Ladies and gentlemen, thank you for standing by. Welcome to Magal’s First Quarter 2019 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 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 like to begin?.

Thank you, operator. Welcome to Magal’s first quarter 2019 conference call. I would like to welcome all of you to this conference call and thank Magal’s management for hosting this call. With us on the line today are Mr. Dror Sharon, CEO of Magal; and Mr. Kobi Vinokur, CFO.

Dror will summarize some 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 this 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 our 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 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. I’d like to welcome all to you to our conference call, and thank you for joining us today. I’m pleased with our start to 2019. We reported a strong first quarter revenue level, which is up 23% versus Q1 last year.

A fifth of our revenues in the quarter were also recurring in nature and the element of our strategies to grow this portion of the business. Our operating expenses were at $8.5 million, a bit down from last year fourth quarter, which includes some non-recurring expenses.

This allows us to bring an improved bottom line versus the previous quarter – prior quarter. We also reported an EBITDA of $1 million. We ended the quarter with $52.8 million, almost $53 million in net cash and no debt. This level of cash is more than we need to ongoing working capital.

And our goal is to leverage this strong cash position for value-adding acquisition. We’re looking to acquire technology, products to our new markets, leveraging our current business platform to bring increased sales and open up new sales channels. Our goal is to use our existing platform to others a larger total market.

Our backlog at the end of the quarter remains at a similar level of debt, which we have seen for the last few quarters, which means, while we are delivering a high level of revenue, we’re also winning business.

While as you know, it is always difficult at this early stage during the year to get a good handle on revenue outlook for the year, our pattern remains growth and full of potential opportunities. We are hopeful that we can turn a good portion of our pipeline into additional orders and revenue in the coming quarters.

Together with the whole management team, we have recently developed our strategy ahead for the coming years. Starting from 2019, the company has been realigned into two divisions, that of project and that of product. Each division has an increased focus on technology and the customers operating in their own go-to-market strategy.

In parallel to operating independently, the division will also corporate across a few strategic verticals while also sharing technologies. I believe this new structure is more efficient for us, allowing us to better share our expertise and technology across our global operations.

It also increases the focus on our customers as well as leveraging our strong technology – technological capabilities and know-how across the organization.

Starting from this quarter, we will therefore be able to add more information to our public releases, which corresponds to the new corporate structure, along an improved understanding of how we are progressing. Kobi will provide these additional details in a few minutes.

Looking more closely at our products, our Video Management Software, the Senstar and Symphony, will continue to release new provisions, improving our customers experience with our products and meeting the requirements. In continue investing in research and development, improving the growing of our products lines.

We recently announced the release of our access control product, which is module incorporating into our VMS product. Our solution is the first and new appeal to the security market. Our solution includes a wide variety of features, including video management, access control and video analytics.

The new access control abilities has further expanded our addressable market and are synergistic to our – with our solutions we already provide to our customers. In the coming months, the U.S. authorities are staring to test our products in two different areas along the southern border of U.S./Mexico. We will update you further as things develop.

During the quarter, we announced $1.2 million in electro-optical systems for military vehicles for the Israeli MoD. It represents some initial fruits of success of the integration of recent acquisition of Esc Baz, which extends our technology capabilities in the observation and surveillance market.

We also recently announced that three years – a three-year $6.7 million contract for the maintenance of perimeter intrusion sensor for an international border fence covering over 200 kilometers.

More than just a contract, it is a reminder of our system of successfully protecting international borders, demonstrating that our system, which are critical components work very well and trusted in the field.

We do believe that our experience of protecting international borders, including in volatile regions places us in a good position to provide a sensor for any border globally. In the project business, our pipeline remains very diverse and is strong and we are bidding on many opportunities in the – in many regions.

Recently, I just came back from the U.S. following the ISC West Security Conference in Las Vegas. We met our existing customers, as well as new potential customers demonstrating our latest technologies and gaining many business leads and opportunities. In summary, we are pleased with our performance in the first quarter.

This is the third year in which we have continually grown our year-over-year revenues in the first quarter. Our financial position, as well as the backlog remain strong and our pipeline is broadened with – and has many potential opportunities. And now, I would like to hand over to Kobi to summarize the financial results. Kobi, good luck..

Israel, 24%; North America, 22%; Latin America, 21%; Europe, 16%; Africa, 6%; Asia and the rest of the world, 11%. The breakout between project revenues and product revenues, which include video were 37% product and 63% projects.

Product revenues were $8.1 million, while project revenues were $13.7 million, which after eliminations combined the total of $21.2 million in revenues. Product revenues grew 14% year-over-year, while project revenue grew 21% year-over-year. First quarter blended gross margins was – were 42.3% of revenue versus 43.8% last year.

The product gross margins were 61% and project gross margins were 28% in average, both similar to last year’s Q1 margins. Operating expenses overall were $8.5 million, amounting to 40% of our revenue versus $7.5 million, or 44% of our revenue in the first quarter of the last year.

Our current level of operating expenses at around the $8.5 million and $9 million is more indicative of the levels we expect in the coming quarters.

I note that the operating expenses are significantly below those of Q4 last year, where there were some one-time expenses, including write-off and provisions for doubtful receivables and in current levels are now back to more normalized levels. Operating income was $0.5 million versus $33,000 in the first quarter of 2018.

The EBITDA, which we feel is the most representative measure of the performance of our business in the quarter was $1 million, almost double when compared with EBITDA of $0.5 million in the first quarter of last year.

We had high financial expenses in the quarter of $0.7 million, compared to financial income of $0.1 million in the first quarter of 2018. In Israel, Magal’s financial currency is the Israeli shekel and the vast majority of Magal’s cash deposits are held in the US dollars.

Because of sharp currency fluctuations compared with that of prior quarter and appreciation of shekel against dollar, we recorded a high level of non-cash financial expenses in the quarter, but it definitely can fluctuate further.

This led to a net loss in the quarter of $0.6 million, or $0.02 per share versus loss of $0.2 million, or $0.01 per share in Q1 last year. Looking at the balance sheet. Cash, short-term deposits and restricted deposits as of March 31, 2019 were $52.8 million, or $2.29 per share. This represents a little under half of our market capitalization.

As at December 31, 2018, we had $55 million, or $2.38 per share in net cash. Starting at the beginning of 2019, we adopted the new ASC 842 standard for leases, which requires leases to recognize leases on balance sheet and disclose key information about leasing arrangements.

The adoption of the standard resulted in a balance sheet recognition of additional lease assets and lease liabilities of approximately $4.5 million upon adoption. 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 [Thurman Willis] [ph]. Please go ahead..

Yes. Good quarter. Could you be a little more specific on the U.S. and Mexican border? I want to make sure I have clarification.

Did I understand you to say that you are doing testing there?.

Hi, it’s Dror. Again, a bunch of questions about the U.S. boarder. We are in constant relation and and – with the U.S. government also hired a year ago a consultant that support us over there, pushing them to put one of our – one or two of our products in the – as part of the solution once it would be defined. The current stage is that the U.S.

government is going to test few technologies. One of our technology is going to be there. And in the next one or two months, we’ll get to install our product in two different areas in the southern border to be tested by the U.S. government. So this is where we are right now.

As far as we know currently, there is no budget for technology in the southern border. But in parallel, we are pushing them and we are going to test the product and to see that we meet the requirements..

My follow-up question is, I know you had conference in New York with some analysts hoping we will plan some follow-up meetings in the U.S. to get some fund buyers in our stock of – which we have low number of institutions involved in our stock.

Can you comment on how those conversations went? And if they were well taken and if you plan more?.

Hi, Thurman, this is Kobi. Yes, indeed, we had Non-Deal Roadshow in April, and we had – and it was quite intense with a series of good meetings with existing and new shareholders. And we – basically, it’s our IR strategy to increase the involvement and share of the institutional shareholders on our stock.

W would like to increase trading volumes liquidity and we understand that it takes time. Again, we had good meetings. We plan to continue in performing such Non-Deal Roadshows during the year. And we believe that’s something that’s gradually will show in the results of this stock price..

All right. And if I could one last follow-up. Let me make sure, again, I understand. You feel that technology of Magal offers you good promise relative to the U.S.

and Mexican border, is that correct, the feedback you’re getting from the Homeland Security?.

Yes. One of our product, at least, one of them looks like it’s going to be the product of choice, at least, the technology is going to be the technology of choice for the U.S. border..

Thank you for taking my questions..

Thank you..

The next question is from Sam Rebotsky of SER Asset Management. Please go ahead..

Yes. Good morning. Good afternoon.

In the financial income, the $731,000 loss compared to $117,000 profit, what is the currency loss in both quarters?.

So in that – in Q1, the majority of the loss is attributed to the currency. As you can see on our balance sheet, we have net cash and cash deposits. So we do earn some positive interest. So naturally, assuming that there is no currency movement, we should actually – at our current situation, record net financial income.

So the majority of the losses is related to the currency..

So $730,000 is currency loss in the current quarter? And did you have any gains or losses in the previous year?.

In the previous year, we recorded a net gain. Previous year started – the U.S. dollar started with – the trend was appreciation against shekel. And this year, we see the – basically, the dollar going back and balancing itself..

Is there any judgment on how the currency will be going this year or…?.

Yes, $100 billion question..

And if you have an answer, let us know as well..

But it’s – yes, currently, at least, our – what we see in the market, the shekel against dollar is more or less constant at the current level. But there are so many speculative and non-speculative impact that it’s very difficult to know..

Okay. At the end of the year, you spoke of your highest backlog, your order and all that. What is it look like in this current quarter? Your sales were up. The profits were – because of currency didn’t show any profit improvement relative to the sales.

What is the backlog and what is the profitability going forward?.

Yes. So first of all, in terms of the FX impact on the real net revenue and OpEx, because our major operational expenses incurred in shekels and Canadian dollars. This is where our R&D centers are based and also the corporate. So actually, stronger shekel would result in some favorable impact on OpEx. So this is from that perspective.

In terms of the backlog, we are, as mentioned before, we are in – more or less in the same range of backlog, which is relatively strong and high range of backlog levels that this company experienced during the last year’s. So I hope it answers the question..

Okay. Yes, yes. And then you’ve been talking about acquisitions.

Is there anything that you’re looking at that could be closed in the next six months to a year in the $20 million sales range or…?.

Currently, the thing that we are exploring is a little below $10 million. One of them can be in a year more than $20 maybe. But we’re exploring few companies now, it’s in the beginning early stages where there’s nothing to report yet. But we’re putting lot of management attention and effort to find the right acquisitions..

All right. Sounds good. Hopefully, you could increase the profits and the stock price maybe could go up too. Okay, thank you..

Thank you..

Thank you..

[Operator Instructions] The next question is from [Ronan Raphael] [ph]. Please go ahead..

Good morning or good afternoon to everyone. I want to focus on Magal cash and cash equivalent, which are at the high level of $52.8 million, or 46% of the company’s value. Furthermore, Magal’s cash flow produces additional $1 million each quarter. This money has no yield and even causes a financial losses, it doesn’t matter why is the reason.

For the long time, we hear every conference call, the money is dedicated for a big acquisition, but companies prices are high. So if I assume no acquisition is in the near horizon. I think it’s time to reveal Magal’s value and support its shareholders and stock prices by using the money to buy back its stock.

So can you comment about this? Let’s say, we should start for $10 million each year?.

Yes. So Dror and I – I do understand the rationale in the question. We are – the company is sitting on high cash balances much longer than we planned. We – as Dror mentioned, we are – it’s our strategy to grow both organically and inorganically.

And we spend very significant portion of our time and efforts to execute the right acquisition for the company. The – it’s a constant dilemma between just spending money on any acquisition and making the right acquisition for the company that is aligned with our strategy.

So at the moment, we don’t believe as a management that cash buyback or whatever it is would – share buybacks would actually optimize what we as a company can deliver to our shareholders.

Mentioning our efforts in terms of M&A execution, we operate as a management team, as well as through our consultants globally and we do have some interesting opportunities in the pipeline. But again, it’s a balance between the right things to do and the right spending and just as an opposite to pending and just spending the money..

Thank you. The next question is from Mike Disler. Please go ahead..

Yes, good morning. Good afternoon, gentlemen. Just nice job on the sales growth in the quarter. Year-on-year, I know the first quarter is always difficult, great work. Kobi, this is just a record for you, I missed the last two sentences of your – of what you said about the change in accounting regarding the leases and some $4 million, $4.5 million.

Can you just repeat those last two sentences in your presentation portion? Sorry, I just missed that?.

Sure. The implementation of ASC 842…..

Right..

…results in basically increasing the liability part and the asset part on the balance sheet. So from the both sides of the balance sheet, we’ll basically add around $4.5 million of assets and liabilities.

The amount represents basically the discounted – on a very high-level explanation, the discounted flow of lease commitments for all our operating lease contracts..

Okay.

That’s basically just a wash you’re just complying with the law is really what that is?.

Exactly, just….

Okay..

…it’s just a bigger balance sheet..

Right. That’s all. I just wanted to make sure I heard you correctly. You anticipated that. Thank you very much, and I look forward to next quarter. Keep up the good work..

Thank you..

Thank you..

Thank you..

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 at www.magalsecurity.com. Mr.

Sharon, 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. I look forward to updating you next quarter, and you all have a good day and nice evening. Thank you..

Thank you. This concludes Magal Security Systems first quarter 2019 results conference call. Thank you for your participation. You may go ahead and disconnect..