Kenny Green - IR Dror Sharon - CEO Kobi Vinokur - CFO.

Sam Rebotsky - SER Asset Management Bruce Tuckman - Merrill Lynch Dan Weston - WestCap Mgmt.

Ladies and gentlemen, thank you for standing by. Welcome to Magal's Second Quarter 2018 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 1-646-688-3559 or view it in the News section of the Company's Web-site at www.magalsecurity.com. I would now like to hand over the call to Mr.

Kenny Green of GK Investor Relations. Mr.

Green, would you like to begin, please?.

Welcome to Magal's second quarter 2018 conference call. I would like to welcome all of you to this conference call and I'd like to thank Magal's management for hosting this call. With us on the call today are Mr. Dror Sharon, CEO of Magal, and Mr. Kobi Vinokur, CFO.

Dror will summarize some of the key highlights, followed by Kobi, who will review Magal's financial performance for the quarter. We will 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. 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 the conference call, we will 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 our press release we have 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 Web-site 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 Dror. Dror, please go ahead..

Thank you very much, Kenny. I would like to welcome you all for our conference call and thank you for joining us today. I joined Magal almost two months ago and this is my first investor conference call with our shareholders.

I intend to continue Magal's position of being transparent and open with its shareholders and I look forward to continuing our discussions on a regular quarterly basis as well as meeting many of you on the road [indiscernible] investor conferences in the coming quarters and years to come.

In my first month at Magal, it has been very clear to me that I have joined the Company with a significant amount of potential type of potential, [indiscernible] which is still untapped. I have been to our main offices and have been impressed by the quality of the skilled and motivated employees and management throughout the Company.

I believe that Magal is right now in a place where we can leverage the strong platform that we have to advance to the next level in its development. Before I start with my summary of the second quarter, I would like to thank Saar Koursh, our former CEO, for his key contribution to Magal's success until now.

I will first provide a short summary of the quarter and our ongoing activities before handing over to Kobi, our CFO, to discuss the financial results. Our results speak for themselves. We are particularly pleased with our performance and the growth we demonstrated in the quarter.

It is quite clear that the strong backlog we have built over the past few quarters is benefiting us strongly now. We reported our highest level of revenue at $25.3 million in Magal's recent industry, up 91% year-over-year and 47% sequentially.

While growing revenues by 91% over last year, operating expense only grew by 8%, demonstrating the operating leverage inherent to our business as well as the good work that Magal has done in improving efficiencies in the past few quarters.

All in all, we reported a strong level of operating profit at $2.1 million and EBITDA of $2.6 million, the highest going back many quarters. Kobi will discuss the results in greater detail in a few minutes. During the second quarter, where we had a strong revenue performance, our backlog still remained strong, higher than at the same time last year.

Furthermore, the pipeline is broad and stronger than what we have seen in the recent past. We are hopeful that we can turn a good portion of our pipeline into additional orders in the coming quarters.

Our success in the recent months is a sign of the increased market interest in our products and service and as well as the recovery in some of the markets we serve, especially in the U.S.

In terms of product, we are seeing particularly solid interest in our new product, the LM 100, a smart sensor integrated with an addressable LED perimeter lighting solution. In the terms of regions, North America, as I said, which was particularly weak in 2017, has shown somewhat of an improvement in 2018, especially in this quarter.

North America continues to be our focus market for products and we see increasing opportunities there. With regard to the south of the U.S. border with Mexico, we are in ongoing contact with CBP, the U.S. Customs and Border Protection agency, which are assessing our pilot solution for this border.

In effect, our pilot solution is seeing very good market attraction in the region and worldwide and we are continuing to invest resources in developing and invest in advancing this line of product. In Israel, we are seeing an increasing diversity in project in the pipeline.

Worldwide; in Europe, we are seeing increased opportunities and we are currently in the process of reorganizing our sales force in Europe, driven by a new leadership in order to better meet requirements and market demand. Latin America was particularly strong this quarter as we are executing on some key strategic projects in the region.

In Africa we are seeing strong opportunities and we hope to win some new business in this coming month in the region. Our strong backlog provides us with good revenue visibility for the coming quarters. Combined with our solid pipeline, I have confidence that 2018 will show a good improvement over 2017 in revenue and also in EBITDA.

I would like to spend few minutes talking about the acquisition strategy. As you know, we acquired the control of ESC BAZ and fully consolidated the results at the start of the second quarter. The acquisition was primarily a technology acquisition and did not have any material impact on our top or bottom lines.

More broadly, we are continually on the lookout of a synergistic acquisition, particularly technology or products. We look to leverage our existing business platform to bring increased sales and open up new [indiscernible] for us. We have over $45 million in cash with no debt, which is more than what we need for ongoing working capital.

We intend to leverage this strong cash position for acquisitions. In summary, I'm pleased to report my first quarter at Magal with strong quarterly results, and in particular a solid backlog level going into the third quarter. I believe we are in a good position to achieve solid growth in 2018 over 2017 in terms of revenue and EBITDA.

And now I would like to hand over to Kobi to summarize the financial results. Kobi, please go ahead..

Thanks Dror. Revenues for the second quarter of 2018 were $25.3 million, up 91% year-over-year. This is the record for second quarter. This is also our third consecutive quarter showing improvement in revenues year-over-year.

Furthermore, the revenue growth this quarter over the same quarter last year is seen across all the business units in the Company, which is a very good sign. This is also the first quarter in which we consolidated ESC BAZ results into our results. We are generating around a fifth of our revenues from the current sources.

This strength continues into the current quarter and we target to grow this portion of the revenue, thus increasing the certainty level in our financial performance. The geographic revenue breakdown for the quarter was as follows; Latin America 28%; North America 27%; Africa 7%; Europe 13%; Israel 16%; Asia and the rest of the world 9%.

Second quarter gross margin was 43.6% of revenues versus 50.2% last year.

There were a number of reasons for the recent 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 and the typical range we would expect for our gross margins is around the mid-40s level.

In the second quarter of 2018, like the prior first quarter, the project mix executed favored 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 early part of the last year, the opposite was true, which produced an unusually high gross margin. Looking ahead for 2018 as a whole, based on our strategy and projects in our backlog, we expect that the average gross margin will be at around a level that we reported this quarter.

Operating expenses in the quarter amounted to $9 million, 8% higher than the $8.3 million as reported last year. I note, the OpEx was slightly higher due to the inclusion of the operating expenses of ESC BAZ as well as some increased sales and marketing expenses associated with the revenue growth.

This was largely offset by the cost efficiency measures we took in the second half of the last year, primarily as you'll probably remember in the North American region. Operating income in the quarter was $2.1 million compared to an operating loss of $1.7 million last year.

During the second quarter, we recorded a financial income of $0.5 million versus a financial expense of $1.4 million in the second quarter last year. Net income in the quarter was $1.7 million, or $0.07 per diluted share. Net loss in the second quarter of the last year was $3.3 million, or $0.14 per share.

The EBITDA, which is more representative of the performance for our business, was $2.6 million or 10% of revenues. This is compared with a negative EBITDA of $1.2 million in the second quarter of the last year.

Cash, short-term deposits, and restricted deposits, as of June 30, 2018 were $45.4 million or $1.97 per share, compared with $49.4 million or $2.15 per share as of March 31, 2018. We have no bank debt in Magal.

In the quarter, we used $2 million in cash for operating activities, primarily for working capital geared towards the scaling up of some projects that we are currently executing or about to commence. I note that already in the first weeks of this quarter, the third quarter, our collections have been strong and our cash position has increased.

Our overall strong level of cash provides us with the 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 will be happy to take your questions now.

Operator?.

[Operator Instructions] The first question is from Sam Rebotsky from SER Asset Management. Please go ahead..

Now the backlog which has improved from the same quarter last year, has it improved from the prior, the March 31 quarter?.

The backlog, as you mentioned, the backlog by the end of this quarter is better than the similar quarter last year, and it is better I would say across all the segments of our activity, including the integration part and also product and VMS, as I mentioned, basically due to the improvement in all business unit tariffs..

But is it higher than the March 31 quarter?.

No, it's not as high. It's still strong but it's still, as I mentioned now, on quite strong levels..

Okay.

Now, was any of the sales in this quarter deferred from the March quarter?.

No..

Okay. It's good that the profitability has turned around and we see maintaining and improving the profitability going forward..

Definitely in Magal, the revenue growth definitely is the key for improvement of profitability. We executed a few significant steps last year in order to extract some cost synergies. We will continue doing so. But I would say that the improvement in profitability should come from revenue growth going forward..

Okay.

Are you looking at acquisitions, is there any discussions or are you finding things that are exciting and reasonable in price that you might want to pull the trigger on?.

We are still looking into a few opportunities but nothing basically important now..

Okay. Thank you very much. Good luck..

The next question is from [Thurman Willis] [ph]. Please go ahead..

Congratulations on an outstanding quarter and profitability. My question is, with the strong improvement in revenues and earnings, institutional ownership is rather low in the Company.

What do we plan to do to get our message across a wider spectrum of potential investors going forward?.

I believe that now when Dror joined the Company, during the next month we'll have some good opportunities to meet with investors across the board, but in particular institutional investors. This is the type of investors that we definitely would like to attract to our stock and we believe that Magal is definitely interesting enough for such holders..

My follow-up question relates to the wall, the Mexican wall, you are having opportunities in this area.

Are we excited about our potential with this wall? And then lastly, something that we don't seemingly talk a lot about is the grid system and all the potential with the electric grid system and does that not provide us with one of the major areas of growth going forward?.

I don't fully understand the last part of your question. About the southern border with Mexico, the attraction to our fiber product for this opportunity, we are in constant negotiations and demonstration with the CBP, the Customs and Border agency.

And what was the second part of your question?.

The grid system, the electric grid system, we have a lot of opportunities in a lot of areas, but we announced a service contract on electric grid system her just recently at $4 million.

And does the electric grid system across the world now provide us with one of our major opportunities?.

This is one of the verticals that we keep pushing and our [indiscernible] products are being sold over there. I don't see a major change over there on top of what we are doing already, but it looks okay..

Thank you for taking my questions and congratulations and I hope that you can bring on some new investors as your stock appears to be highly undervalued..

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

Hello gentlemen. Kenny, Dror, Kobi, thank you very much for meeting with me when I visited Israel last month. It was very nice to see the Company and meet you all and I do appreciate it. I want to congratulate you on the excellent revenue growth in the quarter and hope that that continues and that you continue to make more inroads into the U.S.

border system as well as what Thurman had mentioned with the electric grid in the United States. That's an ongoing program here in the states and it needs various protection. So, I hope we can accomplish some of that going forward.

Also, the institutional ownership does need to increase and stock exposure does need to increase, but I just hope that you continue to show good earnings and the proof will be in the pudding that if you increase the value of the Company that people will take a better look at it..

Thank you very much, Bruce. It was nice meeting you. Although it was very short on my side, but thanks for the warm words..

Thank you very much, Bruce. Appreciate your warm words and hope to be in touch going forward..

Very good. Thank you and keep up the good work..

The next question is from Dan Watson of West Cap Management. Please go ahead..

It's Dan Weston. Most of the questions have been answered at this point. Dror, welcome to the Company. And I had a couple of questions here.

First, on the previous caller's comment about the service contract, the maintenance contract you just announced for $4 million, can you give any color on that? Is that a new piece of business for you in terms of pricing some of these maintenance contracts and how long is the life of the maintenance contract?.

So, actually the press release aggregated a few contracts that we secured during the last couple of weeks. I would say the most interesting one is a five-year contract for one of our major customers in North American markets..

I was reading the press release and it said that one is to provide maintenance and support for the products you previously installed at various correctional facilities, and then one was to provide support for facilities in a electric power generation company.

That second one, was that a contract that you had previously sold product into or is this a services contract for somebody else's work?.

So, first of all, the first contract that you mentioned is a part of our Senstar Care program, and basically this program targets the customers that have already purchased our Senstar sensors products and basically this is the extended warranty and maintenance and support associated with those products that we have sold.

In both cases, basically the contracts were signed with existing customers, our large long-term customers, that basically value both our services products and as well interested in our maintenance services..

Very good.

And Kobi, if you could, maybe I missed it, what was the total VMS revenue in the quarter please?.

Total VMS?.

Yes..

For video, overall the total VMS revenue in the second – it's between $2 million and $2.5 million..

Okay great.

And then just in general, Dror, since you have come in officially in June, maybe you could just give us a little bit of your take on what you see inside the Company in terms of products and then outside in terms of your vertical markets, where you see the biggest opportunities for growth under your leadership please?.

I just finished the tour around the Company facilities worldwide, meeting the teams all over the world, almost covered everything. First, the brand, the market brand for either Magal and also Senstar is pretty strong.

I see that Senstar is the biggest player in the market with good past performance, and Magal in the countries where the Company is playing, a pretty strong company.

I think it's premature to talk about new strategy or say what direction we are taking at the Company, but where we are starting from this point looks very promising because we have very good product base in Senstar and also the software from the acquisition of Aimetis few years ago. It also sells very strong software.

And the combination of what we have there and the strong brand in the market can bring us to very nice new horizons. Also we are now looking into new verticals that came on the table and building some plans out to penetrate them..

And just one of those new verticals you're speaking of have to do with the cannabis market?.

Yes, we have very nice solutions in North America, lots of growth we see, we saw in the last year or so on the [indiscernible] facilities, protecting the grow area and also production area. And we see it also starting to grow in Europe, mainly in Germany. So now we are slowing this [indiscernible]..

Very good. I appreciate that color and congratulations on a nice quarter..

The next question is from [indiscernible] from [Hazan Capital Markets] [ph]. Please go ahead..

Congratulations on a good quarter. I would like to ask you, usually the second half of the year in Magal is much better than the first half.

Do you expect similar, that it will be similar like other years, that the second half will be stronger than the first?.

We have still a few months ahead of us, so it's early to talk about expectations. But overall, talking about the entire year, we do expect a good year, strong year that is better than 2017 from both the revenue and EBITDA perspectives.

We had strong Q2, and as you probably know, in our business it's very difficult to judge sequentially quarter over quarter. So, looking at the entire year, I can definitely share with you this expectation of being stronger year..

I understand. Okay, thank you, and congratulations..

The next question is from [Mike Distler of Manex] [ph]. Please go ahead..

I'm calling as a two-decade-long holder in Magal, as many of the people on this line are. I'm glad Mr. Tuckman got out to see you. So, one is I want to congratulate you on a great quarter. Two, Mr. Sharon, I want to welcome you aboard. It seems you had excellent timing.

And three, I just wanted to advise you, I being somewhat older than many of you, just a note of caution regarding the 28% of the business that's coming from Latin America and of course Asia and the world at this point, just want to make sure that your letters of credit are all bank-guaranteed because of the potential for some extreme volatility relative in currency markets.

So, just a note of caution from years of experience to a growing company, I just want to make sure all that cash that's coming in continues to flow in with guaranteed fees on much of that business. Thank you for your time, continued success, and have a good day..

Thank you very much..

The next question is from [Ronen Raffaello] [ph]. Please go ahead..

First, congratulations for the [indiscernible] as the CEO of the Company and I hope your tenure will be prosperous and successful. And I would like to focus on another part of the world.

In the recent year, there were many publications in the Indian media about the Indian government plans to seal and secure its 6,000 km vulnerable border with Pakistan and Bangladesh using intrusion detection technology like smart fences, cameras and radars.

It was also published that the Indian Border Security Forces, the BSF, are conducting a few test sites using state-of-the-art Israeli border security technology. Some Russian technology is tested as well. The pilot has ended or will end recently and with the success and satisfaction of the BSF commander.

The tender and bid for the first 3,300 Indian-Pakistani border will open in near October.

Can you comment about this and is Magal involved in the project or is it some other Israeli competitor?.

First, nice meeting you. The Indian border is a project that is on the table for the last I think almost 10 years, going up and down all the time. Sometimes they are starting with new, with small portions and then stopped it. Magal has its own facility and partners in India.

We are in few tenders now related to this project in the border, but India is a very tough market, and like everyone else, we're trying to penetrate either from the project and also from the product point of view.

So, I'm not familiar with exactly what you are referring to in what they did already but currently we are trying to pursue this opportunity as well..

Everything I told you is written in the newspapers. You can Google Indian-Pakistani border fence, and all the results are from there..

Yes, we know. Thank you..

Okay, thank you very much..

The next question is from [Thurman Willis] [ph]. Please go ahead..

Looking forward, do we have a lot of projects that we are bidding on and do we look forward to announcing some nice wins going forward, I'll refer to business going forward and not backlog, but the potential for new projects upcoming and our bidding on those, could you comment please?.

I would say, as Dror mentioned also before, our pipeline does look diverse, interesting. I think in comparison to the previous years, we cover more territories and we see opportunities that we actively participate in, in new geographies. And so, it's both a geographical and vertical diversity. I hope that answers your question..

So I can take it that the potential going forward for bidding and making new wins is not a part of the backlog now, is as exciting as it's been in Magal's history?.

Once we consider the backlog, it is orders that we practically secured. So, whatever is in the backlog is just execution. On top of that, we have obviously the pipeline that I just described..

So, in other words, going forward we see lots of potential for new business?.

Yes. Based on pipeline, as Kobi said, we are very diverse and hopefully part of it can be materialized in next few months..

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Dror Sharon to go ahead with his concluding statement, I would like to remind participants that a replay of this call will be available on Magal's Web-site at www.magalsecurity.com. Mr.

Dror Sharon, would you like to make your concluding statement?.

On behalf of Magal management, I would like to thank you for your continued interest and long-term support of our business and have a good day. Thank you..

Thank you. This concludes the Magal Security Systems Second Quarter 2018 Results Conference Call. Thank you for your participation. You may go ahead and disconnect..