Ladies and gentlemen, thank you for standing by. Welcome to Magal’s Third 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 Web site, 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 third quarter 2019 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. 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 demand, 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 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, Kenny. I'd like to welcome all of you to our third quarter results conference call and thank you for joining us today. First, I want to highlight that I’m pleased with the improvement in our results for the third quarter which we reported today. Revenues of $22 million are the highest reported so far in 2019.

Furthermore, our revenues were more geographically and vertically diverse than in the past. All-in-all, we reported EBITDA of just over $3 million on the bottom line, a number I am very pleased and happy with. The stronger quarter results contributed to our balance sheet, and we ended the quarter with almost $55 million in net cash and no debt.

As you know, our goal is to leverage this strong cash position for value-added acquisitions. We are actively engaged in seeking either technology products or newer markets, leveraging our current business platform to bring increased sales, and open up new sales channels. Our aim is to use our existing platform to address a larger total market.

We are currently in various stages of discussions with potential targets, and while I currently do not have news to report, my goal remains to close an acquisition in the first half of 2020. Kobi will dive deeper into the numbers in a few minutes, but I would like to take some time in talking about Magal's strategic directions in the coming years.

In the past few months, we have placed focused management effort on refining our strategy for the coming years in order to capitalize on opportunities in our end markets. I would like to spend a minute discussing the latest upgrade to our video management software, the Senstar Symphony.

We released version 7.3 which improved the user experience and provided better analytic performance and better bidirectional integration. We also continued to upgrade and advance the product while tailoring it to the vertical applications to which we are selling, to increase its attractiveness to customers and potential customers.

We also released a new product, which is part of our fiber optics product family which is one of the most affordable transponder perimeter intrusion sensor on the market. We’re already seeing increased interest for this new product from our customers.

As you may remember, Magal is now aligned into two divisions which are measured separately, that of projects and that of products. And as you know, we have also started sharing with you the revenue breakout of both these divisions so you can better understand our operations.

Each division has an increased focus on its technology and the customers it is selling to. And each division operates with their own tailored go-to-market strategy. This new structure enabled us to be focused on our end customers, but at the same time share expertise and technology across their global operations.

Within each division, we have identified targeted growth verticals which we are investing in, both in R&D and business development. Amongst other, our main target verticals are the oil and gas market, the logistics and transportation market, and the critical infrastructure.

This means bringing on the right people that understand they have experience with these verticals and tailoring our security solutions to very particular client needs. We are already beginning to see traction, and we have been winning new orders in those targeted verticals.

An example was the order we announced in October winning $2.4 million in contact for perimeter security of an international airport. We also received our first PO for a few million dollars in the oil and gas vertical from a large strategic global customer to design the security of a major distribution hub for oil and gas in Western Asia.

We see this as an important breakthrough with a key customer in one of our new strategic verticals with the potential to be a long-term growth engine for Magal.

We also recently won an important order to protect major global online retailer logistics center throughout Europe with the potential to grow our business with a customer to cover logistic centers in other regions as well as the data center.

Beyond that, we have a strong pipeline with potential opportunities, some of which are on the much larger scale. We are hopeful that during 2020, we’ll be successful in converting those into a significant order and ultimately revenue growth and profitability.

Looking at our project business more closely, our pipeline continues to get more and more diverse. While in the past our business was focused on a small number of geographic regions, our revenue today is more diverse and our pipeline contains potential bids on opportunities in many regions throughout the world.

This diversity has helped us offset the revenue reduction we have experienced in the project business in Canada and Latin America, following the delay in the relevant security budgets in both countries. Furthermore, we are winning more contracts with them, which have a higher margin and recurring revenue element.

And example was the recent $8 million order announced, of which a large portion is maintenance and recurring. The geographic diversity as well as the increasing current revenue has had the positive effect on reducing the seasonality in our business.

In summary, trends are moving in the right direction for us and while the order is never smooth, we do continue to see a positive future at Magal. Our financial position remains very strong and we hope to leverage it for growth in the coming months.

At the same time, our pipeline is broad with potential opportunities and we believe we have the strategy in place to capitalize it. And now, I would like to hand over to Kobi to summarize the financial results. Kobi, please go ahead..

Thank you, Dror. Revenues for the third quarter of 2019 were $22.2 million, 7% below those of the third quarter of the last year, but 13% ahead of those of the last quarter.

The geographic revenue breakdown for the quarter was quite diverse as follows; Israel 23%, North America 23% also, Latin America 3%, Europe 24%, Africa 17%, Asia and the rest of the world 10%. The breakout between project revenues and product revenues, which include video were 39% products and 61% projects.

Product revenues were $8.6 million while project revenues were $13.6 million. Project revenues this quarter were 13% down year-over-year and product revenues increased by 3% year-over-year.

I would like to point out that during 2018, Magal was executing on several significant projects in Latin America and Canada, while in 2019 the project activity in those areas was lower. However, we managed to compensate the shortfall by the new projects in other geographies, including East Africa, Israel, and former CIS countries.

Third quarter blended gross margins was 47.5% of revenues versus 46.4% last year. Our gross margin this quarter was at the high end of the range we normally expect. This was driven by favorable sales mix in the quarter.

In addition, we also saw a positive impact due to several maintenance contract orders, which were delayed from the second quarter to the third quarter. This impact on the gross margin was specific to the current third quarter results. Going forward in the coming quarters, we do expect gross margins in the mid-40s range.

The product gross margins were 60%, and the project gross margins were 39%. The margins were similar to those of the last year. Our operating expenses were $8 million, 11% below the $9 million in the third quarter of the last year.

I know that last year there was a one-time negative impact of approximately $0.5 million due to the doubtful debt, while the third quarter of this year we actually managed to collect $300 [ph] of this debt as a part of a payment settlement with a problematic customer.

We expect the normalized level of OpEx per quarter to be in the region of $8.5 million. In addition, we had a 10% lower level of selling and marketing expenses.

R&D was 15% higher than that of the third quarter last year, mainly due our new access control integration efforts and increased investment in product development focused on our target verticals. Operating income in the third quarter was $2.5 million, a 21% increase versus operating income of $2.1 million in the third quarter of 2018.

EBITDA, which we feel is the most representative measure of the performance and profitability for our business, was $3.1 million, up 18% compared with EBITDA of $2.6 million in the third quarter of last year.

Net income attributable to Magal’s shareholders in the quarter was $1.3 million or $0.06 per share versus a profit of $1.5 million, or $0.06 per share in the third quarter of last year. Cash, short-term deposits and restricted deposits as of September 30, 2019 were $54.6 million or $2.36 per share.

As of December 31, 2018, our cash was at a similar level to that of the end of the third quarter at $55 million or $2.38 per share in net cash. That concludes my remarks. We would be happy to take your questions now.

Operator?.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions]. The first question is from Sam Rebotsky of SER Asset Management. Please go ahead..

Good afternoon, Dror and Kobi.

I want to understand the visibility of your backlog and pipeline? Is your backlog higher than the end of the previous quarter? And the pipeline, how is – how large is that and how long does it take a pipeline to become a backlog?.

Hi, Sam. Obviously, the backlog has its trends and it’s not – it is within a certain range. If we compare the current backlog at end of this quarter to a similar point of time at last year’s third quarter end, we are slightly above that level, and we do see a positive trajectory of backlog growth..

And --.

But compared to the previous quarter – is the backlog compared to the second quarter? And the pipeline, how many months does it take to convert pipeline to backlog? How long do you work on the customer?.

Okay. So it's divided – Hi, Sam. It’s Dror. It's divided to two. On the product side – on the product division, the cycle between the opportunity in the pipeline to closing a deal and then bill it is pretty short and can vary between a few months to six months or so. So over there, the backlog is – the turnaround of backlog is pretty fast.

On the project division, usually it can take a year or two years before an opportunity in the pipeline can become a purchase order. And then to bill it, it takes between few months to a few years. Currently, the pipeline is pretty diverse and very strong.

We are talking about hundreds and hundreds of millions of dollars and the range of between $300 million to $400 million in the pipeline..

Okay.

Now on the profitability, when we look at the ups and downs, whether it's general and administrative, is there a way to – are you able to get some kind of consistency that profitability is more consistent, and you had in the financial expense, what item was in financial expense that wasn't last year?.

So, first of all, in terms of the profitability, Magal I think is a company that is very – it's quite difficult to measure on a single-quarter basis. So definitely when – part of it is project activity which is currently around 60% of the total business.

So you definitely need to look – to zoom out and look at several quarters and average more or less especially the operating expenses. In terms of the financial loss, the financial expense that we suffer, as you can see our balance sheet is very strong. We have actually a net cash position. We don't have any financial debt.

And also you see that the dollar amount of cash is actually increasing. So, the financial expenses that we record on our P&L related to the valuation -- non-cash accounting valuation of many of the USD denominated deposits that are held by our Israeli ultimate parent company in Magal which reports in Israeli shekels.

During 2019, the Israeli shekel gets stronger and stronger against USD, and therefore this valuation is a result in our non-cash financial expenses. This is something that if the dollar gets stronger, it could also reverse. So we're not too much excited about it. It does not reflect what's happening with the business..

Okay. So the financial is the shekel, the currency exchange.

Is that accurate?.

Yes..

Yes. Okay..

Is there any way – the objective is to make profits and we want consistency. Whether it's six months or nine months if it's going from quarter-to-quarter, it would be nice to sort of – because we don't have the total number on the backlog what it is – we just have inferences to sort of judge profitability going forward.

How should we do this because it's sort of inconsistent?.

I would say that you should look on us probably on an annual basis comparing the results and the size of the turnover that the company produces.

You can definitely see when you compared Magal results in 2018 and 2019 versus what the company used to deliver in average on an annual basis in the past years, we definitely see a step up from the areas of 60 million plus/minus of annual turnover to the areas of 90 million/80 million that we experience right now and obviously the idea is to grow it further.

In addition to that, from the profitability perspective, as I mentioned before, EBITDA is a much more appropriate metric to measure us because it eliminates the financial adjustments related to the valuation of the different currencies, taxation and et cetera..

Okay. Just one further question.

As far as the acquisition in the first six months of the next year, how substantial is it? And I presume you’ll use cash instead of stock? And could you sort of indicate the size? Is it a 20 million, 30 million? Is it product? Is it – what you're looking at?.

So, at the moment, looking at our M&A pipeline, currently we see – the targets that are, I would say on a high priority or high advancement stage are targets in the area of between $10 million to $20 million of turnover, and we --.

All of them are technology-based companies that gives for our new verticals or the vertical accounting focus that those companies gives us a higher level of solution and double technology. So, they bring with them market share and also technology..

And you could integrate it to your current product level and hopefully get more business through the integration?.

Yes, that is the idea..

Okay. Good luck. Hopefully, we see greater profitability whether it's EBITDA or whenever and more consistency. Good luck..

Thank you..

Thank you..

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

Congratulations on the quarter. Thank you for taking my questions. I have two questions. Number one, we haven't heard anything on the wall relative to Mexico and the U.S.

and I wonder if we're still in the running on that and how our testing’s going?.

Okay. So we are looking – we are waiting to get some clarification from the U.S. government to see where we stand in this project. It’s not clear yet what kinds of technology they’re looking for, and if our technology is suitable for them. It could take some time because as far as we know, they didn’t decide yet..

So no one’s been awarded a contract yet?.

For technology, I don’t know. As far as we know, there’s no one awarded yet technology-wise. I think they already awarded few contractors to build some part of the infrastructure of the wall, meaning either a metal wall or a concrete wall, but no technology yet..

But not technology.

And we don’t know how soon that will be?.

No..

All right.

Now talking about the acquisition, did I understood from the previous caller to say that it would be between 10 million to 20 million and will it definitely be accretive?.

The current – the selection of targets that I referred to are accretive at from EBITDA perspective, but it’s very dynamic pipeline so we can’t promise anything.

Definitely would like to see on our – in terms of our wish list, we want definitely to have an accretive acquisition and to spend our resources on advancing our technology and sales rather than turnaround of unprofitable businesses..

But we did say it would probably be somewhere between 10 million and 20 million.

Is that correct?.

This is what we’re currently working on, yes..

Okay. Can we have – last question, do we have any planned – we still have institutional ownership. Your stock just trades at such tremendous discount to valuation with cash, EBITDA, backlog, et cetera, have put markets at an all-time high. You’re just trading at a tremendous discount.

Do we have any plans whether it be stock repurchase or anything to improve our stock price to get it up to where the market cap where it should be, because trading at $4.15 to $4.18 is just not fair to Magal’s shareholders when the company is seemingly worth so much more with you saying you have 100 million in backlog and 300 million to 400 million in pipeline.

It sounds like you just have tremendous, tremendous maybe momentum than you’ve ever had and our stock price languishes?.

Okay. So first of all, just to correct you. We didn’t mention 100 million of backlog, but I think Dror spoke about the pipeline, that’s 100 million. I do note the comment. However, currently we don’t have any specific plans for share buyback or any sort of – or this type of activity. We mentioned the core verticals that we were focusing on.

Each vertical we do believe that we have an opportunity to have a leap forward from a commercial perspective and M&A is definitely a very significant tool for us to do this and to increase our – improve our offering to customers and grow the business. And currently the cash that we are holding is definitely not our long-term plans, not at all.

But currently we do see a potential use of this cash for the growth of the business and we believe that following that, the share price eventually will bring itself to where it should be..

Well, I’m sure you do agree with me that taking out $2.36, you’re roughly trading at about $1.80, $1.90 a share which for this company you do agree that you feel like that you’re undervalued..

The math is correct..

Thank you for taking my questions..

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

Good afternoon. Congratulations on the solid quarter.

Could you talk a little bit about the pipeline as far as the graphic makeup and also your vertical makeup [indiscernible] see in the pipeline?.

The pipeline is diverse between the three main verticals. On the higher volume is the oil and gas one, which is higher project or higher level of projects and the low one comes from the critical infrastructure and logistics which are much more opportunities, but in lower amount. Oil and gas is Western Asia and North Africa.

Logistics is mainly in Europe. Critical infrastructure is all over the world..

And are you looking at – within that pipeline, are there more governments interested as far as the projects’ concerned, like governments or is it industry, corporate corporations?.

It's more industry corporation, less government..

And as far as the oil and gas, are you any closer to closing anything than you were in the previous call?.

Hopefully, yes. It looks like we're in a positive direction with a few major players. One of them is pretty close, but it's a project and we have to wait and -- patient to see where it's going..

Also your majority is owned by FIMI.

Is there any type of partnerships that you could form with some of the companies in their portfolio in Israel to maybe capitalize on each other's expertise?.

No. Currently, this is not something that we focus on..

Understood. And with regards to the pipeline, do you consider the project in the U.S. – the potential project in the U.S.

border as part of that pipeline?.

No. It’s not the major part of the pipeline, because, again, it’s more technology-oriented, not project-oriented. So it's more products that are being promoted by Senstar or the division – the product division and less the project..

Understood.

So the 300 million to 400 million isn't considering any potential opportunities for the most part at the border at this point?.

It's not a major part of the pipeline today..

Okay, great. Thanks for taking my questions..

Thank you..

The next question is from Bruce Tuchman [ph]. Please go ahead..

Hello, gentlemen. Good morning. Good afternoon. I don't have a question but I just want to make a statement and you could feel free to respond or not. But I've been a shareholder for a very long time and I've been listening to conference calls for a very long time and they're always very positive and they're always very congratulatory.

But the stock is trading at historic lows, which I probably don't have to remind you. And the stock market is a beauty contest. And we're just not showing the judges what's good about the company, whether it's increased earnings or new contracts or closing deals or whatever.

But I just feel very disappointed in the price of the stock which in turn is a reflection of the performance of the company. So, as great as the company is and I've been a faithful shareholder for many years, as I’ve said, it's very disappointing.

And I hope that you're going to address it maybe backwards, like, okay, how do we make the stock look better and what is it going to take? And are we going to close deals? Are we going to make new partners? What are we going to do to improve the stock price because that’s the bottom line? That's what the shareholders care about is the stock price.

And this has been an extremely disappointing run for 15 years, 20 years trading at historic lows. That's my sincere feeling and you can respond or tell me to have a nice day. Thank you..

Anyhow, you could have a nice day..

So, Bruce, you are – we share the disappointment on the stock level with you, of course. And we totally – it definitely concerns us as well. We do – if we look at last year, for example, in terms of what we as a company, as a management can do? We try to put more and more focus on as you say beauty contest.

We try to improve the level of I would say transparency or provide more and more data to the markets to help the investors to evaluate our performance and do their job as investors and then to make the right decisions. We tried to attend more shareholders or investors events.

We do acknowledge that also our internal capabilities are to do the marketing of the stock – are not endless. So, eventually, we have our limitations of resources. But it's – from our perspective, it's definitely – it's one of the focus points. We do take into consideration this aspect that you raised and definitely we are not happy with..

Well, I hope you're successful for my benefit and for your own and all the shareholders. Thank you..

Thank you..

Your next question is from Mike Distler of MNX [ph]. Please go ahead..

Yes. Good afternoon, gentlemen. How are you? I, like all the previous speakers, have been a long-term shareholder as well. I’m just going to pipe in quickly. It's good to see the products and the recurring revenues stream as a percentage of total revenues improving because that's a higher profit margin clearly. So I'm pleased for that.

I just want to make note. We've had this cash on the books for a long time. With interest rates in the U.S. so low, clearly we can figure out a better way to leverage that cash.

So when you do pull the trigger on that next potential merger and acquisition target that some combination of utilizing the low debt on our behalf and still maintaining the cash in the hopes that if it's a mildly accretive acquisition, you have some cash on the books, you do take on some small low price debt.

Hopefully, the stock price rises and therefore it becomes currency for you – for us, for all the shareholders. But for you in management instead of like thinking of the cash as the cash, debt as debt, actually the equity would become the currency by which you could make the acquisition after the one that you're looking at, or two down the road.

So I'm just pointing that out. I think that's what many people here, the undertone and certainly Mr. Willis and others on this call.

Finally, I just wanted to ask you about your visibility and if you can provide some color on your fourth quarter numbers because we're already in mid-November, you should have some handle on? And obviously I know you can't say too much, but I just wanted to get a general feeling for how the quarter is going? Thank you..

Thank you, Mike. Thank you for the first comments. Definitely noted and appreciate it. In terms of – obviously there is still some time to go until the year end, so there is still – it's still a range. But what we see is that Q4 performance will be probably similar to the range of the quarters that we have seen during this year..

Okay. Thank you for the color. And I will get back in the queue. Thanks for your time. Good luck, gents..

Thank you..

Thank you..

There are no further questions at this time. Before I ask Mr. Sharon 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 Web site, 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. We’re always looking for ways to do it much better. I look forward to updating you next quarter. Have a good day. Thank you..

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