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Magal Security Systems Ltd. (NASDAQ:MAGS)

Q4 2012 Earnings Conference Call

March 21, 2013 11:00 ET

Executives

Ehud Helft - CCG Investor Relations

Eitan Livneh - President and Chief Executive Officer

Ilan Ovadia - Chief Financial Officer

Analysts

Mark Lanier - Pegasus Capital

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Magal Security Systems’ Fourth Quarter 2012 Results Conference Call. All participants are present in a listen-only mode. Following management’s formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded March 21, 2013.

I would now like to hand the call over to Mr. Ehud Helft of CCG Investor Relations. Mr. Helft, would you like to begin?

Ehud Helft

Thank you, operator. Welcome to Magal’s fourth quarter and full year 2012 conference call. I would like to welcome all of you to the conference call and thanks to Magal’s management for hosting this call.

With us on the line today are Mr. Eitan Livneh, President and CEO; Mr. Ilan Ovadia, the CFO; and Mr. (indiscernible), Controller. Eitan will summarize the year and the quarter, followed by Ilan who will review Magal’s financial performance in the quarter and in the year. 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 and 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 would in fact occur. Magal does not assume any obligations to update this information. Actual events or results may differ materially from those projected, including as a result of changing market trends, reduced demands, and competitive nature of the security industry as well as other risks identified in the documents filed by the company with the SEC.

And with that, I am ready now to hand over the call to Eitan. Eitan, go ahead please.

Eitan Livneh

I would like to welcome you all and thank you for joining us today. We are very pleased with our performance in both the fourth quarter and 2012. Bear in mind that in 2011, we delivered a substantially large and short-term African Cup of Nation project. Excluding the unusual high contribution of this project to our 2011 results, 2012 as a whole is a great year both in the terms of top and bottom line.

We delivered revenue of $77.7 million for the year with each quarter showing a stronger level of revenue. Our substantially good growth and operating margin also demonstrate the business that is running efficiently on all cylinders. We are very much proud of this achievement, and I believe our business is in a much stronger shape than it was few years ago. In particular, our focus on the emerging market of Africa, Latin America, and Asia is more than compensated for weak markets in Europe and North America.

Our strong balance sheet provides us with significant financial flexibility more so than we have ever had in the past and gives us the ability to capitalize on opportunities as they may arise, such as the Siebel, which we will discuss in few minutes. We continue to look for synergistic markets in which we can enter and bring significant value. Given our success in emerging economies, we are also using our financial strength to expand our activities into various targeted regions. As I mentioned in the past, this is a key part of our strategy that of expanding our presence into key and growing homeland security markets by establishing a strong local presence. This activity significantly expands our addressable markets and increases our potential over long-term. This also allows us to provide better support for both our current and future customer base and enable us to gain strong referrals for additional businesses.

We entered into Brazil market and we have setup the company and recruited people there. Brazil is a market in which we see very strong opportunity and needs for homeland security in the coming years. With regard to our joint venture in India, it continues to proceed according to plan. At the end of 2012, we began offering an integrated suite of solution, combining protection in both the physical and logical worlds. To further our penetration of the increasingly importance of cyberspace, in January, we purchased WebSilicon, offering unique monitoring solution for networks. Our new solutions optimized for critical sites monitor, detect, and protect against abnormal network activity within and close to the protected sites.

Our logical security solution protects the assets and the network, such as the co-protection on sites utilities, information system, and also security network, which by itself maybe vulnerable to cyber intrusions. We have expanded our Fortis4G management system to support cyber security by adding the functionality to detect in response to the cyber events. These pure cyber tech or combination of cyber with physical threats, Fortis4G monitors suspicious activity in the communications, landline, mobile, and any other wireless channel, in addition to its traditional use of monitoring alerts from physical security sensors and systems.

We foresee very strong potential due to many marketing and sales synergies by being able to sell a fully comprehensive solution to our customers. And we already see first sign of customers’ interest in our integrated solution. We believe that our early move into this market enables us to become a leader in the convergence of physical and cyber security.

Moving on to our project and market summary, as I mentioned, our business maintained positive momentum in the emerging regions of Africa, Latin America, and Asia. While there are early sign of improvements, our business activity in West Europe and North America still continued to show weaknesses, and we are seeing delays in projects to which we are supplying products. We believe that this related to the more general negative economic climate in these regions.

Africa continues to remain strong and is one of our major target markets. We continued working on our project to secure the Port of Mombasa in Kenya and will still have some work remaining in this project in 2013. Our pipeline in Africa remains strong and we look forward to updating you if and when we will win orders.

Latin America remained an important target for us and we continued to see strong traction there. As I mentioned, we opened a company in Brazil, a country where we see significant potential in the coming years. In Asia, in particular in India, business continues to be robust and we are executing on a number of projects. We are currently working on protecting some industrial facilities, including nuclear power station and chemicals plants. In Israel, we recently announced a three-year maintenance contract worth almost $8 million for servicing homeland security infrastructure. This contract is a strong sign of confidence in our technical skills and ability from a domestic customer.

Looking ahead, our pipeline remains strong and we have number of opportunities out there that we feel good about. We look forward to updating you on our progress over the coming quarters. In summary, we are very proud of our achievements in 2012 and in the solid turnaround of our business over the past two years. Magal’s business platform is much improved demonstrating profitable growth from a diverse mix of revenues with high cash generation and improving margin. Magal with over $41 million in cash is in the stronger position it has ever been, and we look forward to continuing to unleash our potential in 2015.

I will now hand over the call over to the Ilan for financial review. Ilan?

Ilan Ovadia

Thank you, Eitan. Revenues for the fourth quarter of 2012 totaled $22.2 million. This was below revenues from the fourth quarter of 2011 revenues, which were at $33.7 million. However, as Eitan mentioned, it is important to bear in mind that in the third quarter and fourth quarter of 2011, we received a very short-term high revenue project in Africa, which significantly boosted our revenue. And the revenues of the fourth quarter are well in excess of fourth quarter’s revenues from previous years.

Sales by geography in the quarter were as follows: North America 15.4%, Europe 17.6%, Israel 20.3%, South and Latin America 21.8%, Africa 15.9%, and the rest of the world amounted to 9%. The full year of 2012 revenues were recorded $77.7 million compared with $88.6 million as reported in 2011.

Gross profit for the quarter was $10.1 million, or 45.7% of revenues compared with $15.4 million or gross margin of 45.8% in the fourth quarter of last year. In both the fourth quarter of 2012 and the fourth quarter of 2011, gross margins were at the high end of our normal range due to the product mix delivered in the quarters. Gross profit for the year was $33.5 million, representing 43.2% of revenues. This is compared with $39.5 million, representing 44.6% of revenues in 2011.

Operating income in the quarter was $3.2 million, or 14.5% of revenues. This is compared to an operating income of $5 million, or 14.8% of revenues in the fourth quarter of 2011. Operating income for 2012 was $5.6 million, representing 7.2% of revenues compared with an operating income of $9.8 million, or 11.1% of revenues in 2011. Net income in the quarter was $1.3 million. This is compared with a net income of $4.3 million in the fourth quarter of 2011.

Earnings per share in the fourth quarter of 2012 was $0.08 compared with earnings per share of $0.27 in the same period last year. Net income for 2012 was $4.1 million, compared with $9.8 million in 2011. Earnings per share for the year ended December 31, 2012 was $0.26 compared with $0.78 in 2011. As of December 31, 2012, the company’s backlog was $22.2 million compared with $50.1 million on December 31, 2011. Cash and short-term deposits net of current bank debt as of December 31, 2012 increased to $41 million or $2.55 per share compared with cash and short-term deposits net of current bank debt of $32.5 million or $2.06 per share on December 31, 2011. The increase in cash during 2012 was finally due to a positive operating cash flow of $5.7 million during 2012. That concludes my remarks. We would be happy to take your questions now. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) The first question is from Mark Lanier of Pegasus Capital. Please go ahead.

Mark Lanier - Pegasus Capital

Congratulations on your 2012 year. I wonder if you could shed more light on the acquisition of WebSilicon perhaps informing us of what their revenue base was on a trailing basis, and also whether it was a cash or a stock purchase or any other additional information you can provide? Thank you.

Eitan Livneh

The acquisition of WebSilicon, first of all, WebSilicon is a small company based in Israel software group of about 15 people. Their ongoing business in the last year is in the value of $2 to $3 million and mainly in network management activity I would say. We acquired the company as a platform to grow or to build expansive logical and cynical solution, which we think will be required in the near future when we speak about critical assets. As regarding to the way the acquisition was done, it was done partially by cash and partially by the stocks (opened weren’t) solid in part by internal plan. So, it’s a combination of these three measures.

Mark Lanier - Pegasus Capital

Could you also talk a little bit more about the pipeline and the scale of deals that you maybe looking at to give us an idea of the range, the demand, our business was particularly large or there are other opportunities of comparable size in the pipeline, some additional information in that regard would be helpful? Thank you.

Eitan Livneh

In general, our pipeline is comprised of many different type of projects. Some of them are small, small, I mean, few hundreds of thousands of dollars, and some of them are medium-sized the level of millions. The large project of last year, which were the African Cup of Nation was unique and not a very common project by its size. It was over $35 million, but we don’t have the similar one in our pipeline at this point. We have a nice pipeline with many different activities, whether they are in India and in Latin America as well as in Africa, I would not go into the details of course, but it varies from different sizes.

Mark Lanier - Pegasus Capital

I mean, if I may ask one final question, the news has been filled with information about corporate hacking, as well as some high-profile attacks in the Algerian gas plant, the airport in Belgium, has that accelerated interest in perimeter security, as well as cyber security, do you see the pipeline rightness and readiness improving as a result of that, perhaps you give some insights in that regard? Thank you.

Eitan Livneh

Definitely, the fact that the world is now much more aware to the Siebel domain and the different attacks, whether it was in an airport or in a bank institution whatever creates the better understanding. If I would see already that the request we are facing is the matured, it’s just the beginning. We have enhanced very few opportunities in which we see that understanding coming and materialize. But that is the reason that we entered that world assuming and hope that this will grow and we will be there when it will happen and it’s just the beginning.

Mark Lanier - Pegasus Capital

Thank you. I’ll return to the queue.

Operator

(Operator Instructions) We have a follow-up question from Mark Lanier of Pegasus Capital. Please go ahead.

Mark Lanier - Pegasus Capital

I would be interested in your comments about the targets for operating income and the variability that you see going forward and whether you believe over time the operating margins can improve from their admirably high levels, again, some additional insight in that regard would be helpful?

Eitan Livneh

In general, the operating income is at that level. I wouldn’t expect and I wouldn’t tell you that growing the business, we will see a major change in this number. It can vary in 2% to 3%, that’s it, depends of course, on the mix in our case as we are supplying both product sensors to other integrators, and we are dealing with projects, the mix create the difference. So, it is very much depends on the way – it’s ways between these two elements and now the Siebel, which we are now just starting will see and hope that, that will help to improve, but that remains to be same.

Mark Lanier - Pegasus Capital

Thank you. I wish you good luck.

Eitan Livneh

Thank you very much.

Operator

There are no further questions at this time. Before I ask Mr. Livneh to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available in three hours on Magal’s website, www.magal-s3.com. Mr. Livneh, would you like to make your concluding statement?

Eitan Livneh

Yes. On behalf of Magal management, I would like to thank you for your continued interest and long-term support of our business. I would like to thank my staff for their hard work over the past few quarters. If you have any questions, feel free to contact me, call me or my Investor Relation team, whose contact details are on the press release. I do look forward to speaking with you and updating you again next quarter. For those of you that are following the Jewish tradition (indiscernible), happy Passover. Thank you all.

Operator

Thank you. This concludes the Magal Security Systems’ fourth quarter 2012 results conference call. Thank you for your participation. You may go ahead and disconnect.

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