Kenny Green - IR Yaniv Shachar - Interim CEO Kobi Vinokur - CFO.

Ken Liddy - Oppenheimer Dan Weston - Westcap Management.

Ladies and gentlemen, thank you for standing by. Welcome to Magal’s First Quarter 2018 Results Conference Call. All participants are at present in a 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 at www.magal-s3.com. I would now like to handover the call to Mr. Kenny Green of GK Investor Relations.

Mr. Green, would you like to begin..

Thank you, operator. Welcome to Magal’s first quarter 2018 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. Yaniv Shachar, General Manager of Magal Israel and currently serving as Interim CEO. We also have Mr.

Kobi Vinokur, CFO on the call as usual. Yaniv will summarize some of the key highlights followed by Kobi 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 statements are only predictions and Magal cannot guarantee that they will in fact occur. Magal does not assume any obligation to update that information.

Actual events or results may differ materially from those projected, including as a result 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.

In addition, during the course of this conference call, we will discuss describe certain non-GAAP financial measures which should be considered in addition to and not in lieu of comparable GAAP financial measures.

Please note that in the press release, we’ve reconciled the non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our website at www.magalsecurity.com for the most directly comparable financial measures and related reconciliations.

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

Thank you, Kenny. I'd like to welcome all of you to our conference call and thank you for joining us today. Magal is currently in the changeover period between former CEO, Saar Koursh and incoming CEO, Dror Sharon; and I'm the Interim CEO managing that change.

Before I start with my summary of the first quarter, I would like to thank Saar for his key contributions to Magal throughout his time as CEO, which culminated in the first quarter we announced today. Saar led the company through a challenging period last year and took some important steps to bring the business back to profitability.

Beyond that, he completed some important acquisitions to support Magal’s long term growth and diversification. And finally, his tenure has culminated to be Magal’s highest ever level of backlog. We all wish him well and much success in the future.

Dror Sharon will be joining us on June 24, following a successful career as President and CEO of Controp Precision Technology, a company specializing in Electro Optical and Precision Motion Control Systems for the global defense and homeland security market.

Dror was very successful with Controp, growing the company significantly, while building high profit margins. We believe he has the experience and knowledge to bring Magal to the next stage in its development. We look forward to his arrival. I will now provide a short summary of the quarter and our activities before handing over to Kobi.

We are particularly pleased with the results of the quarter, especially the strong level of revenue. As you know, Magal’s first quarter is always seasonally low on the year. We reported our highest level of first quarter revenue of 17.3 million in recent history, up 20% year-over-year and this is a significant achievement.

Another improvement, which is just as important is our improved operating cost structure. One of the contributing factors to this improvement is the amalgamation of our Senstar and Aimetes operation, which was executed during the third quarter of the year, showing the full contribution of its effect in this quarter.

At the same time, during the first quarter of the year, we combined two engineering and development facilities in Waterloo into one facility and upgraded that facility. This investment demonstrates our commitment to product excellence and talent development.

Revenue growth of 20% lower -- and lower OpEx of 9% enable us to show an improvement in profitability and we indeed demonstrated an advanced breakeven first quarter on the operating level versus a loss of last year. Kobi will discuss the results in greater detail in a few minutes.

During the first quarter, we saw strong and diverse order bookings, which led to a further increase in our backlog, even given our highest level of deliveries in the quarter. This success is a sign of increased market interest in our products. In fact, since September of 2017, we have publicly announced just over 50 million worth of orders.

Our record backlog provides us with strong revenue visibility for the coming few quarters and gives us confidence that 2018 will be an improved year over 2017 for Magal.

With regard to the US Mexican border project in the pipeline, I have taken over Saar’s role in managing our position together with our professional, technical and commercial team in the US and we continue to see interest and we are in touch with some of the key players in the CBP, and we think that when it does eventually reach the selection stage, we believe we have a good chance of winning some orders.

I would like to spend a few minutes talking about our recent acquisition, ESC BAZ. This acquisition closed at the end of the first quarter and will begin to contribute to our -- and will begin to contribute to our income statement in the second quarter of 2018.

This acquisition in particular broadens our video product portfolio with military grade and high security thermal cameras. The BAZ product portfolio includes a wide range of modular and customizable medium and long range surveillance systems with distance from 500 meters up to 25 kilometers.

Our roadmap is to combine our strong video analytics and GIS command and control with BAZ’s surveillance systems to offer the market unique geospatial surveillance command and control systems, designed to detect threat scenarios by analyzing video inputs from cameras and manage a coordinated response.

In summary, we are all encouraged by Magal’s strong first quarter results, in particular, the very high level of bookings and record backlog that we have coming into the second quarter. This puts us for a very strong standing for 2018 and we are excited for the year ahead. And now, I would like to hand over to Kobi to summarize the financial results..

Thanks, Yaniv. Revenues for the first quarter of 2018 were $17.3 million, up 20% year over year. To give you an idea of the scale of this accomplishment, in recent history, the previous high for first quarter for Magal was $15.6 million which we reported back six years ago in Q1 2012.

This is also our second consecutive quarter showing improvement in revenues year over year. Furthermore, another important trend benefiting our revenues over the past few years is that now over a fifth of revenues are from recurring sources and we target this to continue to grow. The geographic revenue breakdown for the quarter was as follows.

Latin America 28%, North America 25%, Africa 14%, Europe 13%, Israel 11%, Asia and the rest of the world, 9%. First quarter gross margin was 43.8% of revenues versus 61.7% [ph] last year.

There were a number of reasons for this divergence in gross margin, which I will go into shortly, but I want to highlight that the gross margin does fluctuate depending on the sales mix. In the first quarter of 2018, the project mix executed several -- some lower margin projects, which were strategic for Magal.

In addition, on the product side, we saw a higher mix of the hardware component in our VMS sales than software, which also affected the gross margin. This is in line with our commercial strategy for this segment. In the first quarter of last year, the opposite was true, which produced an unusually high gross margin then.

Operating expenses in the quarter amounted to $7.5 million, 9% below the $8.3 million as reported last year. I note that the main contributors to the reduction in OpEx was lower marketing and sales, down 12%; and lower G&A, down 9%; while R&D remained in the same positive level as last year.

Operating income in the quarter was $33,000, compared to an operating loss of $0.9 million last year. During the first quarter, we recorded a financial income of 0.1 million versus the financial expense of $2.6 million in the first quarter of the last year.

The financial expense in the first quarter of the last year related to a non-cash financial charge generated through a foreign exposure of our Israel based US dollar denominated deposits. Later last year, we took steps to lower our exposure to the exchange rate fluctuations.

Looking ahead, we therefore expect the fluctuations due to the exchange rate changes to be lower in the future quarters. Net loss in the quarter was $167,000 or $0.01 per share. Net loss in the first quarter of the last year was $3.7 million or $0.16 per share.

The EBITDA, which is more representative for the performance for our business in the quarter was $0.5 million. This is compared with a negative EBITDA of $0.47 million in the first quarter of the last year.

Cash, short term deposits and restricted deposits as of March 31, 2018 were $49.4 million or $2.15 per share compared with $52.3 million or $2.27 per share as of December 31, 2017. We have no bank debt in Magal.

In the quarter, we used $2.3 million in cash for operating activities, primarily for working capital geared towards the scaling up of some projects we are about to commence.

Our overall strong level of cash provides us with a working capital to continue to grow our business organically and at the same time enables us to take advantage of the potential acquisition opportunities we see in our end markets. That concludes my remarks. We would be happy to take your questions now.

Operator?.

[Operator Instructions] The first question is from Ken Liddy of Oppenheimer..

Congratulations on the quarter and the backlog. I was wondering if you could talk a little bit more about the acquisition.

Is this a strategic shift with the ESC BAZ?.

Could you repeat the first half of your question?.

Yes.

Is this a strategic shift in your acquisition of ESC BAZ or is it simply to give you diversification in your product mix?.

I think the latter of your question is basically the answer to the question. The acquisition diversifies our video analytics and video segment offering. So it’s more of a diversification rather than a shift..

And is this -- would you consider this significant increase to revenues or profits or is there any way to measure that?.

It’s less than 10% of our overall revenue portion. So, it's not significant per se. We do have some forward looking observation into ESC’ contribution to our revenue projections, but we will need to wait for the second quarter to end to see that effect take place in our results..

Does ESC BAZ have any type of a backlog in orders that will be billed?.

Yes. There is a backlog for ESC BAZ, and the only thing I can say at this point that based on the projections that were made when we acquired ESC BAZ, we look forward to them joining our results, and we see good results and good signs from ESC in the first quarter..

And would you expect the same type of gross margin from that business?.

I think ESC is somewhere between -- it operates somewhere between the solution or product provider gross margins to the project segments. So obviously, it changes from sale to sale, but I would say that we do not expect ESC to contribute negatively on our gross margins..

Also is it possible for you to comment on the hiring of Dror Sharon and Saar’s leaving.

Was that more of a situation where the new CEO was available, was recruited?.

I'm not sure I fully understand the question, but I –.

On the timing of the shift in the CEO, is there anything that led up to that?.

The timing of the replacement of Saar was a decision made by the board of directors. So obviously I can say very little or comment very little on the board of directors’ decision. I think the board of directors decided that it was the right time to bring someone over to take Magal to its next stage in evolution.

The timing and the replacement process were due to some previous engagements and commitments that Dror had and a personal decision made by Saar to make it clean break, and I think the board felt that it had the right management capabilities to keep the company stable in that interim period..

I guess one other question, with regard to the protests in the Gaza, will that delay any work that you were scheduled to do..

I'm not sure I heard your question.

Can you repeat it please?.

Sure.

With the protests going on in Gaza, is there any type of delay that you would expect from any projects that you may be doing there?.

The current situation is complex, obviously, but we have teams working on Gaza border maintaining that fence, so we are working over there and other than that, I think I would not want to comment..

The next question is from Dan Weston of Westcap Management..

My first one is relating to the video solutions division.

Is there any color you can provide us in terms of either the revenue in the quarter or what the growth rate was year-over-year for that specific division?.

So, I guess your question relates to the VMS segment operation. So I would say that this segment continues to be one of our growth drivers. As you probably noticed on our recent 20-F, we managed to grow this segment for more than 20% year-over-year, and we basically see similar level of revenue and bookings during the first quarter as well..

I know, but I think you had a 32% growth in the fourth quarter year-over-year.

Was it that high or can you not get that granular?.

There is some seasonality in our business overall, and actually in video segment as well, that’s naturally part of the installation works. And I would say that -- we mentioned this also when we discussed our gross margins, we do manage also to grow via the increase of the hardware components in this segment.

So we believe that both the organic growth and also this part of the growth driver would continue showing nice improvement in this segment..

And when you look out for the balance of the year, would you expect the rest of the year's revenue to be skewed more towards the hardware components side of VMS or when will we start to see more of the software contribution..

Hi, Dan. It’s Yaniv again. I think it's a little bit too early in the year to make that projections. I think we'll have to see where we go from here, because it's only the first quarter results that we're discussing now..

Okay.

Let me ask it another way, just in terms of overall gross margins, is there any way that you can provide any ballpark figure in terms of where normalized gross margins should be for the rest of the year?.

So we believe that we should be positioned overall in the usual area of 40 – mid-40s or above. Of course, starting in the next quarter, we will have the impact of the consolidation of the ESC BAZ and we would discuss the gross – the estimated gross margin area of that business as well.

Although ESC BAZ activity is not material to overall consolidated financials, but still this is something that we need to consider. So overall, we should be in the area of mid-40s plus. And by the way, the VMS segment is obviously software dominant and it will continue to be software dominant also in near future of course..

And then finally could you provide any update on some of the larger orders that you'd previously discussed, namely the Toyota project that you won as well as the $20 million of critical infrastructure sites, have those projects begun and do you expect the bulk of the orders that you received in Q4 and Q1 to be completed in 2018..

As a general comment, I can say that a significant portion of our backlog is expected to be delivered during 2018.

With regards to the specific projects, some of them have already been launched and some of them are in final staging of, let’s say, kickoff stage and some are awaiting payment and some were already kicked off the activity, but significant portion of our backlog and out of that basically, we announced most of it in public announcements, we expect to be delivered in 2018..

The next question is from Fred Ermen. Please go ahead..

Congratulations on the improvement in the quarter and we look forward for crossing from the red into the black. 2017 was a disappointing year. And then there seems to be have been a turnaround based on your record backlog.

Could you give us an explanation why 2017 was as disappointing as it was and what was the catalyst to cause your backlog to move up the way it has?.

I would try and answer, but I will let -- with your permission, Fred, I will let Kobi comment also, because I think the analysis is a complicated analysis and not a one dimensional analysis.

I can say that overall, a year like we had in 2017, which is obviously a bad year is a combination of several things going wrong and I think that is the simple answer to a complicated question.

Some market trends, we didn't anticipate and some spillovers in revenues that we were hoping to be accelerating during 2017 actually spilled over to the following year and some challenges there were internally and externally. So I think there is no one answer to why 2017 was a disappointing year.

I think we tried to explain that to the investors and to ourselves over the year.

But I think more importantly now when we look into the future, we believe that we were able to solve the riddle in a way that now things are going better for us, the record backlog, the higher level of confidence in the revenue projections, we now see going forward, I think that is for us, is the main improvement over 2017.

Kobi, would you care to?.

Yeah. I agree with, Yaniv, Fred and yes, 2017 overall was a disappointing year, although this was a mixture of some really great accomplishments in Magal such as great turnaround Magal Israel activity.

And stabilization and significant improvement of the video segment, back to breakeven run rate basically from a negative position since it was acquired. On the other hand, yes, mainly the reduction in product sale in the US was a hit.

And on the positive side, the company reacted on time from both the operational costs and perspective and also from the commercial perspective and I think we start seeing the results for the last two consecutive quarters..

You didn't really explain what caused the turnaround.

Was it -- when you said you solved some of the problems you saw, you reacted, was it a change in personnel, was it emphasizing certain product lines, which had not been done, was it reducing costs, what caused the – and what caused the increase in backlog that happened in a relatively short period of time?.

Again, this is Yaniv. Fred, I will try and better explain what we're trying to say. I think two separate path of operation. One of the expense structure, we took some serious actions when we saw that year was not going our way.

So, we did reduce the operational cost and we took some significant steps in order to improve our expense structure and return to positive EBITDA. On the revenue side, I think the backlog that we see today is a result of some operations that we took over a long period of time and now it's starting to materialize.

So like the recently announced order in Latin America, for example, that is a significant order, which usually is a result of more than years of work. So not necessarily the improvement on backlog and the cost reduction steps that we took go in the same timescale.

However, now, they meet when we start the first quarter of 2018, we see the result of several years of improvement on the revenue side and the steps – the immediate steps that we took during last year in order to improve the expense structure. I hope that better answers your question..

[Operator Instructions] The next question is from Thurman Willis..

You expressed some optimism relative to the American Mexican wall.

What do you base your optimism on with that and how significant a win or revenues could be produced from that? Could that not be a substantial addition to the backlog?.

We're optimistic, because we see the process going forward, but it's still in early stage. The decision is still with the CBP, with the US government.

The next stage, as we see it, is for them to choose the relevant technologies to cover the border and the reasons for us to be optimistic is because we have a very broad portfolio of technologies and solutions and we monitor the situation closely and we have been in touch with the major players in this industry and in this specific project and we believe that we can take part in any future project of the US Mexican border.

Having said all that, there are no guarantees and we need to wait and be patient and see where it goes after the technology selection stage, but we’re confident that we'll be able to provide a good technological solution with a competitive price because this is what we've been doing for the past 50 years..

My second question and only follow up question is, the new CEO that will be come on board, you talked about his excellent experience, but it's been in the private sector. Therefore, it's been a little hard for us to ascertain his expertise.

You’ve stated that he hopefully will take Magal to the next level, can you talk a little bit more about his expertise and was he managing the private company that’s similar in size and what gives you the optimism about his ability to run the company going forward..

Okay. It’s a complicated question and obviously the selection of the new CEO was done by the board of directors and not by the management team. I can only say that I met Dror prior to the announcement and I also have mutual acquaintances with Dror and I feel he is the right guy in the right place in the right time.

So that is basically all I can say, but I think going forward, when you get the chance to get to know Dror, and get yourself acquainted with his strategic vision for Magal, I think you will feel the same..

And it was also expressed that we look forward to him with his past experience and his past knowledge of bringing additional orders to the company.

Is that not correct?.

I think that is part of the selection criteria, but probably the most important one is the leadership skills, the vision that he brings, his very successful tenures as CEO, basically that will be the third tenure as CEO.

He has done two successful tenures as CEO in two different companies, bringing the companies to profitability and more importantly growing the business. So I think leadership experience, vision and also his relations and knowledge of the industry is a full package of a new CEO taking the company forward..

I do have one more to follow up.

And there pertains to the investment community, your stock is not widely institutionally held within the US and with the story that you have, your stock appears to trade at a mighty low market cap relative to where it should trade, are there any plans for analyst coverage or to better introduce the company to the investment community going forward as we enter the optimism of 2018?.

Yeah.

We’re trying obviously to balance between the commitment to investors’ community and of course, with the challenges and the execution of our work plan to increase the value of Magal to our shareholders, I believe that once, first of all, we do communicate on the ongoing basis with investors and as a management, we are always accessible for further clarity and explanations and analysis.

But I believe that once Dror joins us by the end of June, an onboarding period, we will have the opportunity to meet with our investors’ community, the current investors and also with potential investors as well probably within a few months..

The next question is from [indiscernible] Merrill Lynch..

Hi. I just want to mention I'm not calling as an analyst or an employee of Merrill Lynch. I'm a 25-year shareholder of Magal. And I just have a few questions pertaining to the sales area. The technology has been fantastic.

I follow the company as I say for many years and own the stock, not very impressed with the stock prices, but it seems to me that on the website, you talk about projects in 100 countries and sales areas all over the place and I'm just wondering how much dedication you're giving to analyzing whether there's certain countries that are more profitable than others, whether you're focusing enough on US and Canada and I know that Senstar is your sales division in the US.

Do you have enough control over Senstar or are they sort of independent for US sales. So if you could elaborate on your sales thoughts going forward to maybe tighten the situation or eliminate areas that are not profitable, I would like to hear that..

With regard to analyzing the markets and continuously trying to improve and focus our efforts on the more profitable countries and areas, I can only say that this is one of the things that we invest most of our time and efforts in doing.

So, I don't think there is a day go by that it e don't try to analyze and see how we can capitalize on our abilities, but taking the focus to the places where we can succeed best. With regards to North America and Senstar, the North American market is our most strategic market and we look at the market in the US as a market for Senstar.

That is the most important market for us. In terms of control over Senstar, basically, it’s a one management team. I spent only -- in the past three weeks, I spent two weeks out of the three in Canada with the management team in Senstar. We visit the headquarters in Senstar regularly and we communicate on a daily basis.

So that is basically a one management, one team of managers trying to do our very best. I think if you look at the two main divisions of operation, then we have different markets for projects and products basically.

So the fact that we're operating in 80 or 100 countries over the years does not mean that we do not maintain focus for the certain divisions and we try to focus each division on the markets with our best chances of success and the most profitable markets utilizing our capabilities, our different capabilities in each market.

So I hope that answered your question. I can only say that the record high backlog that we see today is a result of, I think, hard work, return to focus and maybe just a little bit of luck, but I think it's not a pure chance that we have a record high backlog speaking to you today..

Thank you very much. And as the previous caller had mentioned, getting a little bit better coverage from some of the US analysts and US investors, institutional investors would certainly be helpful and I want to congratulate you on a good quarter and congratulations to Dror going forward and I hope he does exactly as you say.

Takes Magal to the next level..

There are no further questions at this time. Before I ask Mr. Yaniv Shachar to go ahead with his closing statements, I would like to remind participants that a replay of this call will be available on Magal’s website at www.magal-s3.com. Mr.

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

Thank you, operator. On behalf of the management of Magal, I would like to thank you for continued interest and long term support of our business. In the next quarter, Dror Sharon, the coming CEO will be addressing you in place of me. Finally, on behalf of the management, we all look forward to a strong 2018 and updating you on future quarters.

Have a good day..

Thank you. This concludes the Magal Security Systems first quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect..