Kenny Green - GK Investor Relations Dror Sharon - CEO Kobi Vinokur - CFO.

Ken Liddy - Oppenheimer Sam Rebotsky - SER Asset Management.

Ladies and gentlemen, thank you for standing by. Welcome to Magal’s Third 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 website 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 begin, please?.

Thank you, operator. Welcome to Magal's third 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 of 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 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 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 today, 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 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 Dror. Dror, please go ahead..

Thank you, Kenny. And, I would like to welcome all of you to our conference call and thank you for joining us today. I’m pleased with the financial results for the quarter, which speak for themselves. Revenue up very significant 75% year-over-year to $24 million, leading to $2.6 million in EBITDA versus breakeven that we had last year.

In fact, in only three quarters where our revenues have already superseded those of last year, reaching almost $66 million, leading to EBITDA of $5.6 million versus a negative EBITDA of $1.7 million in same nine-month period of 2017.

Our success in the recent months is a sign of increased market interest in our product and services as well as recovery in some of the markets that we serve. Our revenues are also more diversified than in past years, coming from a mix of projects as well as product sales.

Furthermore, around a fifth of our revenues are of recurring nature, providing us with improved revenue visibility. Kobi will discuss the results in greater details in few moments. But, cash generation was also strong in the quarter and we ended September with $50 million in cash, which is more than we need to ongoing working capital.

We tend to leverage this strong cash position for value adding acquisitions. We remain continuing on the lookout for value adding acquisitions, particular technology or product, whereby we can also leverage our existing business platform to bring increased sales and open up new sales channels.

We’re also exploring entering into new verticals for sales of our services and technology, both through organic growth as well as throughout acquisitions. These efforts will allow us to go up -- to go by enabling us to address larger total market.

Our pipeline remains broad and is full of potential opportunities, well in excess of Magal has seen in the past few years. We’re hopeful that we can turn a good portion of our pipeline to additional orders and revenues in the coming quarters.

In terms of various regions, 2018 in general has shown improvement in most of our geographic over last year -- previous year. Looking at the specifically region, North America, which includes the United States and Canada, has been much stronger in 2018. For example, a new vertical for us for protecting pharmaceuticals.

Leveraging on the recent legalization of marijuana in Canada this business is gaining strong traction. We received close to $1 million in order in the past few months, and there are many further opportunities there in our pipeline. While there has been much talk about Trump’s wall, this remains future potential for us.

We have been in close discussions with the CBP, the U.S. Customs and Border Patrol agency. We do believe that when and if they do fund and move forward with this project, they will choose a smart technology border solution, the type of which Magal has a truly global competitive lead. Latin America was strong in the third quarter.

We have been implementing projects to protect energy infrastructure which include our recently announced order for close to $8 million. Asia-Pacific was also strong geography for Magal in the quarter. And we recently announced almost $7 million in new orders to the region, which are currently delivering -- under delivery.

In summary, I'm pleased to report another strong quarter at Magal. Looking ahead, we will end 2018 as one of the strongest year in Magal history. And now, I would like to hand over to Kobi to summarize the financial results.

Kobi?.

North America, 31%; Latin America, 26%; Europe, 17%; Israel, 16%; Africa, 6%; Asia and rest of the world, 4%. Third quarter gross margin was 46.4% of revenues versus 47.7% last year. The gross margin does fluctuate depending on the sales mix. And the typical range we would expect to our gross margin is around the 45% level.

Operating expenses amounted to $9 million, compared with $7 million as reported last year. I note, the OpEx was higher due to a number of reasons, including the OpEx associated with ESC BAZ, our newly acquired subsidiary, increased commissions related to the high level of revenue and some provisions which we see as a one-time impact.

The typical OpEx run rate for Magal as it looks today, should be around $8.5 million per quarter. Operating income was $2.1 million compared to an operating loss of $0.5 million last year. During the third quarter, we recorded a financial income of $52,000 versus $532,000 in the third quarter of last year.

Net income was $1.5 million or $0.06 per share. Net loss in the third quarter of last year was $0.2 million or $0.01 per share. The EBITDA which is more representative of the performance of our business was $2.6 million or 10.9% of revenue. This is compared with the breakeven EBITDA in the third quarter of the last year.

Cash, short-term deposits and restricted deposits as of September 30, 2018 were $50.4 million or $2.19 per share compared with $45.4 million or $1.97 per share as of June 30, 2018. We have no bank debt in Magal. From a financial perspective, Magal concludes a very good third quarter of 2018, with a solid level of profit and strong balance sheet.

We would be happy to take your questions now.

Operator?.

[Operator Instructions] The first question is by Ken Liddy of Oppenheimer. Ken, please go ahead..

I just wanted to follow up on the recurring revenue. You said you did about 20% of your revenue and recurring revenue, that's about a $4 million to $5 million.

Would you expect that type of run rate for the fourth quarter and the first quarter of next year?.

Ken, by the nature of recurring revenue, we expect this portion of revenue to be similar in the next quarters..

Okay.

And, is that mostly maintenance contracts, warranties, stuff like that, or…?.

That's correct, maintenance and support contract for our VMS solutions for the video management system licenses as well as program that we launched a few quarters ago, sensor care [ph] which is basically maintenance and support to our PIDS physical sensors and also maintenance related to the projects that we executed in the past..

And where was that level about a year ago, recurring revenue?.

I believe that we have improved it by few percentage points..

Okay. The next question I had was with regards to the order in Asia Pacific for cameras mounted on vehicles, that just seems something that's new to Magal.

And if you could talk a little bit about what exactly you’re doing, and if there's a potential for other applications?.

It’s a camera solution we’re providing to one of our partners in Singapore. It’s not -- it’s something that we are used to do, we did it in the past as well, very nice project but it’s not something that -- it's not something totally new to us..

And one last question for you, Dror. You’ve been with the Company now I guess about four or five months.

What do you see -- have you done evaluation of the Company and where you can grow revenues and see the biggest opportunities?.

Yes. I joined the Company little bit about four months ago, visited all the different facilities, and we have many of those worldwide, started to stabilize especially the leaders of the Company and pushing the ongoing projects and products that we currently have.

In parallel, we’re exploring new growth engines and the new verticals, but it’s little bit pre mature to talk about it. I assume, we will do it in the next quarter or so..

Next question is from Sam Rebotsky from SER Asset Management. Sam, Please go ahead..

Good morning. It seems to be a turnaround in the earnings.

Would you say your backlog is the largest? How would you classify your current backlog?.

Hi, Sam. Our backlog level continues to be strong. I would say that we managed to slightly increase it over the beginning of the year while executing quite strong level of revenues. .

Are you still looking at acquisitions?.

Part of the growth will be through acquisitions, not only organic one. As I mentioned in the beginning, we have those $50 million in the bank and part of it’s going to be utilized for M&A, mainly on technologies. .

Are anything close to closing or are you negotiations or no?.

No. We’re just now exploring different directions. There are few ideas but nothing yet is close to be closed..

So, is your pipeline the largest it's ever been, or how would you sort of quantify? I don't seem to understand how large your backlog and what you're bidding on..

The pipeline is very diversified and it’s very strong. And I don’t know if it’s the biggest one we have year-over-year, but it’s pretty good and big. Many opportunities in the pipeline. So, yes, it looks good..

Next question is from Shuki Hazan of Hazan Capital Markets. [Ph] Please go ahead..

How is your visibility for 2019? And do you think double-digit grow by sales is reasonable..

We don’t provide typically outlook for the next year, but we continue improving the business. So, no, hopefully we will not disappoint..

And if we’re talking about seasonality, do you think that also next year first half or first quarter will be the weakest the same like all the last year?.

Looking backwards, we do see some seasonality in which, as you say second quarter -- second half of the year is stronger, actually because our business becomes more and more diversified, which is definitely a positive thing. We see this seasonality a bit less clear from year to year.

But, there is nothing specific that we can say about the next year at this point..

Okay.

And do you consider to give the dividend to shareholders or stock buybacks or there is no any option on the table for these things?.

Look, we need to grow the Company. So, we do have plans to grow it both organically and by M&A. So, at the moment, as Dror mentioned, the capital, the funds that we have and that we just raised by the end of 2016 are designated for acquisitions that will help us to grow the Company. .

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Sharon 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.magalsecurity.com. Mr.

Sharon, 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 of our business. And, we will be presented in the LD Micro, beginning of December. So, you’re all invited over there. And, again, thank you very much for joining us..

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