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

Kevin Dede - H.C. Wainwright Bruce Tuckman - Merrill Lynch.

Ladies and gentlemen, thank you for standing by. Welcome to Magal’s Third Quarter 2017 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 handover the call over to Mr.

Gavriel Frohwein of GK Investor Relations. Mr.

Frohwein, would you like to begin, please?.

Thank you, operator. Welcome to Magal’s third quarter 2017 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 of the quarter, 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 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 this 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 hand 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. In today's call I would like firstly to provide a brief overview of our financial results. I would like to talk about the recent improvements in orders we have seen in the quarter and beyond.

I'll discuss all of the improvements we made to our business structure and the resulting improved cost structure we have seen in the quarter and finally discuss some of the new products which we believe will contribute to our sale over the coming years.

We reported revenue of 13.7 million while this is a slight improvement over the last quarter, it still reflects the ongoing weakness revenue from North America.

While our revenue level from this region has improved this quarter by 27% sequentially it is still below last year levels due to the impact of critical infrastructure budget delays in the U.S. The improvement in the financial performance in the North American region that we have seen this quarter is driven by two aspects.

First, the development and the execution of diversified revenue streams that are not directly related to the federal and state budgets, such as the medical fields retail sector and logistics. Second, we took measures and made adjustments to our operational cost structure in North America.

The initial effect of which is already reflected in the third quarter results and the full effect will be visible in the next quarter and beyond. As a result over this quarter we delivered breakeven EBITDA in comparison to the negative 1.2 million EBITDA last quarter.

I want to spend few moments discussing some of the recent orders we have won which led to a much improved backlog as of the end of the third quarter. We believe that this set up for the fourth quarter and into 2018.

We see ongoing interest for protection of critical sites such correctional facility, prisons, power station and airport using our products and technology. While we have shown some recent wins we are also in the final stages with a good chance of receiving some further critical infrastructure protection contracts.

In terms of some of the recent wins which contributed to our backlog in September we received a 5 million order to provide security solution for correctional facility. The orders include the supply for advanced video solutions and perimeter detection smart solution including Omnitrax buried cable sensor.

All of which would be delivered over the coming year. We also recently launched a new vertical for security solution for the medical marijuana industry in North America which is tightly regulated from security standpoint.

In the last few months, we have seen a number of orders in this field covering several sites in each site amount to a few hundred of 1,000 for dollars. As the market mature we expect to see more such orders soon. Last week, we announced 3.5 million in orders for integrated security solution and maintenance with several major international airports.

This include Munich airport one of the largest European airport that has been using our video solution over the past few years and is now expanding the use of our system. We also won new orders with Ben Gurion Airport in Israel, Indira Gandhi International Airport in New Delhi as well as Barcelona Airport in Spain which is a new customer for us.

The orders include video management and analytic systems, PID system and Fortis4G as well as the framework order for maintenance. Delivery on these orders has started already in Q4 and will continue into the next year.

These customers which are a mix of both new and returning customer recognized our unique offering and are important references for us in both the airport security vertical as well as the correctional facility vertical.

And other important aspects of our third quarter results that I would like to highlight is a significant decrease in our operational expense level by $1.3 million or 15% below that of the previous quarter. Until the end of the second quarter, our recently acquired subsidiary, Aimetis, was operating at independent subsidiary of Magal.

Over this summer, we fully amalgamated this subsidiary with our North American subsidiary Senstar. The cost savings are already very apparent in our third quarter results. It has allowed us to eliminate some of duplicated costs in G&A and sales and marketing and is planned to bring us some tax saving as well.

We will continue to experience the positive effect and the lower operating expense level in the upcoming quarters. Beyond these savings, the amalgamation also enabled us to be much more focused of the North American division rather than two reducing management time and investments.

Furthermore, it allow us to better cross-sale the newly acquired video product within our existing product portfolio and vice versa by having one customer focus sales team selling [tapes] [ph], video and cyber product lines as part of the unified product portfolio under the Senstar brand.

Finally, we continuously launched new products throughout this year which we believe provide us with a number of potential growth engine for the coming years. As a company, we spend around 12% of revenue on ongoing basis on R&D in order to maintain the strong market position we have in many in our markets, while bidding future growth engines.

I would like to highlight a new product that we have released and for those interested you can see it on our subsidiary Senstar's website. We launched the LM100 which combined two key security functions in one product.

It detects intrusion attempts through fence preparation while at the same time providing intelligence perimeter illumination at fence line. The system form a wireless mesh and can work together as a security sensor as well as seamlessly integrated and communicate with the security management system.

I recently attended the ASIS security show in Dallas where we launched the product and there are many potential customers in attendance. We saw significant interest in combination of these two favorites provides significant ROI and ease of installation.

I do expect to see growing orders and increased contribution to the revenue from this product in the coming years. In summary while 2017 has been challenging year so far given our much for cost structure as well as an increase order flow in backlog we believe we will show improvements in the coming quarters.

North America is still our most important market and we are gradually recovering through diversification of our revenue stream and by the cost efficiency measures we took there. When federal and state budget do free up we expect significant upside. And now over to you Kobi, please go ahead..

North America 28%, an improvement from 23% last quarter, Israel 18%, Europe 18%, Africa 13%, Latin America 13%, Asia and rest of the world 10%. Third quarter gross margin was 47.7% of revenues, this is 51.1% last year and 50.2% in the previous quarter.

The lower margin in the quarter was due to the mix of products and projects sold in the quarter which favored comparatively lower margin. Operating loss in the quarter was $528,000 compared with a loss of 1.7 million last quarter and a profit of 1.6 million last year. During the quarter, we saw a financial income of $532,000.

This is compared to financial expense of $491,000 in the third quarter last year as an expense of $1.4 million in the previous quarter. The financial income and expenses mostly relate to the non cash financial charges generated by the U.S. dollar denominated deposits. Net loss in the quarter was $193,000 or $0.01 per share.

Net profit in the third quarter of the last year was $647,000 or 4% per share. Net loss in the previous quarter was $3.3 million or $0.14 per share. EBITDA in the third quarter of 2017 was just near breakeven. This is compared to a negative $1.2 million EBITDA in the prior quarter and $2.1 million positive in the third quarter of 2016.

Cash, short-term deposits and restricted deposits as of September 30, 2017, was $48 million or $2.09 per share versus $52.5 million or $2.29 per share on December 31, 2016. As of September 30, 2017, we have no bank debt in Magal. That concludes my remarks. We would be happy to take your questions now.

Operator?.

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question is from Kevin Dede of H.C. Wainwright. Please go ahead..

So just a couple of things I guess.

I am curious given the slew of airport orders and correctional facility orders I was wondering - I know that you are working on them already, I am just wondering, how you would expect to recognize revenue from them?.

So thank you Kevin. I would start by saying that deliveries of all these orders are already in process during this quarter, fourth quarter, and obviously some of them will be also throughout the first half of 2018.

Kobi, anything specifically on the revenue recognition side?.

Those orders that relate to turnkey project type of activity are recognized on the basis of percentage of completion while product revenue is recognized on a basis of delivery. So overall on both types of activities we expect the revenue to be recognized over Q4 this year and Q1 next year..

Okay. So, Saar, it seems that per your comments, you are thinking that you’ve got great exposure to changes in the budget in North America.

And I am just curious to know what sort of feedback you are getting from your contacts in North America? How do you think the market looks? What do you think the chances are if things change? And then if they do, what sort of timeframe do you think? And I mean to the extent that you can talk to it how significant would the change be relative to your sort of the 13 million to 14 million run rate that we’re at now?.

So, let’s differentiate between the budget that are dependent mostly on the government, either federal or state budget.

So the public sector, in public sector there is no -- there is actually growth that we see in North America and this is one of the main reason that we started diversify from just being focused on the high end of the market, government, the correctional facility, airport et cetera, to more industrial and commercial sites.

In the government budget, we do see some start of the recovery but still some of the projects are being delayed and delayed. Definitely, they cannot be delayed forever.

We do expect that budget will be released -- still some of them still by -- we still have the few more weeks to go, but mostly we would see recovery in 2018 because they cannot hold budgets forever, there are things need to be done. And we are very optimistic on the growth of the market..

Thanks, that helps.

Is there any way that you can characterize how you think it might change your revenue run rate to the extent that you can or are comfortable?.

We would like very much to go back to previous year, if you look on the previous in 2016 second half of the year we were in a run rate which is about 20 million in terms of the revenue. And this is definitely our goal to be back to that number..

Based on some recent conversations I understand there could be some interesting developments with your VSF or VMS capabilities. I know that it's primarily designed for security implementation, but I understand that there could be applications outside of that perhaps in the auto industry or in retail.

And I was wondering if you might be able to add some color around that?.

Yes, I think it is a good point. First, I must say that this quarter we saw an increase in our VMS revenue even though that they are still relatively small portion of our overall business. We do see a strong growth over the third quarter and on.

As we said, the VMS is not used only for security, there are many other type of application mainly using the analytic that you can provide proactive actions and definitely business intelligence as well.

We already signed several contracts with such customers for example with some of the retail company that the system will provide in both for security purposes and for business intelligence from basic things like able to analyze how many people got into the store, what time, what are the queue to the cashiers, density, heat map, et cetera.

There are endless type of analytics that you are able use in order to generate business intelligence. And once they made the investments, the initial investment in the cameras and of course in the VMS, in the software, this is relatively a simple add on that we can provide our customers in the retail and in other segments as well.

So we guess definitely looking to expand capabilities and not just to be focused on security..

Can you talk to how those contracts are structured? Is it sort of a SaaS model or you sell a license? How does the business model tie to the financial model?.

We are using all of the above. We are using both, we are selling channel and we also sell services. It's also important to mention that we see growth quarter-over-quarter in our recurring business, mainly in the VMS portion of that. Today more than 20% of our business in the VMS is recurring business.

It means that we are signing long term contract anywhere between 36 months over to five years that we provide a service that include also the maintenance and support for the license.

So we are very flexible and we are trying to adopt the business model to the customer needs and in many opportunities the customer has more restrictions on the CapEx but has more flexibility on the OpEx and we are very open and flexible to offer our customer such models..

The next question is from Ken Liddy [ph] of Oppenheimer. Please go ahead..

I was wondering if you could talk a little bit about the opportunity you see in the medical marijuana space..

Yes definitely, medical marijuana is a new vertical market for us. As you know today North America is booming. They are building tens and hundreds of new sites for medical marijuana.

All of the sites are regulated to some degree and this represents great opportunities for us as with specific solution, close solution that combine all the different element that we have now including our video management including our analytics, include our perimeter sensors and we are providing a different integrator with a complete package that can basically copy past to other solutions.

This solution was approved by some of the security consultants that specialize in the medical marijuana field and it’s growing. We just started it this year and so far we already received several slides and we expect to receive many more in the upcoming months..

It sounds to me that your acquisition Aimetis have added to some diversification in your customer base.

Is that something you would think of?.

Yes definitely. By the way related to the medical marijuana field it’s not coming from the Aimetis side but definitely we are using our solution and products from our recent acquisition of Aimetis as a complementary solution to our traditional PIDS solutions.

So we are now able to provide a complete solution that offer both sensors and the video management..

And with your recent order with the airports, is much of that order with Aimetis or is that a combination of products?.

Actually that specific personally is that we showed last week it’s a combination of several orders that we received over the last few weeks that came from both sides of our operations. Some of them use just perimeter sensors, some other use just the VMS and we do have some combination of the both.

So for example, if we talk about Delhi Airport, this is a great example when the solution that we are providing the Delhi Airport, combines both solution of perimeter and video. In some others, we are providing either one of the solutions..

And then one last question with regards to the U.S. border with Mexico, I am sure you’ve seen some of the recent documents that were I guess lead regarding the Rio Grande and elsewhere. And what did you see if you are encouraged by some of the use of the data of sensors at U.S.

border and what that might mean for Magal if may be sound in the budget for that?.

Yes so CVP is running several process in parallel, one of their main process is on the physical barrier and obviously all of us saw that in the last test, the last installation they did early this week or previous week on the different eight prototypes of all. As we said from the beginning, this is not something which is in our interest.

We are not building walls and we are not building sensors. We are into the technology part of this business. In parallel, CVP initiated a process related to the technology and we are definitely engaged with that process..

The next question is from Bruce Tuckman of Merrill Lynch. Please go ahead..

This is Bruce Tuckman. I have been a long time shareholder and I have no issues with your technology and to the business, I think you've done a great job and a very innovative and on all the areas that you pursue.

My only questions relate to your sales of your products and how you sell around the world whether you have sales offices in different cities around the world whether you sub it out to sales representatives on related to Magal or whether you work out of the central locations because I feel that that's probably the weakest part of your cooperation?.

Thank you, Bruce. Definitely, it's something that we are working on to improve. The go-to-market is different between the two divisions, that we have. Just to remind you Magal is divided to two different divisions. The first one is Magal group which is an integrator selling end to end solution.

And mainly from Magal as well we have some other establishment in Latin America, where we are approaching the end customer directly and sometimes with cooperation, with other integrators like we do for example in India when we have a strategic cooperation with one of the many integrators in India.

On the product side which lifted by sense now to go-to-market is different. There we work directly with the system integrators. And it's important to note that we are not working in the same geographical areas on both divisions. It means that in North America and in Europe and APAC we are working through our product division sales power.

And in the emerging markets the Africa Eastern Europe and Latin America we work through a Magal division. I think we are always improving our go-to-market and as you can see from as resulted in the third quarter booking was strong. And definitely this will be reflected in the fourth quarter revenue and on..

I mean that’s I have called couple of times before and I've been probably a 15, 20 years shareholder and as you're aware it's not always been a total picnic.

But as I said earlier your technology I think is fantastic and I just think that you need to get your sales force stepped up a couple notches and I think you have a great company there and I wish us all lots of good luck going forward..

The next question is a follow-up question from Ken Liddy [ph] of Oppenheimer. Please go ahead..

I just want to see where your backlog in relation to this time last year compared?.

Can you please repeat the question?.

Yes, I just wanted to see where your backlog was in relationship to the same time last year, is it higher than?.

Yes it is higher than previous year, definitely..

And is it much higher than it was at the beginning of the year or I should say last quarter?.

Yes it is..

[Operator Instructions] The next question is from Mike Distiller [ph]. Please go ahead..

My only quick question is, I know that through the year and actually I am a long-term shareholder.

Even over the last one to three years you have been talking about increasing the level of recurring revenue streams and in light of this quarter’s revenue numbers compared to last year’s, I was wondering if that’s showing a decline in those recurring revenue streams or the recurring revenue is still moving up as a percentage of total revenue?.

Yes so I think it’s -- thank you for the question. Definitely the recurring revenue is increasing. It’s increasing by the way in all three segments, both in the project business, in the product and in the video. So definitely this is very encouraging for us for the upcoming future..

There are no further questions at this time. Before I ask Mr. Koursh to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available 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 of our business. We will be attending the Imperial Capital Investor Conference on December 8, 2017 in New York and at the ROTH Capital Conference in California in March.

If you wish to meet me at one of those conferences, please contact my investor relations team or the conference organizers. Thank you for joining us today and have a good day..

Thank you. This concludes the Magal Security Systems Third Quarter 2017 Results Conference Call. Thank you for your participation. You may go ahead and disconnect..