Greetings, and welcome to the Magal Security Systems’ Fourth Quarter and Full year 2019 Conference Call. At this time, all participants are in a listen-only mode [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brett Maas of Hayden IR. Please ho ahead, sir.

Thank you, operator. Welcome to Magal's fourth quarter and full year 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 is Mr. Dror Sharon, CEO of Magal and Kobi Vinokur, CFO. Dror, will summarize the key highlights followed by, Kobi, who will review Magal's financial performance of fourth quarter and the full year. We will then open the call for question-and-answer session. Before we start, I'd like to point out this conference call may contain projections or other forward-looking statements regarding future events or 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, the un-anticipated and unknown effect of the coronavirus, including on our operations and our clients, as well as 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 requirement. You can also refer to our Web site 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, Brett. I'd like to welcome all of you to our call and thank you for joining us today. I just hope that your family and friends are well and everyone is okay with this crisis around us. For 2019, we reported $86.8 million of revenue, achieving 10% plus reduction in operating expenses that fueled the 61% in operating income. 2019 EBITDA rose 17% to $8.1 million, resulting in an expansion of EBITDA margin from 7.5% to 9.4%. We maintained an elevated level of revenue in 2019 by offsetting the Latin American contract that did not occur last year with solid execution of our strategy to expand in new markets and new verticals along with strong product and software sales. In parallel, we also maintained the high level of backlog, which was the same level as the one we had by the end of 2018. Give me just a moment. Okay. When I joined Magal in July 2018, I led in varieties of markets and with Magal for macro opportunities to identify the company's capabilities and strength. And from this we developed a growth strategy to increase revenue and improve profitability. Our team has been executing this strategy to diversify revenue sources, improving growth through expanding our geographic presence with an increased focus on critical vertical markets and aligning R&D resources to meet requirement of those verticals. We have been improving the operational performance of the business in order to increase cash generation and improve EBITDA margin, key indicator of our business, performance that drive shareholders’ value. We have made a number of organizational changes, including creating two business divisions, which improved the overall structure of the business, facilitating an increase in revenue from new verticals and geographies. Our performance in 2019 confirms that our strategy to deliver our…

Thanks, Dror. Revenue for the full year 2019 ended December 31, 2019 was $86.8 million or 6.2% decline from the last year's record of $92.6 million. The decline was due to lower turnkey projects revenue, offset by growth in product sales. The geographic breakdown as a percentage of revenue for 2019 showed increased diversification and to highlight this, I've included the comparison to 2018; Israel 22% versus 15%, North American 23% versus 26%, Latin America 9% versus 28%, Europe 22% versus 15%, Africa 13% versus 8%, Asia and the rest of the world 11% versus 8%. The revenue breakdown between Magal Integrated Solution divisions and Senstar product division, which includes also video, we have 40% of product and 60% for project. Magal Integrated Solution division's revenue declined [15%] year-over-year and Senstar product division revenue increased by 9% year-over-year. I would like to point out that in 2018 Magal had a material returning customer in LatAm with a significant revenue stream, while in 2019 our revenue from projects has been more diverse. Full year gross margin in 2019 was 44.6% of revenue versus 43.5% last year. The change in the gross margin is a function of the revenue mix between the Magal Integrated Solution division and Senstar. Our 2019 operational expenses were $32.7 million, a 10.5% reduction from the $36.5 million last year. I know that in 2018, we incurred two non-recurring expense items. Last year there was a one-time impact of $1.3 million expense related to doubtful debts, part of which was collected during 2019 as a part of the settlement reached with the customer. In addition, last year we incurred $1 million expense related to the impairment of the goodwill balance from historical acquisition. Operating income for 2019 was $6 million compared to $3.8 million in 2018. The growth…

Thank you. We’ll now be conducting a question answer session. [Operator instructions] Our first question today is coming from Thurman Willis from Magal Security Systems. Your line is now live.

Gentlemen, thank you for taking my call. I know you know I'm a long term shareholder and own quite a few shares. Just want to make a couple remarks. You had a great quarter and you had a great year and I congratulate you. Even though you're having to report on such a negative day in the market and under such dire circumstances. But looking at Magal, if we ex cash, you're trading at 18% of revenues, which is unheard of. If we ex cash and take the last two quarters, you're trading at 2.5 PE. Again, that's 18% of revenues and a 2.5 PE. I know that we have told for several years about acquisitions. My first question was a follow-up I would hope that an acquisition would be a creative, number one. And, can you please explain to me with our stock trading at $2.80, why we would not put into place 10% stock repurchase program. And then I have one follow up, if you'll come back to me after this.

So let me first discuss, answer you about acquisitions and Kobi will speak about the share. So, we have few targets in our pipeline that we have been seeing now and are in close contact with them. Hopefully, we'll be able to close the next few months as least one but again, it depends on the situation around. About a few weeks ago, I was more certain we could see happen, now it depends what we still show in the market. But that’s the group’s policy we've very strong pipeline of acquisitions. We are putting lots of effort into it and again hopefully within the next few months we'll be able to announce one M&A.

Are you saying you will be accretive?

Yes, basically all the targets that Dror mentioned could be accretive. It's one of our, I would say, wish list criteria of course. And as you know, we are selective on M&A target, because it's extremely important for us to execute M&A with strategic value and financial value to our shareholders. I would add that our general feeling now when we are in probably just in the very beginning of the global crisis related to coronavirus is that actually from certain perspective us being a company with a strong balance sheets, with no financial debt, actually it could -- at lease this is our expectation and target. It should provision to be able to not just to navigate through this crisis, and I'm talking about our going organic operations but also execute good M&A deals. Meaning that we believe that good assets, good strategic assets, will be or should be potentially available on the market and will enable us to do what we intended to do to materialize our growth plans, also inorganically for good or more reasonable prices than what we faced before and also probably a larger variety of potential targets could be available in the market due to potential financial distress. So just to the point of the stocks, this is definitely, first of all, all disappointed of course of the performance of the stocks. We totally understand your view on it and the view of the rest of the shareholders. It's really ridiculous that a company with such a relative financial strength, healthy balance sheets, two consecutive years of around $90 million revenue generation, two consecutive years of $7 million to $8 million of positive EBITDA, is traded on ridiculous multiples. Besides the frustration, we as a management we do evaluate all the available options and we say no to in the current situation. On one hand, everything is open, including potential program as you mentioned. But on the other hand, we also need your support and long term understanding that in light of the coronavirus crisis and such high uncertainty into which we need to navigate a company with almost 500 employees and complex global operations. We also need to be very cautious with regards to what do we do with cash, it's very turbulent and very much -- very turbulent time of course, so we all understand. So, all the options are on the table and are being evaluated, I would say, almost on a daily basis, because we also evaluate what we face with regards to the corona disruption also on a daily basis, because the development are really daily as you see this on the on the news.

I had one follow up and really one more suggestion. I am happy to see that you hired Hayden and Company, Brett Maas, as your IR firm. And I loved the announcement that you put out when you hired that firm to gain more exposure. I fully understand that with the present situation, you cannot travel the country and there's a lot of our IR until the uncertainty is complete. But I challenge you once this is over to allow Hayden and Company to get you on the road and I think we'll see a major difference in the stock price. And then lastly, I would encourage you not to go silent and you had good revenues this quarter even though they were down. But, someone normally thinking would think that you didn't announce anything during the quarter. I would ask that you combine some of these orders and put out press releases as to the combination of some of these orders, so that you keep the shareholders informed, especially during these uncertain times. So, thank you for letting me make those suggestions. And I believe, even with the discount on the market in general, you are the most undervalued company that I watch out of about a hundred stocks. You're probably the number most discounted company. So, I know that that will correct itself. And again, as soon as we can, I hope we can get out on the road and thank you for taking my call.

Thanks. Our next question is coming from Sam Rebotsky from SER Asset Management. Your line is now live.

Good morning, Dror and Kobi on this different day to report the numbers seen improvement, and you talked about making acquisitions that you expect to close is it in the $10 million to $20 million range. And presumably going forward, the valuation, as Kobi has mentioned, you should see more things that are a better value. And what impact has this corona had on doing your business and it say takes a certain, a couple of months, what impact do you think this will have going forward on your sales, et cetera?

So, you are asking few questions, first of all, recent acquisition, so yes, this is in the range up to revenues up to around $20 million and below, is what we are now looking at. But again, it depends how the situation will continue around the world with this coronavirus and maybe we will be able to we will find some other even a high revenue company and the strength as we able to leverage our cash and for those kind of opportunities. So this is from the acquisition side. The inference of the coronavirus is unknown. It's unstable situation. Currently, as I mentioned in my earlier discussion is that again we have struggled worldwide with many sales guys inside the countries, including technical support team. So, the guy can support and promote our sales in the countries, even if he cannot fly between different territories. So Senstar is even in a better situation than the rest of the competitor. The question is if the customers of Senstar and end users are going to do some project in the coming month or so. From delivery point of view, the operation in Israel is working. It's also required by the Israel MOD, because we support them on a daily basis. And the Stanford operation in Canada is also working and even if we'll have to shut it down for most of the people, the operation can continue to work. And so again, it’s unstable situation, we don't know what will be today, later today or tomorrow and what kind of restrictions the different governments will put on us. But the fact that we are spread all over the world makes our lives a little bit easier.

Well, that's unique. And as far as you were bidding on a lot of contracts and your backlog say was kept improving. What is your backlog now compared to the September quarter and the previous quarter? And are you bidding on a lot of jobs more than you had previously or what is the status of that?

We are bidding more. We are now focusing on those four verticals. So, we are bidding more and more accurate, understanding the customers better. Now we're bidding on a few nice and larger projects but I don't know what will be the outcome, because it depends if the customers will continue those efforts or not. But yes, we're bidding on pretty large contracts today [Multiple Speakers] and the backlog, as mentioned earlier, is in the same level of the backlog we ended 2018 or started 2019. So we kept the backlog in the same level.

Thank you. Our next question is coming from Dan Weston from WestCap Management. Your line is now live.

Just on the backlog since we ended there. Could you quantify that? I don't have the 18 ending year backlog. What was the actual figure?

It was $60 million, around $60 million.

And are you able to break that down between products and projects?

The majority, the vast majority is of course projects, since products are delivered the average delivery time of the physical products vary between two to three months. And the software license portion is basically, it's an immediate delivery, because it's a license download. So, naturally, the vast majority of the backlog is project related.

And then recurring revenue as a percentage of total is what today?

We believe it's in the area of [1.6]…

Are you seeing any growth in that recurring revenue portion of your business?

We see a gradual growth there. It takes a bit longer than our internal targets, but we definitely go into this direction. We try -- we do see a more maintenance and support contracts for our Symphony license products, and our goal is definitely to bundle our project offering with follow-up maintenance contracts. So, it's growing but not as fast as we wanted but it's in the right direction.

Let me just finish on that. The recurring revenue, what percentage of your recurring revenue is pure maintenance, software maintenance revenue?

Software maintenance revenue is, if you take, for example if you look at our software sales, so our average tax rate of maintenance and support contracts with the license is around 20% to 25%.

We can talk about that maybe offline, dig in a little bit. But can you tell us what type of margins you're receiving right now on your recurring revenue stream?

It's typically higher, generally higher than the regular sales.

Would it be safe to assume maybe 70%, 75%, or higher than that?

So it depends because we have two, project division and product division, they differ significantly on the margin level as you can see. So, for each division, the product division gross margin is typically in the area of 60% to 65%. So maintenance and support in that area would be a few margin points higher than that, project average gross margin is around 35%. So, the maintenance and support contracts, project contracts will be, to an extent, higher than that level.

I appreciate that color. You had pretty big uptick in your receivables sequentially. I think you mentioned in your prepared commentary that, you collected some of that cash. As we stand today, would it be reasonable to assume that your cash balance today is equal or higher than where it was in your end of Q3?

Yes, as of today, it should be definitely higher. The majority of the…

In the Q3 [Multiple Speakers] you’re about $55 million, I think in Q3…

So, we should be in that direction. We build extra, our AR as you can see, grew significantly by the end of 2019 versus '18. The majority of this actually went to governmental sectors. So, we do follow closely right now, especially in light of the coronavirus. But at the moment, we don't see any specific doubts.

Dror, I want to talk a little bit about some of the contracts you announced or talked about on your third quarter call, one of which was a contract with a global online logistics provider in Europe. How is that contract shaping up? You're indicating that you might be able to leverage that into more of your distribution centers. Has there been any change to that Outlook or have you received any more contracts from that particular customer?

With this customer, no, we’ve only taken deployment of that product and the semi solutions. And hopefully, once we are done with this, we'll be able to increase the number of sites we are securing. As I mentioned and what I said earlier, the logistics is a vertical we are focusing on. The online or the logistics centers of the online providers are growing like crazy all the time. And as I said also, we are looking into increasing our offering based on our video management solution, to give them a solution that manage packages movement, not only security. We are using the same security cameras, but different analytic algorithms. We already did one project like this end of last year, end of ’19 and now we are pursuing a few others like this. So, it is a major vertical it’s a growing market, very big market. And I think we can leverage our capabilities and of course the revenues from this vertical. But again we are focusing on it, part of the M&A that we are looking is also to acquire more technology in this area. So yes, it's a good one and we continue towards those.

Last couple of quick ones, the acquisition targets that you're currently evaluating. Is it safe to say that those are all products based potential acquisitions versus project based?

The one that we're looking at now, first they have both of the -- furthermore, three companies we are looking at now are, bring also technology into Magal. It's not a project, it's more a solution based companies but again, they have their own unique technology, either it's a software or hardware, or combination of both.

And then finally, since we're kind of a couple weeks away from end of your first quarter without giving specific guidance. How has that been tracking so far for your first quarter? Would you think that your results for Q1 will be somewhat similar to what you reported in your Q4?

Dan, typically actually seasonally, our fourth quarter is the strongest quarter and the second half is also the stronger half. This is mainly by the weather eventually, both projects and also product sales are targeting system integrators that work outside in the field. So North America, Europe, there is much less digging during the weaker time, so January, February are typically slower. And then the pace increases as we approach Q3 and Q4, also when the budget get released. This is the typical situation of course this year in 2020 with the current situation, we are very, very fortunate because the level of uncertainty is very high. So overall, it's still too early to know. But as a general expectation, our Q1 and Q2 are typically slower quarters, but everything should be obviously analyzed as a part of the entire year. By the way, during our conversation, I just double checked the cash balances. So to reply to your previous question and specifically, so yes, we basically are in a level of cash position similar to end of Q3. So basically this is the reflection of the cash collections that we had from the Q4 billings.

Thank you. Our next question is coming from Stephen Hansel from Eclectic Investment Partners. Your line is now live.

A couple of things, many of them have been answered. And I certainly concur with the very first speaker regarding the value of the company and the discount it's trading at relative to what we would think of value, and we've been a top 10 shareholder for many years. So, I haven't participated in the call. I'm curious as to, first, Israel’s attitude toward you’re being an M&A target, given that there are now Silicon Valley companies, startups with significant funding who are aiming at your space. Could you comment on that?

Again, I don’t think I fully understood the question. But you are asking what is Israel MOD related to our M&A, so or being acquired by foreign company?

Yes.

I don't see any major issue. All of our products -- we are not working under the MOD restrictions or laws other than Israeli law, and I don't see any major issue being owned by a foreign company [Multiple Speakers] we have taken in the part, and we don't see major issue recorded.

On the question of buybacks, I understand that that's difficult for you to take very illiquid stock and make it less liquid. On the other end to the extent that you are in acquisition mode, you can reissue those shares. I do think it's a good idea for you to go on the road and to talk about the opportunities in these four verticals. These will be where you are now, the competitors, the markets here and so forth. And I do appreciate, Brett, as the onetime I've called and he answered his own phone immediately and that is both rare and very welcome. Thank you. And I appreciate your progress.

Thank you. Our next question is coming from Ken Liddy from Oppenheimer. Your line is now live.

Just to follow up some questions on your logistics solution that you worked out in the fourth quarter. About how long did that take to execute to from start to finish?

The project detail?

Yes.

It vary between the project, the three to six months we can deploy if it. Again, we have all the tools, are in house if we need to do some development on the algorithms, so depends how complicated it then takes a bit more time. Other than that, it's pretty straightforward to take us the same as we are doing any other project and once we install the cameras and the software is implement it, so pretty fast. The only issue or something can take us a longer time is the development of specific algorithms the customer need something unique that we don't have yet.

And how large of a facility to do protect in the third quarter [Multiple Speakers] how large of a facility, how large was the warehouse?

It was something like again, we didn't do all of them yet. We got the PO but it was between one to few kilometers perimeter and the one that we did also the installation of, incorporated our VMS solution was a little bit, I’m looking at how many square feet or square meter was it, but it's a major one in Europe. I cannot reveal the names of those, actually a few customers that we're working with due to the -- they restricted us from saying their name?

Has the customers indicated that they're interested in pursuing more of these type of integration of your product?

Yes, they did.

And in a recent article interview where you talked about a goal of $150 million in revenue for, over the next two years, could you talk a little bit about how you're going to change that goal?

I don't think I mentioned two years. But anyhow it's something that we are looking at that will be based on organic growth, also some M&A that we have in the pipe. So we want to achieve it by focusing on those four verticals and M&A in those verticals.

Thank you. We reached end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Okay, thank you. So again on behalf of the management of Magal, we'd like to thank you for your continued interest and long-term support of our business. I hope that we all personally and business wide fight this crises safe and the continuing increasing the company value in the next month and years to come. Have a good day. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.