Kenny Green - GK Investor Relations Saar Koursh - CEO Ilan Ovadia - CFO.

Sam Rebotsky - SER Asset Management Reed Richardson - Talking Points Memo Ken Liddy - Wells Fargo.

Ladies and gentlemen thank you for standing by. Welcome to Magal's Second Quarter 2016 Results Conference Call. All participants are at present in listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded.

You should have all received by now the Company's press release. If you have not received it, please contact Magal's Investor Relations team at GK Investor Relations or view it in the news section of the Company's website www.magal-s3.com. I would now like to hand the call over to Mr. Kenny Green of GK Investor Relations. Mr.

Green, would you like to begin..

Thank you operator. Welcome to Magal's second quarter 2016 conference call. I would like to welcome all of you to this conference call and thank Magal's management for hosting this call. With us on the call today are Mr. Saar Koursh, CEO and Mr. Ilan Ovadia CFO.

Saar will summarize the key highlights followed by Ilan who will review Magal's financial performance for the quarter. We'll 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 events are only predictions and Magal cannot guarantee that they would 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 demands 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 Saar. Saar, please go ahead..

Thank you Kenny. I would like to welcome all of you and thank you for joining us today. Our results for the quarter included a full quarter of Aimetis results following our acquisition of Aimetis at the beginning of February. The quarter results are weaker than we would have liked.

Some of the larger order received recently have deliverables which are only due towards the end of the year. And some of the projects that were originally planned to be received earlier in the year are now forecasted to commence later this year.

On the positive side, we had a strong first half of 2016, in backlog terms and as it stands now, our backlog stand as a higher level than it was the same time last year. So despite relatively weak first half of 2016 in revenue terms, we do expect to catch up in the second half of the year.

The expense in the quarter were higher than those of the second quarter of last year and that was almost exclusively due to the added expenses from Aimetis, which is now become the Magal’s Video and Network security division.

This division is investing strongly in R&D as well as in marketing and sales in order to capitalize on the opportunities we are seeing in the markets.

In the coming weeks, our video and network security division would be releasing its new version 7 of its flagship software which is the most scalable and cost effective video management system on the market. With Native Analytics and Aimetis Symphony7 is the new benchmark for Intelligent Video management software.

The software is highly scalable and very easy to set and to use. Symphony 7 is the project we are currently focussing some of the R&D investments in. We fully expect this new product will lead to increased sales and will enable us to penetrate into new customers.

As I mentioned last quarter, this acquisition has extended our product portfolio range and significantly strengthened our video and network product offering. We now offer our customer a truly world leading video surveillance product with unmatched solution for outdoor and critical sights that’s simplified the management of network video.

Our goal is that the new video and network security division will become accretive to our results at some point during 2017, but it’s clear that we need to invest to build and to grow the business.

As I said last quarter, the process of integrating Aimetis into Magal will require higher level of investment in R&D and marketing and sales going forward until we can leverage the synergies on the cost side as well. I would like now to briefly summarize what we are seeing in some of the key regions in which we operate.

In Latin America, we had seen some good booking and as you saw we announced a $10 million in order to secure and maintain critical Power Utility sites belonging to a major national power supplier, a project we expect to deliver before the year end.

We expect this region to continue to grow as an overall share of the revenue pie in the coming quarters. I would like to add that Aimetis has a strong presence in this region, having supplied a video system to Brazilian Campinas airport in Brazil. With regard to Africa, we are working on a number of opportunities.

The $9 million order we announced for a complete security solution for prison, we also expect to start deliverable later this year and to continue throughout 2017. Looking ahead, combined with our solid references, we feel good with regard to our ongoing potential from the African region.

In the Asian region, we are investing and increasing sales and marketing. We opened a new sales center in the Philippines out of which we are managing all our sale opportunity for this region, as we see many opportunities which we capitalized on. We believe that our investment in the region will pay off in the coming quarter.

In Israel, we recently announced a large framework contract to secure the City of Holon and Tel Aviv. This project has the scope of about $5 million and will be delivered over the five year time frame, with supply of fully integrated solution including control center based on its Fortis and hundreds of surveillance camera as well as alarm system.

In addition, in Israel we do expect to receive some of the orders for our borders solutions on the Israeli [Indiscernible] later this year. And finally, the first half of this year in the U.S. was good and we saw a strong year-over-year growth. We recently received an order from international U.S. airport for a Fiber and Flexon [ph] product.

Additionally, we received important order for a major U.S. Defense contractor for sensors which will be deployed on the Middle Eastern borders. In summary, 2016 is an important transition year for Magal.

We have taken some solid step involving Magal to accompany with increasing broad range of products and services particularly in the video management software and analytics.

Our long term goal is to structure Magal for improved profitability with a more stable long term growth profile with a very broad range of marketing leading online security product. The process is ongoing. In the intermediate term, we’ll continue to invest in our R&D and sales effort to capitalize on the many opportunities we are seeing.

From a financial perspective, we do expect the later part of the year to show significant improvement over the first half. I will now hand the call over to Ilan for the financial review.

Ilan?.

Thanks. Revenues for the second quarter of 2016 was $13.6 million, this were 13% below those of second quarter last year. Sales by geography in the quarter were as follows. Israel 16%, North America 46%, Africa 6%, Europe 13%, South and Latin America 9% and the rest of the world amounted to 10%.

Gross profit in the quarter was $6.1 million or 44.5% of revenues. This is compared with $7.3 million or 46.4% of revenues in the second quarter of last year. The variance in the gross margin was due to the mix of project reported sold in the quarter.

Our operating expenses in the quarter amounted to $20.3 million in the quarter compared with the $5.9 million reported in the second quarter of last year. The significant growth in the operating expenses was in large part due to our acquisition of Aimetis at the start of the second quarter.

We had $0.5 [ph] million amortization of purchase price allocation and retention expenses related to the Aimetis acquisition, most of it is expected to be continued for the next two years, for each year after which it will be reduced.

Operating loss in the quarter was $2.2 million compared with operating income of $1.4 million in the second quarter of last year. Net loss in the quarter was $2 million, or $0.12 per share, compared to net income of $190,000, and $0.01 per share, in the second quarter of last year.

We reported a negative operating cash flow of $1.7 million in the quarter. Cash, short term deposits and restricted deposits, net of bank debt, as of June 30, 2016, was $22.9 million, or $1.39 per share, compared with cash and short term deposits, net of current bank debt, of $31.1 million, or $1.90 per share, at December 31, 2015.

It is important to note that we paid for Aimetis acquisition in the quarter approximately $16.2 million in cash. 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 Instruction] The first question is from Sam Rebotsky of SER Asset Management. Please go ahead..

Yes, good afternoon, good morning Saar and Ilan.

The $15.2 million acquisition did we -- what kind of -- were there any significant assets or how much was capitalized as goodwill and what do we expect to write off? And one other thing relative to this, we expect the backlog was higher; did the -- this acquisition contribute to the backlog in the current quarter?.

Good morning. So I will start, maybe answering your last question later through the backlog and as you probably understand that Aimetis is a product company that the selling cycle between booking the orders and delivering the software which is the main product, the video management software is relatively fast.

So the backlog that was added is mainly due to maintenance agreement and it’s not significant adding through the backlog. Related to the other question I will hand to IIan..

Just repeat the question, just to be sure..

Yes, yes. Well we paid $15.2 million and we indicated in the acquisition that it’s going to be accretive in 2017 so I assume the bulk of this is goodwill, will it be written off, what is the goodwill on the acquisition, I assume that was the total cash acquisition..

Yes, the total cash acquisition and part of it is goodwill. I would say about 60% out of it is goodwill..

Okay, okay so -- but we referred to the acquisition, will you still expect it to be accretive in 2017?.

No it will continue, it will continue afterwards as well. But the amount will be reduced..

Okay, okay. As you are bidding for different jobs, do you see more jobs available, less jobs, I mean your backlog went up.

You don’t have so much cash left to make any more acquisitions, so you basically have to figure out to make your profits higher could you sort of address what you expect to do to get the profits higher, so you are profitable and no longer loosing like in this current quarter?.

So we definitely would like to see how we are going to increase our profit and basically to become a profitable again during the second half of the year.

Some of -- in terms of revenue we are seeing a more purchases [ph] from North America as we mentioned North America was a very strong market for us in the first half of the year and we still see a very strong demand there for our products mainly in the U.S.

In terms of the project, it’s a mix between recognition revenue, recognition that on the project that we booked during the first half of the year would be executed in the second half of the year. So we do expect to improve our results and to become profitable in the second half of the year..

All right. Good luck. Thank you..

Thank you very much..

The next question is from Mike Drescher [ph]. Please go ahead..

Yes, good afternoon over there gentlemen, how are you? Just a couple of quick questions as a very long term holder.

The -- I was a little bit surprised to hear about the ongoing $0.5 million amortization of purchase price allocation and retention expenses on top of the $15.2 paid to -- for Aimetis’ so and that will continue at the rate of $2 million a year for the next two years according to your press release and after which it will be reduced.

To what level will it be reduced to?.

This amount is as we said in the -- before the amount is going to continue in the same level for this year and then afterwards we will see a reduction in the second year and then further reduction in the third year and on. So it’s not the same amount for the coming two years and afterwards..

But let me just maybe correct the statement. The amortization that we are having is part of the 15.2, it’s not on top of that..

That’s what I was hoping you would say, I just wanted to make that clear to whomever may review and/or be listening. That’s number one. Number two, I had no issue on the goodwill, I think Mr. Robesky [ph] was just asking about in 2017 fiscal 2017, do you anticipate the Aimetis acquisition being accretive.

And I believe you answered my question to his, but I get the feeling that that looks to be a growing portion of the business and I won't put words in your mouth, I'm just – it's my job as an investor to decide what to do with my risk capital.

Number two, is a short question regarding the operating expenses in the second quarter would increase to $8.3 million, I'm reading right out of the press release compared to $5.9 in the second quarter of prior year 2015, the majority of the increase is due to the increased expenses associated with the Aimetis acquisition.

So, of that increase of $2.4 million in operating expenses, the next paragraph basically defines this amortization, pardon me, two paragraphs down to this 0.5 million, that's still leaves a whole bunch of couple of million extra in operating expenses.

Is that just because the level of sales and product mix and/or adding the Philippines office, those types of standard business growth spurs [ph] and practices were thrown in – not thrown into but were spent during this quarter.

I assume that's what that is?.

Actually no. Actually if we're looking and comparing our core business expenses which is our traditional PIDS product and our project, the expense are relatively the same that we had last year in the second quarter. The increase is mainly because of the acquisition of Aimetis and it's purely related to that..

Okay. And that mean, you're just spending more as you said and as written here you're spending more on R&D sales and marketing. So that's fine..

Yes..

Well, third point is just this in terms of the decrease obviously in working capital in terms of cash per share, that doesn't mean your working capital has reduced. But I'm not going to ask a particular question on that. I can read it from the balance sheet.

My question is as you had -- sent out for the Annual Meeting, one of the questions was regarding a rights offering. And I was wondering, I'm sure that if the 40% for the fiduciary in-charge of that 40% and I'll leave them unnamed, is backing that position.

Therefore if you guys assume that you need the capital, that our rights offering would provide assuming you have the right opportunity or target in mind that would have the -- something that you would alert the investing community to as fourth -- as soon as you are aware of it.

Is that correct? Meaning, if they were the rights offering were to proceed and you found a suitable project to utilize the proceeds from that rights offering, you would proceed and announce as soon as possible that that was in the plan?.

The right offering as we mentioned already are aimed in order to increase the level of cash in order to support purely M&A activity..

Right..

And so this is straight forward. We are currently evaluating several alternatives. The right offering that we are still not fully decided. We are still evaluating..

Okay. That's what I want..

Once we will decide it’s not necessarily means that it's for specific acquisition, because as you may understand that there are some opportunities that comes and goes and we will need to prepare in the right amount of cash when this opportunity would mature..

Yes, Just now I have participated in prior rights offerings which were multiple years ago as you may recall looking over your financials, finally, just a word of news and maybe you could alert your U.S. sales affiliates.

I'm sure they are aware that there was a breach in the Omaha, Nebraska Airport where a slightly crazed gentlemen hopped the fence, perimeter fence about eight feet tall, there was I think six strands of barbed wire, if I recall I'm not looking at the story right now.

And then, come into the other truck that was parked there and drove it into the nose cone of a plane, I thought I’d point that out to you as maybe we could reach out to the Omaha Airport folks and see if they need a little better security procedures and maybe possibly use ours..

Thank you for that..

Okay. That was three days ago, so it's in the news, I'm sure your U.S. people are on it already..

I don't mind on it personally, but I am sure they are and we'll check that for sure..

Right. And thank you very much. I understand that you are building a platform for growth in the company and we appreciate your efforts. Enjoy your day..

Thank you..

The next question is from Todd Levy of [Indiscernible]. Please go ahead..

Hey, good afternoon, everybody or good morning for the American listeners.

So, I was talking about the possibility of getting some border defense contract in Israel in the second half? Are we talking of the Egyptian border, Jordanian border or the Gaza Strip border? And if so there was little bit of writings in the Israeli press about the budget of the Gazan border have been left outside and outside of the Israeli budget, could you elaborate on that please?.

Thank you for the questions, but unfortunately as you may understand for this specific contract I'm not able to elaborate, because of the classification, security, all of them are security classified.

So as I said already, yes, we are looking to have later this year an order for border solution in Israel, but I cannot specify on which border we are talking about..

Could you at least talk about what was written in the press concerning the Gazan border, does it affect Magal with the budget was left aside?.

I cannot comment on the press..

Okay..

Thank you..

Thank you..

The next question is from Reed Richardson of Talking Points Memo. Please go ahead..

Hi, gentlemen. Good morning..

Good morning..

Just more of a broader question about sort of the company and the market, obviously in the United States presidential election, border security has been a big issue among the candidates, but I was wondering from your company perspective, do you think the outcome of the election would actually have any effect on the opportunities about securing the United States Mexico border.

In other words, do the policies of respective candidates really matter in terms of the overall opportunity and the market going forward based on all the other factors outside you're seeing in the market place today?.

Again thank you for the question. I tend to consider myself as an expert in security, but definitely not in American politics. So unfortunately I cannot even comment on that. It's definitely something which is totally out of our control..

Sure. I understand that.

But you don't think from assessing the marketplace perspective and what's already underway you don't see a potential change based on what might happen in November?.

No. There is – you know what can happen in November either way something that I cannot assess at this point, I think nobody can assess what will happen in November in the U.S. and definitely we are working as I said, North America was a very strong market for us and it's keep growing.

I believe that this year it will be significantly higher in terms of revenue in North America, but this is not, nothing related to the elections..

Right. Okay. Thank you. .

Welcome. Thank you..

The next question is a follow-up from Sam Rebotsky of SER. Please go ahead..

Yes. Thank you.

I'm just trying to understand the $15.2 million, 50% of this was capitalized and is it my understanding that we are of the -- what's capitalized charging off a $0.5 million, or is the $0.5 million in addition to what we capitalized in a charging offs?.

The $0.5 million is part of it..

Part of it, so we are not paying any additional money to the founders of the company than the $15.2 million that we paid?.

Well, there is some part related to results..

Okay..

Might be great [ph], if they will achieve the results. .

Okay.

And what is the size of the market and I presume is there any sales so far and what are our expectations and at what point the results do they get paid additional moneys?.

The size of the market you are talking about video surveillance market?.

Yes..

Video surveillance market which is -- I would say the largest market and the largest portion is security market is estimated to be about $1 billion just for video management software. So it's a huge market. It's definitely much bigger than the traditional PIDS market that we operate..

So what -- has there been any sales so far and at what point of sales? Is it sales that they get additional money or is it profitability or both or what?.

Answering you first question, yes, the company, it's not a start-up, it’s a company that generates revenue on a constant basis every quarters and this quarter they generated revenue as well. Related to what you ask about the compensation, it's purely related to revenue..

Revenue and what is the revenue so far from this venture?.

We don't publish quarterly base. We will publish like we do segments by the end of the year for each segment including the video segment..

What was the revenue when we acquired them?.

Its few millions of dollars every year..

Okay.

So, it’s a large market and there is a lot of choices to increase revenue significantly and the only question really is how quick you spent a lot of money for everybody to get to know Aimetis and the question is how quick can you get there?.

Again, we are very confident that the system that we are running that Aimetis have developed over the years and Version 7 that they've mentioned that is going to be released by the end of next week. It's one of the best video management systems in the market, the most scalable one and the potential is tremendous..

And we're marrying this product with our product and does that could -- let me -- I didn't understand that.

Are we able to join this with the product that we have, so that we could increase sales more significantly or is it just the separate standalone product?.

It’s both, we have a synergy with our command and control, our Fortis. We already finalized the first stage of integration between the video management system and the command and control. This is already implemented and then this will be part of Magal offering for the different project.

And in parallel, we are selling to third party integrators, the software for them to work on projects which are not part of Magal project business..

So -- and we selling this on a royalty or what is the basis and do we expect to use the cloud for this product or how we…?.

Yes. Again we are selling it -- trying to simplify it. We are selling it per channel. It means if you have a site that have 1000 cameras like an airport or seaports you're paying per channel..

Okay. Okay. I better on this. I understand more on what your objectives are. Good luck. And as far as the rights offering, we don't expect to make any acquisitions with the cash we have now unless we do a rights offering I assume..

Definitely not a substantial one, you're correct..

Okay, okay. Good luck..

Thank you very much..

Thank you..

[Operator Instructions] The next question is from [Indiscernible]. Please go ahead..

Good morning. Good afternoon. My question pertains to sales force that's promoting your product and I'm wondering whether your sales force is sufficient enough to get the product out there. Seems like the marketplace is gigantic and your niche of the market should be greater than it is.

Is it due to the sales force not being large enough and efficient enough or is the competition just greater than what it seems that it is?.

The situation before if you're referring to Aimetis for the video management system..

No, no, excuse me. I'm not. I'm talking about the general. I've have been a long term shareholder and the stock is down about 13% based on your report this morning heavier than normal volume.

So I'm looking at the perception of the company by the public and wondering whether a site from the acquisition, whether the general Magal Security Systems have a sales force sufficient enough to get the product out to the market, the market seems hungry for the product and I'm just not seeing enough of the product getting out there that's more where my question is coming from?.

Okay. So let's differentiate the two divisions that we have in Magal, the product division and the project division. In terms of product, if I compare our results for the first half of 2016, it's a little bit higher than we had in the same period in 2015.

In terms of project we are significantly lower than what we had, and this is the results, the main results for the loss that we published today. And this is mainly due to timing as we said, some of the projects were signed later than the previous year and therefore the execution be later this year.

Some of them they are still – we are chasing and will be later this year and some of them 2017.

So related to the product, I think we have the right sales force in place related to projects it’s not just sales force, its something – the selling process its much more complicated, it’s usually government budget and timing and some of them tends to move between quarters..

Okay. Thank you. And as everyone else said good luck. I'd like to see a lot more business coming down the avenue..

Thank you very much..

Thank you..

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

Hi.

Could you talk a bit about the opportunity at the Kenyan margin in the quarter?.

Yes. Ken, I can talk a little bit about that, it’s basically its public information that the Kenyan government is looking to secure its border especially the border between Somalia and Kenya.

And they are looking into having technologies coming from Israel based on the experience that Israel have been very successful with our border protection there, solutions stopping both illegal immigrants and terrorist activities from our southern borders and other borders like Gaza.

Definitely, Magal having more than 80% of the border of Israel, we are positioning ourselves as a player in this tender. It's too early to say at this stage what will be the exact solution and what will be the exact participate of Magal in this project, but we are definitely chasing this one..

How significant opportunity is it based on report seems like thisto be the biggest project we've ever worked on?.

It's mainly dependent on the government of Kenya budgets and the way they are going to allocate the budget. Let's remember in the end of the day Magal is not an infrastructure company.

Most of their money related to borders are going mainly to infrastructure for putting roads on the border and of course a portion of the budget will go for technological solution, and definitely we would like to take part of this, but it’s too early to say what will be the decision between the infrastructure and the technology and which technology they are going to adapt..

Thanks.

And it seems that there is some other opportunities like in Hungary, is that something they are interested in?.

Of course we are interesting. Again, Europe as oppose to the other one that you just mentioned, definitely everyone understand that there is a border issues over the European Union, but so far the European Union haven’t executed the large scale project for its borders, and I’m not sure if they are going to do so at the end of the day.

So anyway if at the end of the day there would be a project in Ungaria [ph] or in other places, I’m not sure at this point..

And could you give us an update on what’s happening in the Southern border of Israel?.

Yes, at this stage our system are installed and working on a portion of the southern border of Israel over the last few years and working successfully.

At this stage the government haven’t put yet or didn’t allocate yet the budgets for to equip the entire border and this is definitely, it’s a pending budget of the government of Israel and once they would allocate the budget we will down select for this project together with two other companies we definitely would pursue this one..

Just one more question on the Kenyan opportunity. In the past, Kenya has been a major [country].

What type of timeframe would you expect the tenders for that to be – business to be awarded?.

I’m not sure; I understood the question, if you can repeat it..

About what type of timeframe will be technology portion of the wall, what kind of timeframe would the orders be potentially coming at? Is it a year out, six months out, two years out?.

It’s hard to say, because at the end of the day, it’s something which is not fully disclosed by the government, but it’s definitely would take several months in order for them to have the definition of what they are planning to execute in the first phase of the project..

Okay, great. Thanks for your help..

Thank you very much..

The next question is a follow up from Reed Richardson of Talking Points Memo. Please go ahead..

Hi, thank you. I just wondered if you could elaborate a little bit more about, you mentioned the contract with the major U.S. Defense contractor to provide border solutions for a Middle Eastern border.

Could you talk a little bit more about what those solutions are and the geography of that Middle Eastern border if possible?.

Thank you for that question. I think that we are offering for U.S. contractors is our sense of border solutions and as part of this offering we signed an agreement with one of the major U.S. contractors, one of the biggest one that did a project in the area.

Unfortunately I cannot elaborate on the project because we are under NDA and we cannot disclose further information on the specifics for this project..

Okay. Is this the first project of that type you have done with the major U.S.

Defense contractor?.

I wouldn’t say it’s the first one but it’s definitely the first one for the last year or two..

Okay..

And definitely we see a potential for further project like this in the future..

Okay, thank you..

Thank you..

And there are no further questions at this time. Before I ask Mr. Koursh to go ahead with his closing statements, 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.

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

Yes, thank you. On behalf of the management of Magal, I would like to thank you for your continued interest and long term support for our business. I look forward to talking with you next quarter, have a nice day. Thank you..

Thank you. This concludes the Magal Security Systems second quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect..