Greetings, ladies and gentlemen and welcome to the Magal Securities First Quarter 2020 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Brett Maas of Hayder IR. Thank you, sir. You may begin.

Thank you, operator. I would like to welcome all of you to the conference call and thank Magal’s management team for hosting this call. With us on the call today is Mr. Dror Sharon, CEO of Magal and Mr. Kobi Vinokur, CFO. Dror will summarize key financial and business highlights, followed by Kobi, who will review Magal’s financial results for the first quarter. We will then open the call to questions and answers. Before we start, I would like to point out that 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 as 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 unanticipated and unknown effect of the coronavirus, including on our operations and on our clients, 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, 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 website at magalsecurity.com for the most directly comparable financial measures and related reconciliations. With that, I would like to now turn the call over to Dror. Dror, please go ahead.

Thank you, Brett. I would like to welcome you all to our call, and thank you for joining us today. I hope that everyone’s families and friends are safe and healthy. For the first quarter of 2020, we reported revenue of $17.4 million by reducing operating expenses by 9% to deliver operating income of $237,000. Year-over-year, we improved net income by almost $1 million to $439,000, primarily due to currency valuation changes in the quarter, and reduced EBITDA of $723,000 for an EBITDA margin of 4.1%. We delivered another quarter of positive cash flow with $4.7 million in cash from operations. I am pleased with my team’s efforts to support our customers’ closing business and manage our cost structure. The first quarter is typically seasonally weaker quarter due to limited outdoor access in Europe and North America and Asia. This year’s first quarter compare also – it was also with – impacted by several million dollars of revenue from the Latin America project completed in the first quarter of 2019. During the quarter, we implemented several key initiatives focusing on the safety of our stakeholders while also providing our businesses continuity and opportunity. These measures, allows us to remain profitable for the quarter. In recent years, we have improved the operational performance of the business, increased cash generation and increased EBITDA margin key indicators of our business performance that drive shareholders value. We have made several organization changes, including creating two business divisions to improve the business structure and facilitate growth from new verticals and geographies. Our strategy has improved margin and profitability. Higher gross margin is primarily related to the increase in Senstar’s gross profit, driven among other factors by Symphony, our video management solutions software and our enhancement to this robust flexible platform that has increased its appeal…

Thanks, Dror. Revenue for the first quarter of 2020 was $17.4 million, a decline of 17.7% compared with the revenue of $21.2 million in the first quarter of 2019. The decline in the first quarter revenue was primarily due to the commencement of the large projects in Mexico in the first quarter of the last year, and partially due to the impact of COVID-19 on our Magal Integrated Solutions and Senstar Product Division sales. I note that usually the first quarter is our seasonably weakest quarter, which I will break down as a percentage of revenue for the first quarter was as following: Israel, 21% versus 23%; North America, 25% versus 22%; Latin America, 5% versus 21%; Europe [indiscernible] Africa, 20% versus 6%; Asia and the rest of the world, 12% versus 11%. The breakout between Magal’s Integrated Solutions and Senstar Product revenue was 58% for products and 42% for projects. Magal Integration Solutions division revenue declined 24% year-over-year and Senstar Products Division revenue declined 6% year-over-year. First quarter blended gross margin was 45.8% of revenue versus 42.3% last year. This gross margin increase was primarily driven by high gross profit contribution related to the mix of sensors and software products sold during the quarter. Operating expenses were $7.8 million, an 8.8% reduction from the prior year first quarter operating expenses of $8.5 million. The reduction in operating expenses is attributable primarily to payroll-related actions, such as delays in hiring and reduction in vacation liability as well as reduction in other expenses such as travel and marketing. Operating income was $237,000 in the first quarter of 2020 compared to $471,000 in the year ago period. Financial income was $470,000 compared to financial expense of $731,000 in the first quarter last year. This is an accounting effect we regularly experience due…

Thank you. [Operator Instructions] Our first question comes from the line of Todd Schefflin, Private Investor. Please proceed with your question.

Good day, everybody. Good day. I wanted to ask you two questions. One is what can we expect from Senstar in the coming months as far as PR to educate the public and the different end users out there about the products that Senstar has for nongovernmental, mainly in the multifamily real estate and other real estate arenas? And two, can you also shed light on any activity with the United States government regarding electronics portion of the border wall?

Okay. So thank you for the question. About the first one, after we started today, we did a very big webinar, hundreds of people participated in it, to reveal our new Symphony feature that we – that I just talked about in the call. And later this year, we’ll do more and more sessions like this and including PRs to reveal our new technology and new offering to the different verticals and to open it to the market. So probably today, all of you can see a new PR that we just launched describing this new product that we added to our portfolio. So this is one. Can you repeat your second question, please?

Yes. I just wanted to know...

You talked about – yes, yes, yes you talked about the southern border and the U.S. government. Okay. So we talked about it in our previous call. It’s not in our focus. It wasn’t in our pipeline for 2020. We understood that we – the amount of investment is too high. And there’s nothing firm on the U.S. government side, adding technology to the world. There are some agencies that adopt our technology and some that who failed to pass in the past. So we decided, frankly, not to pursue it and wait to see if there is a tender, and we will participate in it, if it can. If not, we will not. But currently, as far as we know, there’s not too much investment and technology on the southern border. Hello?

Thank you. Our next question comes from the line of Sherman Willis, Private Investor. Please proceed with your question.

Thank you for taking my questions. Excellent quarter under the circumstances. I have two questions. The first question is, where are you seeing opportunities for growth in this environment, in other words, closing business pipeline growth? And can you specifically stay with your announcement on the safe spaces video analytics solution, what that might provide in the way of revenue? And then I have a follow-up question.

Okay. So about your first question, we see the opportunities in growth in few verticals. In the short term, I assume that the logistics is a very important one. The amount of packages that are running around the world are huge. People are buying more and more online and we already closed few deals with logistics providers worldwide. Just at the end of last year, we closed protecting almost 20 sites of one of the major logistics provider. We cannot reveal its name. And we have many others. And this market is growing with or without COVID-19 swing, and we are focusing over there and training our sales team and technical support guys to pursue this market. What we are doing on the Senstar side, from the video management tool that we have is what we just described as Safe Spaces, meaning we see there’s an opportunity to support different industries, different verticals, adding them this capability, unique capability to their VMS. Either it’s our VMS or one of our competitors’ VMS it can be an add-on to those VMS’s. And by that support, those organizations to get back to business in a more safer way. So those are the things that we are focusing currently in the near and short-term.

And you didn’t speak to the new announcement that you had today relative as to what revenue that might be able to provide. Can you give us a little color?

It’s pretty – no, we just launched it today with a very big webinar we did, as I mentioned. It’s VMS plus unique analytics developed, especially for the COVID-19 by the Senstar R&D team. We did this in a very – in amazing short time and it’s very nice and well-built platform. How much money it will generate? It’s I think too early to say. Probably, after a week or so, when the people will start to download this feature from our website and we’ll see some traction, then we’ll be able to measure better what is the future business can come out of it. But it was a huge effort on the R&D team in Canada. And we pretty much appreciate the way they did it in such a short time.

Thank you. My second question is your stock is trading like at $2.90. And I want your thoughts on the company’s repurchase program. And while cash is important, but as the stock fell to $2.40, basically cash in the company, to me, the best use of cash would be buying stock. With less than $6 million of your $55 million, you could repurchase 10% of the outstanding shares. And I think this would show investors faith in the company and be the best use of cash. Where do you stand on a repurchase program with the stock trading at such low levels?

Thurman, this is Kobi. So I could agree more with you. Our stock deserves a bit higher valuation than it is right now, very close to cash. We proved year after year that it’s a stable business. We carry a very nice level of backlog. We’re improving our margins, growth profitability margins and operationally, we continue to invest in our future. You just saw a taste of what we do right now in this turbulent period and our technological offerings. So the company is not just in business, it’s executing a midterm, long-term strategy. So the valuation is indeed problematic. The cash, the stock repurchase program is something that we discuss internally. We also have this subject raised, and we understand why during the recent investor’s calls, we are – it’s one of the things that we are looking at. It’s definitely one of the things that could be done. However, at our current stage, we do everything to stick to our midterm and long-term goals, which includes execution of M&A transactions in a significant – relatively significant volumes and magnitude to boost the business inorganically. We invest in technology and in organic growth as well and added this to the high uncertainty that we currently see in the industry and the market, I mean, economic environment. This is not – at the moment, this is not the leading option. But this is something that is on the table and we review it.

Thank you for that. And if you would get – I’d like for you to come back to me in the – I’ll get back in the queue, but I’d like for you to come back to me because I have a couple of follow-up questions. But your answer to that, I thank you very much, but I’ll have a more reason to repurchase your stock, in my opinion. Thank you.

Thank you, Sherman.

Thank you [Operator Instructions] Our next question comes from the line of Sam Rebotsky with SER Asset Management. Please proceed with your question.

Good morning, Dror. Good morning, Kobi. I hope everybody is doing well. Magal seems to be holding its own. Now as far as the backlog, has backlog decreased from the previous quarter? And what do we see as far as improving the backlog?

So specifically, this quarter, we saw some decrease in backlog, a decrease of $2 million. And overall, even after this decrease, the profit continues to be strong, and it’s high levels comparing to previous years. We do – we did start seeing by the end of the quarter, some delays in things, in order bookings, as a result of COVID-19 crisis. And this is something that basically caused a lower-than-planned order booking in comparison to the revenue level.

Okay. Well, good luck in improving backlog. As you mentioned, you’re talking about closing on two acquisitions during the current year. Could you sort of give a range in the sales of these acquisitions? And are you getting a better deal based on the economy, etcetera? Fortunately, you have a substantial cash. So, could you talk about the acquisitions? And when do you expect to make them in this size?

Yes, so size-wise, Dror?

Okay. Kobi, a few words about this, first, size-wise, we are talking about between the $10 million to $20 million in revenue. We have a few of those in front of us. But the current situation is a little bit holding back. People are rethinking and we want to reevaluate the valuation of those companies. So it will take – I think, first, we need to be able to fly and meet and discuss face-to-face those companies again. And second, we’ll have to reevaluate the valuation of the companies because things are changing. Some of them were in verticals that heated a little bit. So, I want to see what is the focus that they can provide us and what assurance they can give us on this focus and of course, what is the risk on our side. So this was the plan, and this is still the plan, to acquire at least two – to do at least two acquisitions in this range, but we’ll have to wait and see how things are evolving in the world and in the different verticals that we are exploring.

Well, that makes sense, Dror. So, each one is $10 million to $20 million. Have they indicated on their finances? Have their finances slipped or – I mean that they could submit to you without seeing them?

No. We know the finance of those companies. Go ahead, Kobi.

Sorry. We’re talking to these specific entities that are private companies. So of course, there is some delay in availability of financial information. We are in constant contact with them as well as with other targets. And there are always new targets in the pipeline. I have just to add to what Dror says that so far, we are 2 months, 3 months within the crisis. We still didn’t – in the M&A dynamics so far, we still didn’t see a huge impact in terms of the expected valuations on the service side, meaning that it looks like [indiscernible] – they are nicer. Definitely, it’s going to be more and more buyers market. And here is our strength with cash on hand. But it’s early. We don’t see yet – for the good assets, we want to purchase and we want to have strategically. We still don’t see immediate opportunity for COVID-19 deal, to buy something for a very attractive valuation because of that. Maybe it will come in the future, but not for now, two t three months within the crisis.

It sounds good. Cash is king. You’re in the driver’s seat. And I guess you have to wait to see what the numbers are and what the attractiveness of the potential acquisition could be and how it meshes. Hopefully, it fits. Good luck, and keep doing what you’re doing.

Okay, thank you.

Our next question comes from the line of Ken Liddy with Oppenheimer. Please proceed with your question.

I just wanted to clarify. So are you seeing any new potential for other acquisitions? Or is it just really too early to tell? When I say other acquisitions, meaning companies that you had your eye on previously.

Currently, we didn’t see any new opportunity that we didn’t know about. We have a pipeline of targets that we defined and we approached most of them. With few of them, we’re in much further steps. But again, everything is currently on hold. But there’s nothing new that we saw due to the COVID-19. As Kobi said, we didn’t see any what we call the COVID-19 opportunity that companies seek for cash, and we can support them and acquire them in a low price. Not yet.

And one other question, what are your subsidiaries that you acquired recently? Has thermal cameras and military equipment that could be used at the U.S. border, is it something that you have looked at potentially?

The company has acquired 3 years ago – 2 years ago.

Yes, yes, 2 years ago.

Yes. We acquired a company in Israel, 55% of the company in Israel, the Esc Baz. But no, they are not part of what we can offer in the U.S. border. There are enough suppliers of those kinds of technology in the U.S. What we can provide – if, I think, there’s going to a tender over there, it would be more Senstar’s products, which are unique and they’re also U.S. based company. What we have here in Israel, the thermal imagers and the other things that we have on this company, it’s more related to military side of the business.

And is that something you are looking mostly just with those products with the MOD in Israel?

Yes, the MOD is one of the customers of this company, yes.

Are you looking to increase the 55% at any time?

Yes, once the time will come.

Okay, thanks and good luck during COVID-19 and manage your business.

Yes, thank you Ken.

Thank you. Our next question comes from the line of Sherman Willis, Private Investor. Please proceed with your question.

Yes thank you for coming back to me. A couple of follow-ups here. At the present level, basically trading at cash, I would think, if I were in your shoes, your greatest fear is getting bought out by another company. And the way to prevent that is through education and moving forward in a much faster pace on your investor relations front. Note that you’ve hired an excellent IR company. And again, I think it’s very important that you move forward on this front with biweekly telephonic conferences with wealth managers and participating in various virtual conferences. So could you comment on the fear of getting bought out, if you’re not able to get your stock up and where you’re headed relative to increasing your exposure to new investors?

Hi Thurman, first of all, we are happy with Hayden IR. And together, we have a program to reach out to new investors, new wealth management teams. The original program was to participate physically in conferences. We plan to attend a few of them in New York, Los Angeles, and other places where COVID-19 caused cancellation of those, consider participating on some online virtual conferences and trying to see how effective they are. And under the limitations of the current situation, what we have in plan, together with Brett and his team, is to start reaching out after this quarterly release to existing and new potential investors and bring our story to them.

So are you saying that you’re going to wait until after the COVID-19 is remitted? Or are you going to move forward immediately with virtual conferences and telephonic conferences and allow your investor relations to better educate others?

We are not waiting for the end of COVID-19. Nobody knows when it will end. So the idea is to start virtual meetings and client calls with new people, new investors and tell the story.

Good. And the only thing you didn’t comment was your fear about getting bought out, trading at these levels. To me, that would be my greatest fear if I were in your shoes and you’re not successful in getting the stock price up.

I can’t comment now about – in about fear terms. It’s – we do – we focus first of all, continue and improve the business, good – improve the gain which we can deliver, increase, improve profitability, grow the company even in such a year, maintain the company’s profitability and be – stick to our longer-term strategic goals. And also in parallel and together with that, work on improving the company’s valuation via marketing of the stock and it’s the best that we can do.

Good. Thank you very much for taking my call as I continue to believe you’re the most undervalued stock I follow of about 150 stocks. And I think if you really move forward on the education front, your stock will trade much higher. Thank you again and good job.

Thanks.

Our next question comes from the line of [indiscernible] Holdings. Please proceed with your question.

Yes, good afternoon gentlemen. I will be brief. I hope you and your families, employees, everybody is great at Magal. As you guys probably know and many of the listeners, Mr. Willis, Mr. Liddy, Mr. Rebotsky, et al, we are collectively long-term holders. I think Mr. Willis expressed the frustration that we all have share. Of course, with your 40% holder, I don’t think the fear of a takeover would – is all that imminent. However, one thing I do wish to point out, I did on the last call and for a few years, is that we want to get the valuation up, not merely just so that everybody feels better, which is true, but the – that the shares themselves can become a vehicle as a currency for you to use for future acquisitions. That’s primarily how I see it. Irrespective, I believe you guys are aware of this, and I don’t mean to be patronizing in any manner. But realistically, putting in place a very small stock repurchase program sets a floor price, meaning what Mr. Willis was suggesting in terms of the dollar amount, buying – putting in that floor price. You don’t name a price, you put in the small percentage buyback and you never really have to execute it. It just sets a floor. It’s like having an imaginary put option for not just your shareholders, but for confidence in the marketplace that there is a price below which we will be unwilling to let this stock sink. And the reason – once again, it has nothing to do with my personal ambition, it has to do with the ability to utilize the stock down the road as a currency. So I just wanted to point that out that by putting in a small…

Thank you very much, Mike. It’s very well said and it’s clear.

Okay. Thank you. I just wish you all well.

Thank you very much.

Thank you. Ladies and gentlemen, this concludes today’s Q&A session. I would like to turn the floor back to management for closing comments.

Well, on behalf of the management, again, I’m very pleased, at least that we have a very strong leading team that can navigate together, very committed during this challenge in front of us and it’s not simple. But on behalf of this management and unique team of Magal, I would like to thank you for your continued interest and long-term support of our business. We look forward to update you next quarter. And hopefully, everyone will feel safe and sound and feel well. Thank you. Have a good day.

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.