Senstar Technologies Ltd (SNT) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magal Security Systems first quarter 2012 results conference call. All participants are at present in a listen-only mode. Following the management's formal presentation instructions will be given for the question and answer session. (Operator Instructions). As a reminder, this conference is being recorded May 30, 2012.

I will 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 first quarter 2012 conference call. I would like to welcome all of you're 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 highlights, followed by Ilan who will review Magal 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 the 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 please go ahead.

I would like to welcome all of you and thank you for joining us today. We are very satisfied with our performance in the quarter. Our results are strongly improved over the first quarter of 2011 on all accounts.

We grew our revenue by 35% to $15.6m. We saw improvement in profitability across the board and reported a first quarter net income for the first time since 2007 in what is seasonally our weakest quarter. I should note that the results were not as strong as prior two quarters of last year.

It is important to remind you that the second half of last year included the vast majority of our highly successful and short turnaround project in Gabon, which made a very significant and large contribution to our financial performance. The Gabon project was completed in February, so we only recognized a small portion of the revenue in this first quarter.

In addition, for Magal, as I said, the first quarter of the year is seasonally the weakest one as it is harder to install perimeter security during the winter months in many of the northern geographies in which we operate.

In general, we are pleased with our overall performance which set a positive tone for the rest of 2012. However, we are also aware of the weakness in some markets that is suffering from the economic crisis, especially in Western Europe and North America, as this may impact our ability to grow in this market in the immediate term.

During the first quarter we also maintained an exceptionally strong balance sheet ending the quarter with $37.8m in net cash. This is very important from a strategic perspective as it opens many new avenues for us. It allows us to further execute on our ongoing strategy which has been very successful to date.

As I explained last quarter, we have two important elements to our strategy. First, we aim to maintain and build on our market leadership in perimeter intrusion detection products. While we do have one of the best product portfolios in the industry for PIDS protection there are gaps we need to fill and we are doing so in order to sustain and grow our market leadership position. We are doing this through our internal research and development, but we are also looking at acquisitions for technology companies that can complement our product offering.

The second part of our strategy is to expand our presence in key markets by establishing a strong local presence. Here to we are also looking at potential acquisitions that will provide us strong presence and revenues in key markets. We believe this will enable us to strongly expand our business in those regions by gaining a better understanding of 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.

Last quarter we announced a new joint venture in India which we are now in the process of establishing and setting up and everything is working according to plan. We believe that if all goes well we will begin to see revenue from the JV in India by the end of 2012.

While entering new markets it's always exciting. It is also challenging and have inherent risks. However, this activity significantly expands our addressable market and substantially so, and substantially increase Magal potential.

In fact, we are now increasingly seeing the fruits of our efforts from the establishment of our offices in Spain and Colombia back in 2009. Colombia has already been providing us with revenues since 2010 and is now ramping while Spain began to generate revenues this year.

Moving onto our projects and market summary, our business has a lot of positive momentum, particularly in the emerging regions of Africa, Latin America and Asia.

Europe and North America right now are showing signs of weakness, which we see as being related to more general economic climate in those regions. However, we are using this downtime in the region to improve our operation and distribution.

For example, we recently launched a new off-the-shelf fence protection kit in the United States to sell through the distribution channel for use by local small integrators and installers. The kit comes in a size of either 100 meters, 200 meters or 300 meters of fences, so it is designed primarily to protect houses, business or smaller areas. This will enable us to penetrate the small perimeter protection market, expanding our addressable markets.

Africa countries remain strong and is one of our major target markets. As Africa market emerged, the countries in the region are increasingly placing importance on the security of assets they are building.

We successfully completed the African Cup of Nation project in Gabon, securing 16 sites in seven months in time of games in January. This installation and subsequent protection of the live event was a 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. I urge you to watch our short video about this event via YouTube link in our site in the media center section.

This large project represents a highly significant business achievement. It is also a very important additional reference for us in Africa region. It is also provides us with a new potential market opportunity that -- of securing major events.

With regard to our other big project in Kenya, the $24m total deal to secure the Port of Mombasa, to date, only a small portion of this project has been recognized and we expect the majority of this project to be completed and recognized during the coming three quarters.

Our close cooperation with the Kenyan authorities over the past year as well as our proven experience in securing sea ports, we believe will lead to further similar orders in the region. We have a number of projects in the pipeline in Africa. And we look forward to updating you if and when we win orders.

Latin America remains an important target for us and we continue to see strong traction there. While the first quarter was slower in the region for us, I expect that 2012 will be another good year for Magal in this strategic geography.

We recently announced $2.5m order to secure two high security prisons in the region. And this follows on from a number of other orders of similar system in prison over the past few months.

In Asia, business continues to be robust and we are executing on a number of projects, protecting chemical and nuclear facilities. We have a number of other important projects in the pipeline there. We are particularly focused on outdoor perimeter protection project in which we are -- we can already point to a large and broad installed base in the region.

While our execution in 2012 is proceeding as we had planned, we continue to pursue many further opportunities in our pipeline of potential business. We believe our strong and successful execution last year has increased our chances of winning business ahead.

Our backlog remains strong and it is at a similar level to that of the end of last year. And it underlines my confidence that Magal will see a good 2012.

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

Thank you Eitan. Revenues for the first quarter of 2012 totaled $15.6m, 35% higher than the first quarter of 2011 revenues of $11.5m.

Sales by geography in the quarter were as follows. North America 14%, Israel 11%, Europe 16%, Africa 45%, South and Latin America 4% and the rest of the world amounted to 10%.

Gross profit in the quarter was $6.5m, or 41.5% of revenues, an increase of 40% compared to the gross profit of $4.6m, or 39.9% of revenues in the first quarter of 2011.

Operating expenses in the quarter amounted to $6.3m. This is higher than compared with the $5.8m we reported in the first quarter of last year and was primarily driven by additional marketing and sales expenses.

The operating profit for the quarter was $135,000 compared with an operating loss of $1.2m in the first quarter of last year.

Financial expenses in the quarter amounted to $220,000 compared to financial expenses of $155,000 in the first quarter of 2011.

Net income in the quarter was $46,000 compared with a net loss of $1.6m in the first quarter of 2011.

Cash and short term deposits net of current bank debt as of March 31, 2012 were $37.8m, or $2.39 per share, compared with a cash and short term deposits net of current bank debt of $32.5m, or $2.06 per share on December 31, 2011.

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

Thank you. (Operator Instructions). The first question is from Spencer Lehman of Capital West -- of Financial West. Please go ahead.

Yes, just a couple of dollar figures. For your Kenya port project, what is the ballpark amount of that contract?

The value of the contract today is $25m.

Okay, and you've done about how much?

We've got about what? How much we got already?

Yes.

I'm not sure I understand your question.

How much did you do?

You say the total project was $25m.

Yes.

So most of it's going to come in the next three quarters.

How much we will recognize in the next three quarters? Majority part of this project will be recognized this year. A small part of it will move to next year.

Okay. And then on your backlog what -- approximately what's your backlog now?

About $50m.

$50m, okay thank you.

Thank you.

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

Hi. Could you talk a little bit about your joint venture in India? What type of business are you trying to pursue there?

The joint venture in India is to continue our ongoing business in India. As you know, Magal is doing business in India for years, and we would like to expand and to enjoy the potential business by being a local contractor, to be more competitive and to be better connected.

So, all in all that should create in long-term. It won't happen this year and only slow growing for next year is expected. But once we will be there, we would like to create a sustainable business of millions of dollars every year.

Could you quantify that -- your goal longer term?

Well in general, we expect to become a player as we are in some other regions in the world. And if that can bring us in longer term, and that can take in three years' time, four years' time (technical difficulty).

Okay. And you talked about your pipeline looking robust in areas like Africa and Latin America. Could you talk to some (technical difficulty) were project related or are they product related?

These two regions are two projects mainly. The product business is more of a short-term type business and the long-term business, the pipeline will extend to projects (technical difficulty) about projects in the pipeline.

And there are some of mid-size and in Magal, as you know, mid-size is a few millions. The high numbers of last year, Gabon as well as Kenya, large projects are not (technical difficulty) in our business, but if we would be able to get three projects, a smaller size around [5m] that can help or build our backlog to the levels that we are at now actually.

And are the larger projects like (technical difficult)?

There are, but in general, larger projects, the magnitude of 20 and over are very rarely available in the world in regions. There might be such projects in the United States but (technical difficulty) with these projects.

In the regions we are effective and in Latin America (technical difficulty) our goal in Brazil, for example, that can be a potential business point.

You mentioned you were (technical difficulty) I say I guess off-the-shelf perimeter solution for North America. Could you talk a little bit more about that?

Looking to the budget cuts in the homeland security activity in North America we aim part of our activity towards smaller installations, smaller sized private houses, warehouses of 100, 200 and 300 meters of perimeter.

In order to present our products to this market we have to work via channels. And to show them easy to install off-the-shelf or out-of-the-box type of product and that's what we did.

We create a kit and this kit starts to be presented in the US different channels. At first we start with one or two, but we see that as a potential business. In long-term again that will take a year or two to penetrate into the market with such a kit. Also our microwave products which are same by its nature are applicable to this market.

As far as your backlog and your large port project in Africa, do you expect that to be recognized sequentially in the next three quarters, the current quarter and the next two quarters, or is it going to be weighted in the third and fourth quarter largely?

Our current backlog in Africa is mainly built towards the Mombasa project. And as I said, most part of the project will be executed in the coming three quarters. And the third quarter and the fourth quarter will enjoy a large portion of this.

Do you expect to be profitable over the next three quarters?

We expect to be profitable this year.

And as far as your operating profit is there -- are you still looking around that high 30 gross margin level?

Yes.

Okay, great. Thanks for taking my call, my questions.

Thank you.

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

Hi everyone. Eitan, last conference call you mentioned that you had completed one test of the PipeGuard system and that the second test would be completed probably in May and that you were hoping that it would become a standard in the industry. What is the status of that?

You have a good memory. Yes, we have had this second test, and we concluded that test successfully. And this is to remind everybody on line that this is aimed to damage prevention in the industry in the United States mainly for infrastructure or for utilities.

So we have successfully concluded the second test. And it has to stay in the test site for the next 60 days to see how it is active during longer period of time. And then after it will become, I wouldn't say a standard in the industry, but standard with those companies that finance the development and the test. These companies are behind it. Then it's still a challenge to us to expose it and to market it to the rest of the US utilities and infrastructure industry.

So, do you have any ballpark expectations of when you'd see, start to see revenue or earnings from that?

I wouldn't expect that to have any significant impact in 2012.

Longer term are you hopeful that it would be a significant part of your revenue?

Not significant. We are speaking about one product that will complement our lie of products. It will be a nice and good complimentary that will create revenue. But when we look on our product activity it's built on different products and each -- and every success is important.

Okay. And in terms of your sales staff, how do you feel about them? Do you feel that that needs to be improved or that they are doing as good a job as can be expected given the economic circumstances in the world?

Look, if I would say that I am -- there is no improvement that can be done that is not the case I believe in Magal as in any other company. So, yes, we are trying to improve our sales skills and sales manpower all the time. And we will continue to do it.

As we are doing that in the last year, we will continue to do it in 2012. So there is room for improvement. Not something to write home about, but just a general comment.

Okay. So last question, I -- at one point I think around quarter I emailed Kenny Green, I hope he past it onto you, that although Buffet and Gates are unusual, it's not unusual in Israel to have people like Mickey Federmann who own 45% of Elbit systems. And Gil Shwed, I'm not sure if I got his name correctly who even though Check Point is a $6b company he still owns 12% of it. So now that Magal Systems is trading at $3.70 here, and as we speak down from $10 in 2007, do you think they're priced at which you or Mr. Perry would be interested in actually participating with us as owners?

I would not comment on Mr. Perry's position. I can tell you that we are employees of this company. We work -- we have not built this company as Mr. Shwed built Check Point. It is his company. He started the company, so it's a completely different situation. And therefore, we are in a different position. And we are buying or not buying it's a personal decision.

Okay, thanks very much.

And the next question is from [Maybad Duvash of Borak Capital]. Please go ahead.

Hello folks. I have one question about the situation of the refugees in Israel, mainly with the border of Egypt. Is there any opportunity for your company to take some efforts in this problem?

In general, the Israel Government, and we discussed, or we referred to that in our last two conference calls, has decided to build barriers in the southern border between Israel and Egypt and that is undergoing.

In that specific barrier there is no decision yet whether to install indicative sensors. But definitely if the decision will be taken about improving, or installing any sensors that will help to identify intrusion trying to penetrate via this barrier, we will be part of that and that is an opportunity to us. But it's not something that I can tell you will happen soon. I don't know more than you, or more than anybody that reads the paper with regard to the refugee's problem.

Okay. Another question, referring to the last question of the guy before me, I think he was asking about repurchase stock exchange not by you by a manager, but by the company itself. Is there a price that you might do it?

I don't know about any specific decision or plan of Magal Board of Directors to acquire shares from the stock and to change the structure of the company.

I understand. Last question, do you expect to have more net cash in the end of this year regarding your backlog?

No. I said that the cash position that we have achieved at the first quarter is relatively -- first quarter is the highest level of cash in Magal, and second we do not expect to grow the cash level in the coming months. And this relates to the cycle of our projects and the payment terms on those.

I understand. Thank you very much.

The next question is from Fred Ehrman of Brean Murray and Company. Please go ahead.

Good afternoon. Could you comment on your strategic acquisitions that you are looking at? Whether they would be in product lines that are complimentary to what you're doing or duplicating what you're doing but maybe on a different level. Whether the size of the -- in revenues of the companies you might be looking at.

First, we are looking for complimentary technology and markets that we are less active in. I would say that the level of revenue that we are speaking about, knowing our industry, there are very few companies reaching the $10m revenue a year. So the potential candidates are small companies.

Okay. Would the -- would you look for the acquisition to be immediately earnings accretive or not necessarily?

I am not sure I understand your question. Can you rephrase it?

All right, yes. It's when you make the acquisition, would you expect that the company you are acquiring would immediately add to your earnings or would you expect, or would you anticipate there might be a loss initially until you make certain changes?

As we see it now and as we speak about specific candidates I do think it will add to our revenues if we will become a major shareholder. And not necessarily profit because at first I believe, at very first it will create some expenses. But definitely the idea is to improve both our revenue as well as profitability in the short term.

So you're saying if you become a major shareholder, that means you might consider investing in a company and you would be a minority shareholder?

As a first phase in such an investment it can happen.

So you're not talking about acquiring, you're talking about an investment?

We talk about both. I cannot tell you at this point if both will happen.

Okay. I noticed you had a $200,000 finance expenses which was up even though you have much more cash. Why were the finance expenses up?

That relates to the movement or the weakness of the dollar compared to the functional currencies in our subsidiaries all around. We -- that's the answer.

In the second quarter we can -- we see the opposite way until now. We don't know what will be the result by the end of this quarter, but that reflects the situations in the rate exchange compared to the functional currencies.

Okay, thank you very much.

Thank you.

And the next question is from [Alan Nazro] of Metlife. Please go ahead.

Yes, can you hear me okay?

Yes, good.

Good, glad to hear it, so my speaker phone is not too bad. Okay, we covered the subject of you seeking strategic acquisitions. I appreciate that information. Can you comment on any situations of other companies or larger companies that have approached Magal as far as buying them or taking them over?

I can tell you that there is no -- as much as I can tell about our shareholders and some of them are on line, I don't know about any specific shareholder that is looking to a major sell of its position. But, at the same time, I can tell you that we have not been -- faced any large company that you can have in mind looking to acquire Magal in the last year.

Okay. Is it a situation that if it arose, you would entertain?

Well that is not for me to answer. That is for shareholders. But I am -- I don't know.

Okay. And my last question is the financials that you've covered in the conference call so far about earnings and revenues and so forth, they -- obviously there are certain risks going forward in certain areas as you mentioned. But given that it seems like the report in general was fairly strong are you surprised that the stock is trading down about $1 as we speak from yesterday's close?

Yes I am surprised, and I must admit that I have no clue of what is behind the last day's fluctuation changes in our stock price in New York.

Yes, well it's very surprising to me. I mean I -- initially the earnings announcement and report seemed pretty much on the positive and optimistic side. So it's surprising to me, but obviously most of us probably don't know why this stock is trading down like 20% from yesterday's close. So, we'll hope for a better close by the end of the day.

We too.

There is --

[Okay then].

I apologize, did you want to continue?

No, no, I'm finished thank you.

All right, thank you. There is a follow up question from Ken Liddy, please go ahead.

Hi just some clarification as far as potential acquisitions. You talked in the past about improving your research and development. Would any type of acquisition try to help aid you in that area as far as research and development and technology or something like that, that you'd be interested in working.

If you are speaking about internal R&D, this is a different effort we are doing permanently. And we are doing that in major three areas sensors, different technologies, video analytics and management systems. And that is something we will continue to do. But that is -- doesn't [fade out] technologies that we still would like to acquire in order to close some gaps and to get some market share.

What type of -- are you looking to get into other areas as far as other regions in the world or other technologies to compliment some of the things you are already doing? What would be the driver of an acquisition?

Technology mainly with some market presence of the specific company that we are talking about. So it's both, the technology and the presence in specific markets.

Based on some of your previous comments it sounds like you might be looking at something like a strategic partnership with another company. Is that an avenue that you would pursue perhaps?

I think that we will become a strategic partner to such a company that develops technology and not necessarily have the presence, marketing capabilities that we have. And we can leverage on that and improve and using or leverage on the technology and gain the potential business using our channels.

Okay and then one last question. As far as your pipeline and your optimism about 2012, are you any less confident about your pipeline today than you were 60 days ago in your last conference call.

No. I am similar confident, and even a little bit better. 60 days we did something.

And in the -- as far as your optimism about revenues and profitability, are you any less optimistic than you were in the last conference call?

With regard to 2012?

Yes.

My confidence with this year has not been changed.

Okay, great thanks for taking the time.

Thank you.

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

Thank you. On behalf of myself and my management I would like to thank you for your continued interest and long-term support of our business. I'd 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 investor relations team whose contact details are on the press release.

I intend to be presenting in New York [Marco] Micro-Cap conference on June 20. If you would like to join the presentation please give my IR team a call. I do look forward to speaking with you and updating you again in the next quarter.

Have a good day. Thank you all.

Thank you. This concludes the Magal Security Systems first quarter 2012 results conference call. Thank you for your participation. You can go ahead and disconnect.