Kenny Green - IR, GK Investor and Public Relations Eitan Livneh - President and CEO Ilan Ovadia - CFO.

Fred Ehrman - Bmi Capital Sam Rebotsky - SER Asset Management.

Ladies and gentlemen, thank you for standing by. Welcome to Magal Second Quarter 2014 Results Conference Call. (Operator Instructions) As a reminder this conference is being recorded. You should have all received by now the company’s press release.

If you haven’t already received it, please contact Magal’s Investor Relations team at GK Investor and Public Relations, or view it in the news section of the company’s website, www.magal-s3.com. I’d now like to hand over the call to Mr. Kenny Green of GK Investor and Public Relations. Mr.

Green, would you like to begin?.

Thank you, operator. Welcome to everyone. And welcome to Magal’s second quarter 2014 conference call. I’d like to welcome all of you to this call and I would like to thank management for hosting this call. With us on the call today are Mr. Eitan Livneh, President and CEO, and Mr. Ilan Ovadia, CFO.

As Eitan has lost his voice he will save his responses for the Q&A session, Ilan will summarize the key highlights followed by a review of Magal’s financial performance of the quarter. We will then open the call for the question and answer session where both Eitan and Ilan will be available to answer your questions.

Before we start, I’d like to point out that this conference call may contain projections and other forward looking statements regarding future events or 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 and results may differ materially from those projected, including as a result of changing market trends, reduced demand, and the competitive nature of the security systems industry, as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission.

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

Thank you, Kenny. I’d like to welcome all of you and thank you for joining us today. We are pleased with the improvement in our revenues in the second quarter. We show strong growth, amounting to 33% over the last year and 30% over the prior quarter.

I do note that this quarter is the first time that we are including the results of our newly acquired fiber optics US-based company which added approximately $1 million out of the $4 million in cash this quarter to the revenues.

Another positive factor was our gross margin strength due to the product mix which favored higher margin product in the quarter. I note that our operating expenses were higher in the quarter, which was the main reason we were not able to attain true profitability in the second quarter.

Excluding our continuous investment in CyberSeal, as well as the recent acquisition of an optical fiber sensor business, our ongoing core business would have shown operating profitability in the quarter.

I do believe that based on our plans for the second half of the year, I expect revenues to continue to grow from these levels which should lead to an overall profitable second half of 2014.

While we do expect to continue our organic growth in 2014 over 2013, we are also looking further leverage our strong cash position to grow our businesses through acquisitions.

As I mentioned, at the beginning of the second quarter we purchased a small company in the US for about $4 million which is a leader in the field of fiber optic sensing and security.

The acquisition added key advanced fiber optic sensing technology to our portfolio, opening for us a potential market growth about $40 million per year, relatively high growth rate. For Magal, the acquisition currently adds approximately $4 million per year of higher margin fiber optic sensor sales and we do expect these sales to grow.

On the other end, it is important to note that this acquisition together with our combined investment in CyberSeal has led to some increases in operating expenses in both R&D and sales and marketing.

In addition, during the second quarter we launched a number of new products of which we see much potential which slightly increased our sales and marketing expenses. Compared to the second quarter of last year, during the quarter our sales and marketing expenses were about $1.4 million higher.

R&D expenses are about $300,000 higher, while we managed to keep our G&A expenses stable. We do see our increase in sales and marketing as well as R&D as paving the way for future increases in revenue and profit. We recently launched three new products. FlexZone is our latest generation ranging fence mounted sensor.

It detects and it can also currently locate any attempts to cut, climb, or otherwise disturb a perimeter fence. Both power and data can run over the [fence] [ph] thus minimizing infrastructure requirement and making it simple to install.

It locates intrusions to within three meters even when there are multiple simultaneous intrusions and in the presence of background environmental noise such as wind. This is one of the most advanced fence mounted sensor out there in the market today, optimized for small to medium sites.

We also recently released a new high-end [aggression] [ph] detection fence-mounted sensor called Fensor. The underlying technology is based on solid state electronics rather than electro-mechanical components, increasing energy efficiency and sensitivity. As you saw yesterday, we announced our first of its kind RoboGuard product.

We are especially excited about this product as it can significantly reduce the extensive manpower needed for routine perimeter patrolling. RoboGuard is an agile surveillance robot that travels on a monorail along a perimeter fence, constantly patrolling a secure perimeter to ensure the integrity of the fence.

It conducts regular inspections of the fence line, which are essential to maintaining the integrity of the perimeter. It can also promptly respond and check on any suspected intrusion as needed. A complete system consists of autonomous robots, each covering up to 1 km, with a battery recharging docking station for every two robots.

RoboGuard is the ideal solution for remotely monitoring unmanned sites where the timely first response by manned guards would be impractical or expensive.

RoboGuard can also cost-effectively augment guard forces on larger typical sites like airports, sea ports, prisons, and military base where there may be insufficient resources to provide a timely response. We only recently launched this product and we are already seeing strong market interest.

I’d like to spend a few minutes talking about our Safe City or municipal security project as it has been quite a topic in the news recently. The Safe City is a concept for bringing security, safety, and quality of life to today’s complexities through the use of technology infrastructure, personnel and [processes] [ph].

It combines the street patrolman’s intuitive approach with state of art observation, communication and information management managed by a control center. The results are faster, more effective responses to service outage, streamlined law enforcement operation, and real-time management of crisis situation.

Just a few weeks ago we announced that our Safe City project in Ramat Ha’sharon has led to further orders and was recently extended to include additional sites. As well as Israel, we are seeing traction for our Safe City solutions in Africa and South America, and we do believe this area continues to be long-term growth area for Magal.

I’d like to now briefly summarize the performance in our various regions. In Latin America, in particular Mexico, we are seeing some shifting of projects out into later this year and next year.

However, businesses in Mexico is still [producing] [ph] after coming to a complete halt last year and budgets which were frozen following the elections are beginning to be freed up. As such, in May we announced a $4.5 million contract to supply full perimeter security solution for a manpower distribution center in Mexico.

We are also seeing strong business improvement in the western part of Continental Europe, driven by a general improvement in the macro-economic climate in the region. With regard to Africa, the continent continues to provide us with a good level of business.

While during 2012 and 2013 we completed some major projects in the region, the new projects we have received in the past few months are smaller but more diverse. In May we announced a $6.4 million turnkey contract with the Kenyan Airport Authority to secure critical areas of the international airport in Nairobi.

The project includes multiple surveillance and access control technologies integrated by Fortis and are expected to complete the project in the first half of 2015.

Kenya is a classic example of a country in which we have successfully delivered a number of security projects for critical national assets which have subsequently led to significant further businesses. Our North American subsidiaries are also performing well and we expect to see further growth in 2014.

Earlier this year, we announced a number of orders for installing systems in correctional facilities and prisons in US and Canada. In addition, we recently announced orders for our fiber sensing technology to protect industrial and seaports in the United States.

In Israel business has performed well though we are also seeing some order push-outs into the later half of this year and next year. We recently announced $2 million for a dual technology smart fence including taut wire and vibration sensors for a homeland security application in Israel.

We expect to receive additional homeland security orders later this year. With regard to CyberSeal, we continue to make progress in June. We demonstrated our systems to ISC West Show in Las Vegas, one of the largest US security trade shows and we are seeing very strong interest especially in our latest developed cyber products.

Because CyberSeal is a new concept for many of our customers, we are educating the market with regards to the importance of combining physical and logical security.

This is also meant it has taken us longer than originally anticipated to grow our products sales in this market, which also means that CyberSeal continues to contribute to our operating loss.

However, we are already seeing the initial revenues from CyberSeal earlier this year and we hope to also see our first integrated physical security and logical security project later this year, adapting our [converged] [ph] concept.

In summary, Magal continues to invest in the future and I do believe that this second half of the year will be much stronger than the first half with growth in revenue and returning to profitability. Revenues for the second quarter of 2014 were $16.2 million, an increase of 33% compared with $12.2 million in revenues for the second quarter of 2013.

Sales by geography in the quarter were the following. North America, 31%; Israel, 17%; Africa, 16%; Europe, 11%; South and Latin America, 8%, and the rest of the world amounting to 17%.

Gross profit in the quarter was $7.1 million, or 43.6% of revenues, an increase of 45% compared to gross profit of $4.9 million, or 39.8% of revenues in the second quarter of 2013. That gross margin was a function of changes in the revenue mix between periods – periods and the higher revenue levels this quarter.

Operating expenses in the quarter amounted to $7.7 million compared to the $6 million in the second quarter of last year. We are investing more strongly in our R&D activities, particularly in CyberSeal, and our R&D expenses at $1.2 were 30% higher than the R&D expenses in the second quarter of last year.

In addition, our marketing and sales expenses which were at $4.5 million were 45% higher than those in the second quarter last year. The increase was due to the early second quarter acquisition of an optical fiber sensing [border] [ph] security business.

It was also due to the recent launch of a number of new products and the associated trade shows we presented them during the quarter. G&A expenses were almost the same as the second quarter of last year at $1.9 million.

The operating loss for the quarter was reduced to $601,000 compared to an operating loss of $1.1 million in the second quarter of last year. Due to the weakness of the dollar, US Dollar, versus the Israeli Shekel, in the quarter we saw some financial expenses amounting to $641,000 versus an income last year of $411,000.

Net loss in the quarter was $1.1 million or loss per share of $0.07 compared with a net loss of $715,000, or a loss of $0.04 per share in the second quarter of 2013.

Cash and short term deposits net of bank debt as of June 30, 2014 were $27.4 million, or $1.69 per share, compared with cash and short-term deposits net of current bank debt of $36.3 million, or $2.25 per share on December 31, 2013.

The decrease in the cash level was primarily due to the net investment and purchase of fiber-optic security business in the United States, as well as cash used in continuing operations. That concludes my remarks. We would be happy to take your questions now.

Operator?.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions) The first question is from Fred Ehrman of Bmi Capital. Please go ahead. .

Good afternoon, gentlemen. I have a couple of questions regarding RoboGuard. You are launching the product on September 29.

When do you think it will be ready for commercial sale?.

Hello everybody, Eitan speaking. I hope my voice will stay with me for the rest of the question-and-answer session. With regards to Fred’s question, we see already some interest from very important customers, both Israel, US and Canada. And the product will be ready for commercial installation and sales by the end of the year. .

Are you able to demonstrate to your potential customers the kind of cost savings that this product will provide?.

Yes, of course. When we speak with specific customers for a specific site, we analyze with the customer and we show them – as we actually mentioned yesterday in the PR that the return on investment is in the range of 12 to 18 months. .

Okay. And it seems to me that the perimeter fence guard could revolutionize that whole segment of the industry.

Would you agree with that?.

Yes. Actually we invested into that looking towards change in the industry, but at the same time we still think that it has to do with the cost of manpower. As much as the manpower costs higher then this RoboGuard is attractive. But that works not all over the world. .

All right. Would you say that, I would say probably in the United States and Western Europe it would be more effective and let’s say Africa would be less effective.

Is that correct?.

Yes, at this stage, yes. .

Okay.

In the areas where it would be used, would it cannibalize any of your other sales of sensors that you now provide?.

No, basically the concept is that this has to work together with the sensors on the fence as a - they are there to replace the guards, not to replace our current sensors. .

Okay.

It replaces the manpower only, correct?.

Yes.

And gives some additional features and capabilities which are beyond the current sensors and beyond the guard’s capabilities because as we announced and as you can see in the short video attached in our site, we have in that also cameras, day and night, lasers, radar, and even the ability to talk and spray into the intruder some tear gas or any other thing.

.

Okay. Lastly, this is just a suggestion on your PR release today of your report for the second quarter. In the written part you show the second quarter results. And you do not give the six-month. But in your balance sheet and income statement you show the six months and not the – unless I’m missing something – and not the three-month results. .

That’s the way we do every quarter. We show the numbers and we refer to the quarters. .

No, no, the balance sheet is always to the date of the end of the quarter or the period. .

Unless my page was cut off, I only show six months ended June 30. I don’t show the three-month comparison, unless my page was cut off. .

Regarding the balance sheet? Or regarding the P&L?.

I’m talking about the P&L. .

P&L is supposed to be six months and three months. This is the way that we publish, maybe something went wrong, I don’t know, the way you printed it. .

Okay. But in the written part you talk about the quarter and you don’t discuss the six month. Often companies show – give us three months and a six-month comparison. .

You’re right. This is the way that we are analyzing the quarter. .

Okay. I’m just telling you that most companies give both. I think that would be helpful. Okay. Thank you very much. That’s all I have. .

Okay. Thank you, Fred. .

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

Yes, good evening, good afternoon. Trusting things are going better in Israel now.

And as far as the RoboGuard, is there a size of the market and is there any other product that’s competitive with RoboGuard?.

For the size of the market, it’s too early to say. As for competitors, there is no direct competitors. There is many robots running around for various applications, but such a robot that is directly dealing with the perimeter we don’t know about. .

Okay. And you speak of being profitable in the second half.

Are you able to make a statement that you’re going to be profitable for the full year or is it premature to be able to do that?.

I’ll answer you in a different way. As I didn’t make the presentation during this call, I had a chance to listen to what Ilan says. In listening to what Ilan says, and I’m 100% of course behind every word, I feel that we are going in the right direction and we are going to improve our performance in the second half of this year and the years to come.

But to answer directly to your question, it’s early to say. .

Okay. Okay.

And is any particular area stronger for your future business? I know that what’s going on with Israel, are there additional security that you have to put in that will create additional business? Or are there any other areas that you’re backlogged? Is your backlog higher than it was the previous quarter that leads you to be profitable, expect to be profitable in the second half?.

For the Israeli business situation, as we are part of the vendors for the Ministry of Defense for borders, and if you follow there is a lot of activity in the Israeli boarders. We can expect some business to come.

As for the backlog, our backlog at the end of the quarter is lower than the previous quarter and as we can say at this point we see some additional business coming before year-end, so we feel comfortable with that. .

Okay. Well, thank you. Good luck. .

Thank you very much. .

Your next question is from Mike Distler [ph]. Please go ahead. .

Yes, good afternoon, gentlemen. As you know I always try to get to these conference calls. I raced home from oral surgery this morning, so I too may stumble over a word or two. One, congratulations on the increase in revenues. Two, these are just general questions, so they’re kind of soft balls for you guys.

I assume from the press release yesterday that all of your current, well, certainly the future fencing you’d be putting in, but I assume all of these current sensors have the capability to be retrofitted with the new Monorail system above them to accommodate RoboGuard should an existing customer choose to add it.

Is that a fair assumption?.

Yes, of course. Our fences, our customer’s installations, but much more than that. .

No, I understand. I heard the previous call. Clearly the additional capabilities with the laser scanner and the two cameras with the infrared for a short and medium range is a terrific thing that a human being couldn’t sense, certainly not at night without vision goggles.

And, of course, the communication to identify a potential intruder from an accidental passerby is terrific.

I assume you’re either at the charge point between the two, I guess a charging station that exists between the two RoboGuards would have an embedded satellite modem within it or wireless embedded system, whether it’s in each unit or whether it’s at the charging station. I assume it’s something like that. I’m not asking for any details.

So, you can just say yes or no to that general question. .

In general, we install this with communication systems. .

Right. I saw that. Okay. I wasn’t looking for detail there, you know, industrial espionage information.

Would it be fair to say that the new RoboGuard along with your existing perimeter system, along with your entire PSIM and the Fortis system together actually becomes the point of integration for presenting CyberSeal as a new total package for like the Kenyan, the Nairobi Airport, although that’s already a customer? Would it be fair to say that this actually almost – and pardon the pun – but seals the deal for CyberSeal because you’re presenting now a vision as well as security, as well as instant response over a short period of time, over a short length of field.

I’m assuming that would be --.

Actually, you did the marketing pitch as good as we do. And we are approaching the same, or we are doing the same thing. Just to make it more coherent with the market situation, not many of our customers are at this point, even in the United States, are ready to pay in order to have this comprehensive solution. .

Right. Which leads to my final area that I want to discuss and then I’ll let you go because I don’t want your voice to fail.

Assuming we could get, we, Magal S3, could get the range of the RoboGuard unit up from the approximate one kilometer that we’re talking about in between charging stations, are there certain economies of scale that you could look at that you could foresee over a three to five year period whereby new advances in both battery technology, monorail technology, the use of magnets, I don’t know exactly what’s propelling the system now, so that we could through economies of scale and improved production capability handle large enough orders and capture enough business to someday foresee, for example, border patrol between say Israel and Egypt, which I know is always a contention? Or border patrol between US and Canada? In other words, I realize now it’s an unreachable, but is that something that in the three, to five, to ten-year period appears as it could be on the horizon if nothing better comes along?.

Even today the robot can do more than one kilometer. The question is the response time to an alert and how fast can it reach a point? In order to be efficient and operationally useful, we built it – so we suggest it for one kilometer. But it can do more.

As for the future, speaking about long lines, like borders and better technology and better production and reliability, it’s too early to say. .

Okay. I appreciate that. I thank you and I’m anxiously awaiting September 29 and the market response and an early Shanah Tovah to everyone in Israel and please be safe and I always appreciate your time. Thank you..

Thank you, too. Shanah Tovah. .

(Operator Instructions) The next question is from Mark Miller [ph]. Please go ahead. .

Good afternoon, gentlemen. Could you explain the transaction agreement on July 30 of this year with Ki Corporation, or who is Ki Corporation? Thanks. .

Ki Corporation is the major shareholder of our company for over 35 years. It’s an investor’s main office in London. The FIMI fund is an Israeli fund. The deal was signed in July. The closing is still in its way. It’s waiting for the approval by the antitrust commissioner in Israel. But other than that, that’s what I can tell. .

So these will be newly issued shares?.

No, no. They exchange shares and they buy KI shares and they will hold 40% of the company. .

All right. Good.

And you said they’ve been with you for three decades or longer?.

Yes. .

That’s almost a rarity in US equity investing. Okay. And then one more, sir.

Your [GlobalGuard] [ph] that is going to launch on September 29, is this a proprietary product that was developed by your own R&D? Or was this acquired through the acquisition channels?.

No, no. It’s our own R&D and it will be presented during the ASIS USA show by the end of this month, beginning of October in Atlanta. .

Oh, what time, what date in Atlanta?.

I think the ASIS show is in the, starts on the 29th or 30th of this month, goes all the week. .

And what’s the name of the show?.

ASIS. A-S-I-S. It’s the 29th September to 2nd October. .

ASIS?.

ASIS. .

ASIS. .

Yes, ASIS..

Okay. .

A very big show in the US. .

I could just go online and probably find that out. Okay. Well, thank you very much and I wish you all the best. .

Thank you, too. Bye. .

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 the replay of this call will be available in three hours on Magal’s web site, www.magal-s3.com. Mr.

Livneh, would you like to make your concluding statement?.

Yes. Thank you very much. Thank you all for joining us. On behalf of the management of Magal I would like to thank you for continued interested and long-term support of our business. As you understand, I’m very excited with what we’re doing.

If you have any questions, please feel free to call me or my IR team whose contact details are on the press release I do look forward to speaking with you and updating you again in the next quarter. And I will take this opportunity and wish you a Happy New Year, Happy Jewish New Year, as probably we will not talk before that.

Thank you all and have a nice day. .

Thank you. This concludes the Magal Security Systems second quarter 2014 results conference call. Thank you for your participation. You may go ahead and disconnect..