Senstar Technologies Ltd (SNT) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magal S3 fourth-quarter and year-end 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 April 4, 2012.

I would now like to hand over the call to Mr. Kenny Green of CCG Investor Relations. Please go ahead.

Thank you, operator. Welcome to Magal's fourth quarter and full year 2011 results conference call. I'd like to welcome all of you to this 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 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 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 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 securities 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 proud of our achievement in 2011, reporting record 2011 results on both top and the bottom line with record margins. Ilan will provide you with the details shortly.

In 2011 we also generated a significant positive operating cash flow of over $20m. And that together with our successful rights offering has given us exceptionally strong balance sheet at the yearend with $32.5m in net cash. This opens many new avenues for us. It allows us to further execute on our successful strategy, which I will talk about, and enable us further growth opportunities through both organic and synergic acquisitions.

A contribution factor to our achievement was the record $80m plus in project wins that we announced for -- 2011 as well as the short-term delivery for our major one in Gabon for the 2012 African Cup of Nations. Our win rate was due to the solid execution on the strategy that was initiated two years ago by a new management team. This strategy is two pronged.

Firstly, we are aimed to maintain and build our market leadership in perimeter intrusion detection products. While we do have one of the best product portfolios in the industry for the PIDS protection, there are gaps. We need constantly look to fill to sustain and grow our market leadership position.

Over the past two years we have taken great strides in improving our portfolio through internal R&D. An example of which is our recently launched Fortis 4G, the latest upgrade to our Fortis Command and Control System, which has gained significant interest from the homeland security market and is being used to protect many sites and cities globally.

Our now exceptionally strong balance sheet with $32.5m in net cash opens many new avenues for us to further pursue this strategy and enable growth through both organic as well as through synergic acquisition.

The second part of our strategy is to expand our presence in key markets by establishing a strong local presence. We believe this enable us to strongly expand our business in those regions by gaining a better understanding of the local markets, culture and people. It will also allow us to provide better support for both our current and future customers. And this in turn will enable us to gain strong referrals for additional business.

The announcement a few years -- a few days, sorry, ago of our new joint venture in India is a classic example of steps we are taking in this direction. While we have won previous business in India, the formation of a joint venture with Veecon Group solidifies a local presence in a very large growing and economically important market with significant homeland security challenges. This subsidiary will provide homeland security products and solutions to the Indian market while supporting both our existing customer base, and seeking to capture new business.

We also recently made additional inroads into Brazil another leading global fast-emerging economy. We signed a representation agreement with a local IT integrator. They are expanding their offering into security projects, enabling us to capture new business in the region.

While entering new regions is always exciting, it is also challenging, and there are inherent risks. However, these activities significantly expand our addressable market and substantially increase Magal's potential.

Moving onto our project and market summary, our business continued to see a lot of positive momentum. Africa continued to remain strong and is one of our major target markets. We successfully complete the African Cup of Nations project in Gabon, securing 16 sites in seven months. The installation and subsequent protection of the live event was the resounding success for us. And we believe we are in a very strong position in the region to win further business on the back of this. You are all invited to see a short video about this event via YouTube link on our site in the media center section.

With regard to our project for protecting the seaport in Mombasa, Kenya only a few weeks ago we announced an additional extension of $3m to this project. This brings the value of this project up to $24m. And we expect the majority of this project to be executed in 2012.

Latin America remains an important target market for us. In 2011 we saw substantial revenue growth in Latin America over last year, and I expect 2012 will be another good year for Magal in this strategic region. We recently announced $2.1m in orders for perimeter intrusion detection system to secure two high security prisons in the region. This follows on from a $2.7m order of a similar system at that prison, announced at the end of October last year. We expect to complete both these projects in 2012. I believe we have built significant visibility in Latin America. And I expect to see more similar business in the Latin America in the coming years.

In Asia business continued to be robust. We recently announced the win of $1.2m in orders to protect chemical and nuclear facilities. This is an additional to a $1m order received in November to protect two other nuclear facilities. These orders will also be delivered in 2012. As you know nuclear power safety has become a very important topic in Asia and perimeter security protection is a critical part of that. I see more potential for additional business in the coming quarters and years.

In Western Europe and North America, markets are still challenging. In the US we are also expanding into distribution channel, a path rarely used by us in the past.

We ended 2011 with a backlog of around $50m which is at the same level we started our record year. We expect to deliver the vast majority of this during 2012. In addition, we continue to pursue many further opportunities in our pipeline of potential business, which we hope will add to our backlog. We believe our strong and successful execution in 2011 will increase our chances of winning business ahead.

In addition to the projects we are executing on, our product business remains strong and provides around a third of revenue in 2011. This underlines my confidence that Magal will see a good 2012, and my focus has already moved to preparing Magal for 2013 and beyond.

We are at the point where the company will have graduated to the next level. We have now achieved our goals set over the past two years. And we look forward to setting new targets for the coming years. The market demand for our products and services remains strong in the developing markets that we are currently focused on, namely Africa, Asia and Latin America.

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

Thank you, Eitan. Revenues for the fourth quarter of 2011 totaled a record of $33.7m, 122.9% higher than the fourth quarter of 2010 revenues of $15.1m.

Sales by geography in the quarter were as follows. North America 12.5%, Europe 8.7%, Israel 9.6%, South and Latin America 13.3%, Africa 49.9% and the rest of the world amounting to 6%.

For the full-year 2011 revenues were recorded $88.6m, a 78.3% increase compared to those of 2010 of $49.7m.

Gross profit for the quarter was $15.4m or 45.8% of revenues, compared with $5.6m of gross margin or 37.1% in the fourth quarter of last year. Gross profit for the year was $39.5m, representing 44.6% of revenues. This is compared with $18.3m, representing 36.8% -- percentage of revenues in 2010.

Operating income in the quarter was $5m, or 14.8% of revenues. This is compared to an operating loss of $0.6m in the fourth quarter of 2010. Operating income in -- for 2011 was $9.8m, representing 11.1% of revenues compared with an operating loss of $4.7m in 2010.

Financial expenses, net, were $73,000 for the quarter, compared with financial expenses, net, of $405,000 in the fourth quarter of last year. The reduction is attributable to our lower financial debt as well as more favorable exchange rates.

Net income in the quarter was $4.3m. This is compared with a net loss of $1.5m in the fourth quarter of 2010. Earnings per share in the fourth quarter of 2011 were $0.27, compared with a net loss per share of $0.14 in the same period last year.

Net income for 2011 was $9.8m, compared with a net loss of $6.2m in 2010. Earnings per share for the year ended December 31, 2011 was $0.78, compared with a net loss per share of $0.60 in 2010.

As of December 31, 2011 the company's backlog was $50.1m compared with $50.2m on December 31, 2010. Cash, cash equivalents and short-term deposits net of current bank debt as of December 31, 2011 were $32.5m or $2.06 per share, compared with $9.5m or $0.21 (sic - see presentation) per share on December 31, 2010.

The increase in cash -- in the cash during 2011 was primarily due to a positive operating cash flow of $20.4m during 2011, plus the proceeds of $16.2m from the rights offering less the repayment of the bridge loan of $10.4m granted by the company's largest shareholder.

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

Thank you. (Operator Instructions). Your first question is from Fred Ehrman of Bream Murray Carret & Co. Please go ahead.

Good morning, gentlemen, I should say good afternoon. My first question is how do you say wow in Hebrew? That's not a serious question. You've done, in Africa you've done sports stadiums. And I'm just wondering whether that's a niche in the world market that you might find could be very open to you with the performance you exhibited. You did -- I think you completed the projects on time and within budget. Is this an area that could be of interest throughout the world and could be very profitable for the company?

First of all, we say wow.

Okay.

Second, yes, the sports event is a very active niche in the market. We are now investigating this niche. We have a list of upcoming events as of 2012 to 2022 in Qatar. And I don't have the list in front of me, but there are many, many events in this list. It's a major activity in the world, some of it in regional, some of it world activity.

Of course the most known ones are the upcoming Olympics in London and then after the World Cup for football in Brazil as well as the Olympic Games in Brazil. So Brazil is definitely one of our main targets for very many reasons among them this one. But this is not the only direction we are looking. And we hope that by showing our expertise and experience that we get from the African one we will be in a good position for any future opportunity.

Okay. With all the cash you have are there any attractive acquisition targets out there that would be a good fit for the company? And can they be bought at prices that would not necessarily -- would not dilute the earnings per share?

Well, there are targets. We are reviewing some of them. We are working on that. Not as of today, but we start a month ago. It's a long process as you all know. And we are doing that in a very, I hope, reasonable way and we will announce in due time about things that happen. Among them are in different regions and other in different technologies.

Okay. All right, thank you very much. And we look forward to future results like this. Thank you.

Thank you very much.

The next question is from [Craig Stephens of CSC Consulting.] Please go ahead.

Hi gentlemen, a great quarter. I just have a couple of questions for you, just to try and (multiple speakers) just to get some thoughts together here. Obviously, guys, completed that -- or near completion with the contract with the African Soccer Cup work, and that was a $35m contract. As we move into 2012 would you view that your first quarter seasonality would be approximately the same where you'd move into a weaker first quarter, especially with the notion that the African Soccer Cup work is completed?

First of all, the African Cup moves into the first quarter because it was completed in the first quarter. Second, there is seasonality in our business and 2012 is not an exception with regard to that. So we will have it both. In one hand we have to complete or to recognize the rest of the African Cup, and we will face some impact coming from seasonality because the Northern hemisphere is not as active in the winter as in the rest of the year.

Okay, so the colder weather obviously has an impact on your -- the amount of work that can be completed and so forth as far as construction is concerned, is that correct?

That's not unusual. That's always, because you know all that in part of the north of the United States, in north of Europe things are -- in Canada as well, things are not moving in part of the heavy winter time. But that is something that we are used to.

Okay. Okay, understandable, yes. So when you look at the trend of your first quarter, your first quarter is generally a seasonally weaker quarter. So you are saying this is basically due to weather scenarios and so forth that seasonality trend would continue.

Another question I have is as you work on the completion of this African Soccer Cup work and you're saying that that's going to be -- actually being completed here in the first quarter. Would you foresee that you would move back to a more normalized revenue level? That you would see for instance, in 2011 second quarter you were around $15m of revenue. Would you anticipate that being more of normalized revenue level that you'd be at, during 2012?

We think that 2012 will show a growth over the usual, if I can use this word, performance of the last years, and will be profitable year under the assumption that the world economy will not face another big crisis. We are part of the world. But in the current situation we can say that 2012 would be positive.

Okay. So, you know, if we are just basically trying to draw some thoughts here, you've really pulled some really nice strong quarters based on this African Cup scenario where you did $27m in September and also $33m in December, based on that large contract obviously your projecting some growth here in 2012. I guess the idea I'm trying to get across is that, would that normalized level moving through 2012 be closer to that June revenue level but with some growth?

First of all, the numbers that you have quoted is a combination of very different activities and projects, not all of it comes from the African Cup.

Second, the year 2012 will enjoy the remaining part of this event, and other good opportunities and orders that we have collected already and we hope to collect in the remaining of the year as well as the ongoing sensor business, which is part -- important part of our revenue as well as the big project in Mombasa Port that we carry into 2012. So it's a -- it's an overall picture here.

Okay. All right, well, great we appreciate that. And we look forward to your performance as you move into 2012.

Thank you very much.

The next question is from James Khan of Oppenheimer. Please go ahead.

Great quarter. I am gratified that I was right about you guys. I am interested in exploring the question as to what degree you have a business mode.

In your last year's annual report you noted that you are considered the world leader in perimeter intrusion detection systems. And I know you've been doing this for, I think, 35 years I read in one place, 25 in another, so it would take a while for someone to get up to speed to compete with you. So I'm curious about that in general.

And specifically, do you know who got the London Olympics? I take it, it wasn't you. And also, in the Sinai there is a big fence being built. But as I understand it, you guys don't have a contract there yet. And I'm wondering -- obviously there's political things that go on there. But I'm wondering if you can give some thoughts as to why the country of Israel chose others ahead of you, so far.

As long as the sport event, yes, we see that, as I already mentioned, as a potential business to us. I can say very little on the London Olympic Games. As you said, it's not us. But who is leading there is not for us to tell. And regarding Israeli local markets, we are very active in the Israeli market. And as I mentioned in our previous conference call, the decision with regard to the southern border is not yet taken towards a fence or fence. There is a process of building a real barrier, but not yet a smart fence. So this is the situation. It's not in our hands. And we will advise you or we will bring it up to the PR when we will have any major change or any major contract coming from the Israeli MOD. That's it.

Well, thank you. If I could just rephrase my question in a slightly different way, do I have it correctly that you are the world leader in perimeter intrusion detection systems? And also, who would you consider some of your competition?

Well, we are the world leader, as long as you speak about perimeter intrusion detection sensors. There is a report coming out sometime in the second half of 2010, analyzed the world market by Frost & Sullivan. And we came out the largest sensor provider in the world. And there are some competitors in the United States. There are some competitors in the UK, in Australia. So we are not alone, unfortunately. But still, we are taking a nice portion of this market. And we have the advantage of being present in many countries and by having a nice large portfolio of products. And at the same time, being present in many markets, this gives us the advantage on this specific market.

Thank you.

You're welcome.

The next question is from Robert Katz of Senvest. Please go ahead.

Hi there. Very nice quarter. I was wondering if you can give us a sense of what the backlog is or book to bill for the quarter. And what percentage of the upcoming quarter do you have visibility into? Like how much turns business do you have to do within a quarter?

First of all, the backlog as of beginning of this year, we referred to it, it's at the same level of last year, $50.1m. Then we have the Mombasa Port to execute. And that will be reported along the coming quarters, as we recognize the revenue with this project. This project starts with $21.5m and grew by $3m lately. So the majority of it will be executed in 2012.

Other than that, we have announced on a few orders that we have collected. And with those we refer to projects. As you know, our product activity is ongoing, short-cycle business. But that creates about one-third to 50% of our revenue in an average year. So this can help you to figure out the overall picture.

Thank you very much for that.

Welcome.

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

First of all, congratulations on the excellent year. I know it's been a long road, but really, quite a wonderful turnaround here. My first question is with regards to your joint venture in India. What was the catalyst to this joint venture?

As we presented in -- I think it was more than a year ago, we built a strategy to penetrate and to build some presence in strategic territories. One of them was India. In the last year, we evaluated a few candidates. And we looked into the potential business that we can generate with different type of companies. And the catalyst was the strategy of Magal. The result is this joint venture, in which, as you saw in our latest -- last press release, that we have established this joint venture. And we really think that this will help us to build the business and to grow the business in India.

Is there any specific projects that you're -- without telling us the details. But are there specific projects that you're looking at? Or is this more or less something that you feel the activity level of homeland security in India is such that this joint venture will open up some doors?

India is not a new market for Magal. We are active in the Indian market for many years. The joint venture was decided in order to improve our situation and in order to help us to be considered in more than -- more and more projects and the -- to increase our activity. Other than that, yes, there are projects that we are involved with. There are projects that we are in process. And hopefully, the joint venture will create additional opportunities so the business can grow within the next years, I would say. It's not a short-term decision.

The company that you are working with, Veecon Group, what is their position in the Indian market?

Veecon is a company that's involved in the security business from different angles. They are working together with Smith Industries from the US. And they are the main supplier together in another joint venture, nothing to do with us, of x-ray machines to a majority part of the Indian market for airports, hotels, industrial areas. So they are involved with the relevant or similar customers, and they are in this field already.

Switching gears a little bit, as far as your product growth, you've talked about trying to improve your product line. Do you have any progress with some of your research and development that you can talk about?

In the last year, we have launched a new microwave -- we call it ultra wave -- new product. We also launched a new fence-mounted Flex-PS. It's an improved version of a product that we had in the past. So in this respect, we introduced last year two new products. We are working on other developments. We have developed also a new vibration product, called Pinpointer, which is also in the marketplace already. And we came out with the Fortis 4G that I refer already and the VVIP. VVIP is the DreamBox IP product that is in our portfolio for a few years already. But we came out with a software package that is capable to do more visual analytics and visual motion detection, including many other options within this VVIP, like face recognition, like place recognition, so all of these are part of our solution for the coming years.

Do you see any specific areas for DreamBox and your Fortis solutions, to grow those revenues?

Definitely. In any of our future projects, these two elements, of this DreamBox IP, as well as the Fortis 4G will play a major role. We came out with a great system. And we got very good comments from potential customers, as well as from existing customers that looking to upgrade the previous version.

Your PipeGuard has been a product that you've recently felt more optimistic about. Could you talk a little bit about the progress with your trials?

We are now presenting the result of this late development with PipeGuard towards the US customer. We have done the development in the last nine months, I think. And we're supposed to go for a test in the second quarter of 2012.

And could you talk about -- PipeGuard is -- protects a variety of things. What are your customers looking for, to protect?

We are working to prevent third-party damages, which comes from the environmental protection side of the world, in order to prevent third-party damages in infrastructure. The PipeGuard is used and successfully went through the initial test and actually is elected by this US customer with some modification and improvements. And if we will meet the requirements in the coming tests, then it will hopefully become a standard.

That's great to hear. One last question, with regards to your work with the water utility, how has that relationship, is that still going on? Do you see other facilities with that customer that you could be guarding?

I cannot hear you when you refer to that specific customer. Can you repeat, please?

Oh, I'm sorry. In the past, you talked about your relationship with a water utility. Has that relationship -- is that still existing? Are you still looking at other potential sites to protect?

Well, we do have, in different parts of the world, as part of our customer base, water utilities. But there are no specific information that I can add to that. As long as perimeter security is involved, water utilities is very important sites. They are actually a very important infrastructure for every city, and every state and every country. So we are there.

I was specifically speaking of the North American customer that you started working with, I believe in 2010.

We are working with that customer. He's satisfied. He's happy. I don't know of any specific event that cross my mind that I can refer to.

Okay, great. Again, congratulations. We look forward to a strong 2012.

Thank you very much.

Next question is from Abba Horowitz of Old School Partners. Please go ahead.

Hi. Good afternoon. Congratulations first on a very nice quarter. I wanted to understand the SG&A a little bit. How much of the SG&A is variable? Given the seasonality of your business, I'm just wondering how much of that number that we saw in Q4 will carry over into Q1 and how much is fixed?

In Q4, when we look at the SG&A, we can say that part of it or most of it is ongoing. Of course, depends on the project. Part of it is related to project. That means the higher volume of project, higher cost in there. And part of it --

Okay. That's what I want to know. In other words, I understand that. How much is fixed and how much is variable? How much is going to be project oriented and how much of it is -- when you don't have a project, how much are we going to have SG&A on a minimal basis of projects? I want to understand the correlation.

We can say that out of the SG&A, there is -- or if I refer to the sales, let's say that in some of the projects, there are some [rated] costs that can move around 5%, even 10% sometimes from the project value, which are within the SG&A. In this year, we saw what we say is the higher volume of projects all [motored] up in the last year. Therefore we see a jump -- a really significant jump in those costs. Next year, assuming that we will be back to a normal level of project, then that kind of a cost of course will be cut down.

Okay. I think we'll do this offline, just because I'm not sure -- okay, that's not the answer. But if we could just move on. Could you give us a sense of the size of the opportunities that you're seeing? Are you seeing an increase in the number of potential tenders for your Company and where you're bidding? You sort of indicated that in your release today. I wanted to get a sense of how large the market that you can tackle right now, given your current size, ex any acquisitions. How big can you become and what is the market looking like today?

The market has not changed dramatically because we succeeded in 2011. There is no dramatic change in the market.

Second, the project that we are working -- or tender that we are participating, yes, we are now chasing larger projects. There are some opportunities that are there. But still a long way to go. Sometimes this project takes six months and sometimes 18 months between proposal and decision of the customer on who will do the job. And this is the long cycle of project in our market. But we have small size. We have medium size. And we have a few, very little. But this is the usual market of security that we know for many years.

Okay. And how -- in terms of size, what kind of volume can you do in your current size? You've shown some very high growth rates. I want to understand. Is there a certain limit to what you can do today?

In our current size, we definitely can manage similar size of projects, which is in the range between $4m to $40m, let's say. If we will have a very large project, I believe that in 10% to 20% growth, we can manage. If it's much bigger than that, of course it will need some adjustment and extra cost will be involved.

Okay. And are all your current projects profitable for you or are you losing money on any of them?

All of our current projects are profitable.

Okay. And typically -- this is my last question -- typically, when you get a project, what's the average timeframe that it takes for you to generate the excess cash flow, to actually see that excess cash flow?

Well, that depends of course on the terms of each project. Some of the projects are -- the collection is immediately. We get advance payment. And then that, of course, helps us to bridge working capital that's needed for this project. Some of them are longer term, spread out upon the time (inaudible). So there is no typical project. Each and every project is different.

Okay. Fair enough. And just what was the DSO? Did you guys give out a DSO number?

We have not announced on DSO. But we can tell you that we are in good shape with collection.

Okay. Thank you and congratulations.

Thank you very much.

The next question is from Beverly Machtinger of Grace and White. Please go ahead.

Hi. I was wondering if you could elaborate a little on the improvement in the gross margin. One, is this level sustainable? And has there been a change in the product mix or more product projects? Or have the projects themselves just been more profitable? I was wondering if you could just explain what's going on there.

This is of course a question of mix of -- between projects and projects, and within the projects themselves, it depends the mix of projects themselves, more infrastructure, more civil works, less civil works. This year it's been that the mix of projects do pass through higher gross margin than average year. But as we said before, looking long term, we think that the high 30s, this is the average gross margin that we will see. Of course, some years this will be higher a little bit, as this year. Maybe some years, hopefully not, but some years might be even lower.

Okay. So the 40%-plus is really atypical. This is not what to expect in the future.

From our past experience, yes, it's not typical.

Okay, thanks.

Thank you.

There are no further questions at this time. Before I ask Mr. Eitan Livneh to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available within the next 24 hours on Magal's website, www.magal-s3.com. Mr. Livneh, would you like to go ahead with your concluding statement?

Yes. Thank you very much. Well, definitely it was an unusual year for us. It was a major effort that was done by the team of Magal worldwide. And I would like to take this opportunity to appreciate our management, to thank all of our people. And on behalf of management, I would like to thank you for the continued interest and long-term support of our business. I would like also to thank my management. And definitely we are looking forward to achieve our goals in the strategic level.

If you have any questions, please feel free to call me or our investment relation team, whose contact details are on the press release. And I'm looking forward to speak with you and update you again next quarter. Have a good day. Have a great holiday, whether it's Pesach or whether it's Easter. And thank you all.

Thank you. This concludes the Magal S3 fourth quarter and year end 2011 results conference call. Thank you for your participation. You may go ahead and disconnect.