Gavriel Frohwein - IR, GK Investor Relations Saar Koursh - CEO Kobi Vinokur - CFO.

Sam Rebotsky - SER Asset Management Kevin Dede - Rodman & Renshaw Mike Willner - Willner Capital.

Ladies and gentlemen, thank you for standing by. Welcome to Magal's Fourth Quarter and Full Year 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 and Public Relations at 1646-688-3559 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 Gavriel Frohwein of GK Investor Relations.

Mr.

Frohwein, would you like to begin?.

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

Saar will summarize the key highlights, followed by Kobi who will review Magal's financial performance of 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 and 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 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 or 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 hand the over the call to Saar. Saar, please go ahead..

Thank you, Gavriel. I would like to welcome all of you to our conference call and thank you for joining us today. We are pleased with our results for the quarter in 2016 as a whole representing a general improvement. We reported a fourth quarter revenue of $20.3 million up 5% year-over-year.

Most notable was our strong cash generations from operations, which amounted to $7.4 million for the year and combined with our rights offering in September, we ended the year with a record high of $52.5 million in cash with zero debt.

This strong level of cash provide us with a working capital engine to grow our business organically and at the same time, it enables us to make advantage of the many potential opportunities we see in our end markets to complement our organic growth. We are indeed actively looking and we aim to complete an acquisition in the next year.

In terms of operating income, we reported $1.5 million for the year versus $4.4 million for 2015. The lower level of operating profit despite the improved level of revenues was primary due to our investment in our Video division Aimetis. Kobi would provide more financial details shortly.

Following the acquisition of Aimetis in April 2016, the strong potential for intelligent video security product is becoming clearer. We took the decision to increase operating investment in order to maximize the growth potential of this business especially in the U.S. market.

These investments in Aimetis primarily in R&D and sales and marketing added to the non-cash charges associated with acquisition, lowered Magal operating income by around $3 million in 2016. We're beginning to realize the synergies from our acquisition of Aimetis by leveraging Magal extensive global customer base for their products.

As an example, in the fourth quarter, Aimetis received initial order for its video management system and its analytics for international airport, which is Magal traditional verticals. Aimetis offering is also experiencing Magal addressable market.

As an example of the initial success, we recently won the first retail order with a major sports chain to provide the biggest security monitoring for all their stores worldwide amounting to hundreds of stores. This market is a market we have not played in before and it represents a phenomenal opportunity for us.

We're working hard to secure further such orders with even larger retailers. Looking at the broader picture, our results demonstrate that our strategy is becoming a more product-centric business is on track.

Our 2016 results show the positive trend of increasing the product revenue portion, which increased for 49% in 2015 to 54% of our revenues in 2016. Additionally, the recurring portion of our revenue increased to 20% of overall revenue of the year, while last year it was around 17%.

Looking ahead, our strategy to continue to grow the product portion of the revenue, which carry a higher margin profile and provide for a steadier income stream.

I would like to spend a few minutes talking about our expertise in border security as I've recently received many questions from investors and significant press coverage covering our market-leading ability in that sector. As you all know, establishing a secured border between U.S.

and Mexico is becoming an important goal for the United States federal government. RFI and RFPs for building and protecting of this 2,000 miles of border have been recently announced in the first phase of the RFP of which the submission are due to date. We're participating in that process and our proposal is being submitted as we speak.

Based on the customer timeline, the process should move fairly quick to the order stage in the coming months. While obviously, there is a lot of interest in this project, there are only a handful companies globally with the expertise to deliver the intelligence sensor to protect this border.

Out of those, we believe our [active] experience is unparalleled. Just to be clear, we are not going to build a physical fence or a wall, but we're competing to be the intelligent sensor and technology partner for the project. We're positioning ourselves as the best choice for any prime conductor undertaking any part of this sport.

Last month in Israel, we announced an $8.5 million order for border security product and services. This is only the first phase of the entire project and we believe that we'll see additional order for border security solution in the near future. Furthermore, we recently partnered with a major U.S.

defense contractor, providing our fiber solution to their project to secure a major international border.

In fact, in recent years, we provided our technology and services, covering thousands of miles in borders and perimeter security projects and I believe that Magal is unparalleled experience on a global scale when it comes to electronic border security.

Therefore, while there are absolutely no guarantees on which companies will ultimately gain orders for the U.S. southern border, we feel that we are in strong position. I would like to spend a few moments talking about our recent success.

Last week we announced the first order for our RoboGuard system following a rigorous in the field test from Israeli Government customer representing a strong step of approval. The system in also being evaluated by federal government agencies for critical sites perimeter security and we believe we'll see further orders in the upcoming months.

We also announced the upgrade of the integrated security system for the Gabon African Cup of Nations football tournament. The Gabon project was awarded just few weeks before the games and we've successfully completed the mission to the customer full satisfaction.

Our North American subsidiary in particular has seen a strong order momentum in the past few months. A major state utility that was looking to protect its main electrical substation, chose our microwave Flexon products while the overall size of this particularly order is not significant, the U.S.

Government is calling for revamp of the physical security system of electrical substation throughout the U.S. to comply with Critical Infrastructure Protection Order Number 014. There are over 55,000 electrical substations in the U.S. So, we expect to see significant activity in this vertical in the coming years.

We recently delivered a contract for rapidly deployed electronic security system to NATO and we expect more orders to follow for these types of the global solution. Furthermore, we won an important perimeter security contract for U.S. International Airport, which we plan to provide more information about upon customer disclosure approval.

In summary, 2016 was an important year for Magal and in line with our strategy, we've made much progress in shifting Magal toward a higher margin profile. Most stable product centric company with an increasing share of recurring service revenue.

We concluded the year with a high level of quarterly bookings and a strong increase in our backlog year-over-year. In the near term, we'll continue to invest in our organic growth through our R&D and our sales effort to capitalize on the many opportunities we are seeing especially in the U.S.

At the same time, we'll use our strong cash position with zero financial debt to pursue acquisitions, which will complement our organic growth. And now over to you Kobi. Please go ahead..

Thanks Saar. The revenues for the fourth quarter of 2016 were $20.3 million up 5% year-over-year. The geographic revenue breakdown for the quarter was as follows. North America, 25%; Latin America, 19%; Africa, 18%, Europe, 16%; Israel, 10%; Asia and the rest of the world, 12%. Fourth quarter gross margin was 49.6% of revenues versus 56.4% last year.

I know that the gross margin is a function of the revenue mix in the quarter and in the fourth quarter of 2016, the gross margin was particularly high primarily due to the short-term project delivered in that quarter. Operating income in the quarter was $1.5 million compared with $2.9 million last year.

During the quarter, we recorded a financial income of $0.5 million and a tax income of $0.9 million mainly due to a net tax asset we recognized in the quarter. In the fourth quarter of the last year, we recorded a financial income of $0.1 million and a tax expense of $0.5 million. Net income in the quarter was $2.9 million or $0.13 per share.

Net income in the fourth quarter of the last year was $2.5 million or $0.15 per share. I note that there was an increase in the number of shares outstanding in the fourth quarter due to our rights offering to shareholders in September. To summarize our full year 2016 results, reported revenue of $67.8 million, which increased by 6% year-over-year.

Sales by geography in 2016 were as follows. North America, 35%; Israel, 18%; Latin America, 15%; Europe, 13%; Africa, 6%; Asia and the rest of the world amounted to 14%. In our annual report, which we'll file later today, we'll publish our segment breakdown.

Sales of products including Cyber and Video were 54% of 2016 revenues and project sales were 46% of revenues. Last year the breakdown was 49% products, including cyber and 51% projects. Gross margin was 49% versus 48.7% last year. Operating income in 2016 was $1.5 million compared with $4.4 million in 2015.

As Saar mentioned, we had increased operating expenses primarily due to our investment in Aimetis during 2016. I note that the opening income from the product segment excluding video and cyber security was $5.8 million for 2016, representing operating margins in that segment of 17.9%.

Our full year 2016 net income was $1 million versus $3.1 million last year. EPS was $0.06 per share in 2016 versus $0.19 in 2015. Cash, short term deposits and restricted deposits as of December 31, 2016, increased to the record level of $52.5 million or $2.29 per share versus $31.2 million or $1.93 per share on December 31, 2015.

As of December 31, 2016, we have no bank debt in Magal. I would like also to mention the $5.9 million improvement in working capital year-over-year, which also contributed to the improvement in our end of year cash position. That concludes my remarks.

We would be happy to take your questions now, operator?.

Thank you. Ladies and gentlemen, at this time we'll begin the question-and-answer session. [Operator instructions] The first question is from Sam Rebotsky of SER Asset Management. Please go ahead..

Yes. Good morning. Good afternoon, Saar and Kobi. You had a successful rights offering and you talk about all the opportunities that's going on.

Could you sort of address the bookings, how they compare to the same time last year and the backlog and do you expect the first quarter to have significantly higher sales etcetera relative to these new bookings?.

Good morning. As we already mentioned, the fourth quarter was a strong quarter for us in terms of booking and we increased our booking year-over-year and our backlog year-over-year compared to the end of 2015.

Related to the expectations of the future, as you know, we are not giving guidelines for the future, but definitely we are looking as a year whole to increase our financial results..

Okay. You speak of the potential, the security as far as the U.S. -- with the U.S.

and Mexico, do you expect to partner with somebody or you could bid on your own for these? What is your -- or would you do both?.

As we mentioned, the process have just started. Actually today, there is a submission of the first phase of the RFPs. On this first phase, we participate as a prime. It depends on the definition of the second phase will decide what will be our role, but overall, we're looking to partner with private contractors.

We expect that this huge project will be divided to different segments that will be done we different private contractors and we're looking to partner with many private contracts as we can..

Okay. And relative to the rights offering, your expectation is to make some type of acquisition. Does that appear -- and you stated that it would be in the current year.

Is it more eminent in the first half or are you negotiating with somebody or what's the -- what can you address to that?.

The only thing I can address, it's nothing mature enough. So, I can talk on it right now. So definitely it's not going to happen in the next or in the next two to three months, but our goal is to conclude the M&A still in 2017..

Okay. All right.

And I assume you expect improved profitability on a quarter-to-quarter basis and for the year going forward, based on the additional capital and your learning curve that you've completed?.

Definitely, this is our goal..

Okay. Good luck..

Thank you very much..

The next question is from Kevin Dede of Rodman. Please go ahead..

Hi Saar. Thank you very much for taking my question.

Just back a little bit to the perimeter security solutions, can you talk a little bit about the technology -- that application that you deployed in Israel and how that might compare, contrast to what you're offering the other partners to be in a security solution for the states?.

Okay. I think there is little bit misconfusion because when talking about perimeter security, it is little bit different than border security.

Even though that many times it seems like we are using the same technology or the same sensors since the application is different and the requests are different, it’s important to understand that border security it's not the usual security project. The requirements are much more demanding.

Usually when we talk about borders, we talk about that very long perimeter distance, which first responders of spreads very routinely across the borders. So, you need to have a system that will combine in one hand.

It's very high level of proof of detection and very low level of [sell-outs] and even it's true to any [distort] or true to any perimeter of any critical sites, security project in border solution it's even much more demanding than in usually critical sites. In Israel, we developed a specific solution for the Israeli border.

It was developed for the last three years. It was recently certified by the Ministry of Defense and the IDF and following its certification, we received the initial order for the border, the one that we announced about a month ago.

Definitely, it's one part of the solution that we are offering for the U.S.-Mexican border, but this is not -- this is not a single solution because looking at the 2,000-mile border between U.S. and Mexico, you cannot -- there is no one solution that fits all. There are many different type of geography, there would be many different types of barrier.

From our understanding, for example, it's not going to be a concrete wall. Allover, there are places that you cannot just put a wall. For example, I've been in the -- I've been in the U.S.-Mexican border in Texas last week and the border there is the real grounding and you cannot put a wall just in the middle of the river.

You have to use different solution and for this specific place for example, we are offering a different solution, which is not implemented in Israel. So just to summarize, as a company that specialize both in their border protection and perimeter security, we have in-house all the different technologies and solution to address the U.S.

border solution project..

Okay. Thank you very much, Saar. I appreciate the detail..

Welcome..

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Koursh to go ahead with his closing statement -- oh! There is another question from Mike Willner of Willner Capital. Please go ahead..

Very congratulation to you guys. You're doing a great job.

As you indicated, big time transformational year for the company in its history, I've been following the story for quite a while and really excited about the opportunities there or in front of you guys and I guess one of my questions is in that regard in terms of your ability and ramp-up of personnel or what have you to be able to execute properly on these opportunities and that’s my first question.

And secondly, any additional capital requirements in the near-term? Thanks again..

So, I would start with the second question. We don't see additional capital required in the -- I would say in the upcoming months. Of course, it will depend in the end of the day on the acquisition that we're planning to do. We are currently looking on several opportunities. Some of them, medium-sized; some of them, bigger size.

So, when this will be materialized, we might need additional cash, but it's too early to say. Definitely, we don’t need it for our ongoing operation. As you saw in our statement, we generated quite a lot of cash during 2016 especially in the last quarter.

Related to your first question on personal, as I mentioned, we're not going to build a physical barrier. We're not looking for constructing people in the U.S. We're providing technologies. We're providing sensors. Currently, we have production facilities both is Israel, the U.S.

and in actually North America, in Canada and we use also in some cases outsource. For the current level, we don’t see additional stuffing, any major additional stuffing is needed. It depends on the projects and how it will progress. If needed, we don't see any problem to adapt and to use subcontractors to do the job..

Thank you. And best of continued success in this coming year..

Thank you very much..

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?.

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 an active 2017 and I hope to update you next quarter. Have a good day. Bye, bye..

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