes the Magal Security Systems third-quarter 2011 results conference call. Thank you for your participation. You may go ahead and disconnect.