Roundhill Magnificent Seven ETF
Q3 2020 Earnings Call Transcript

Published: 16 Nov 2020

[Operator:]

Greetings and welcome to the Magal Security Systems Ltd Third Quarter 2020 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Rogers with Hayden IR. Thank you. You may begin.

[Kim Rogers:]

Thank you, operator. Welcome to Magal's third quarter 2020 earnings 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 Mr. Kobi Vinokur, CFO. Dror will summarize key financial and business highlights, followed by Kobi, who will review Magal's financial results for the third quarter. We will then open the call for questions-and-answers session.

[Dror Sharon:]

Thank you Kim. I would like to thank everyone for joining us today to review our third quarter results. In my comments all the comparison are year-over-year referring to the third quarter of 2019. Globally the Magal team is executing well. Despite the impact of COVID restrictions we continue to develop new business relationships, beat the pipeline, and close sales. We are closing sales in both of our divisions Magal Integrated Solutions, our project division and the Senstar Product division. As a result backlog in the third quarter rose to a record level with reduced operating expenses by over 9% and the total EBITDA of $1.3 million. Year-to-date we have lowered operating expense by $3.2 million. Magal has maintained profitability without restricting investment in sales and R&D or primarily growth -- drive growth and in assets and often crucial to our future growth post COVID. Ongoing investment in new products and upgrades to our platform enabled the company to maintain competitive advantage and grow our business. As a percentage of total consolidated revenue Magal Integrated Solution was 54%, while Senstar was 46% in line with previous quarterly performance to date in 2020. Both business segments continue to be impacted by COVID 19 in the third quarter.

[A - Kobi Vinokur:]

Thank you Dror. Revenues for the third quarter of 2020 was $18.3 million, a decline of 18%, compared with $22.2 million in the third quarter of 2019. The geographical breakdown as a percentage of revenue for the third quarter was as follows; Israel 24% versus 23%, North America 25% versus 33%, Latin America, 7% versus 3%, Europe 21% versus 24%, Africa 16% versus 17%, Asia and the rest of the world 8% versus 10%. The breakout between Magal Integrated Solutions and Senstar product revenue was 44% product and 56% project. Magal Integration Solutions Division revenue declined by 26% year-over-year and Senstar’s product division revenue declined by 5% year-over-year. Third quarter blended gross margin was 41.8% of revenue versus 45.1% last year. The gross margin decrease was primarily due to the increase in project revenue that carried a lower gross margin, partially offset by higher gross profit contribution from Senstar sales and cost savings in the quarter. Our operating expenses were $6.8 million, a 9% reduction from the prior year third quarter operating expenses of $7.5 million. The reduction in operating expenses is attributable primarily to payroll related actions, such as delays in hiring, the reduction in location liability, as well as the reduction in other expenses such as travel and marketing and subsidies received from the Canadian government. Again, I want to emphasize that we delivered these reductions while maintaining our continuous investments in R&D and sales personnel, our most important assets. Our employee headcount remained mostly unchanged.

[Operator:]

. Our first question comes from the line of Mike Disler with MNX Holdings. Please proceed with your question.

[Unidentified Analyst:]

Good morning, gentlemen. Thank you for providing the information regarding the continued R&D investment. I think that's critical for the future of the company. As you know, I'm a very long term shareholder. Just a quick item, you said that I guess resolution number three was approved this morning at your board meeting. And in light of the investment expense, R&D over time and any potential acquisitions down the road, for the last several years the cash funds have been sitting on the books while gathering some dust, has always been there for basically R&D and acquisition. And my question is, and I suspect the Board did this, but I just thought I'd ask both of you is in light of the fact that we've had that cash hoard sitting there for R&D and for potential acquisitions, wouldn't it be a more prudent use instead of just returning it in the form of a dividend whereby the funds will have been taxed twice, meaning at the corporate level by Magal as paying the tax on earnings as well as the shareholders who would then receive those distributions, at least in the United States, would have to pay a tax. Would it be slightly more prudent to use some of the small portion of those funds, I have mentioned this before, to repurchase shares, which does two things; one, you're able to buy them at a substantial discount to probably fair market value, certainly book value; two, thereby reducing the outstanding share count, which would drive earnings; and three, not subject the shareholders receiving a dividend to any sort of taxation by whatever government would tax them. I'm just pointing that out. And I know that we've been -- you guys have been careful stewards of that cash and in fact, during the last two quarters, it's remarkable that you didn't really have to dip into it at all and remain profitable throughout this 2020 period. So my hat's off to you there. I just wanted you to consider the alternative use of that cash in light of what I just laid out? Thank you.

[Kobi Vinokur:]

Hi, Mike, I would take the question. So basically, at this point of time, the Board of Directors is still discussing the different ways of -- different potential ways or designation of using of the capital. In light of as we mentioned before, the M&A opportunities that are on the table as well as investment in -- continuous investment in the company and the strategic goals of the company. From the corporate law perspective, both repurchase of shares or dividend distributions are regarded essentially as the same, as the reduction of shareholder’s equity. And therefore, based on the Israeli corporate law, we were required -- we are required to obtain an approval of the Israeli court, since the company doesn't have a significant retain earnings to distribute. So currently we are in this, I would say, preliminary stage of removing this limitation. And once we get the approval from the Israeli court, the Board of Directors will have to reconvene and consider all the different components, different options, both what should stay or and what should be should get back to the shareholders and in which manner.

[Unidentified Analyst:]

Okay Kobi, thank you very much, that was very thorough. Finally, I just wanted to say, keep up the good work. I do understand that by purchasing shares back you are actually also reducing some of the liquidity in the marketplace, which is not necessarily a good thing with only say 23 million plus or minus a million shares available, not including the FEMI holdings, the total outstanding. And therefore, that would probably limit the number of shares available in the marketplace, which is not necessarily a good thing in terms of the size of institutions that can then seek to purchase shares. They need a certain amount of liquidity, as you are aware. So I fully understand the tightrope, the balancing act that you are doing, and I appreciate your full explanation. Thank you very much. And I look forward to hearing from you next quarter. Do well.

[Kobi Vinokur:]

Thank you.

[Operator:]

. Our next question comes from the line of Sam Rebotsky with SER Asset Management. Please proceed with your question.

[Sam Rebotsky:]

Yes, good morning Dror and Kobi. Good afternoon. The backlog, you say, is the highest ever. What percentage did it increase from the prior quarter?

[Dror Sharon:]

Hi Sam, it is Dror. It is about 20% or so. Even close to 70%.

[Sam Rebotsky:]

So how much did it increase?

[Dror Sharon:]

Close to 30%.

[Sam Rebotsky:]

30%, that's wonderful. That's wonderful. And you expect to close on an acquisition, presumably to be a cash acquisition shortly, is that in the $10 million range?

[Dror Sharon:]

I assume we are looking at a few in the range of again between $10 million to $13 million in revenue.

[Sam Rebotsky:]

That's wonderful. Alright, hopefully that this COVID will end soon as they keep discovering vaccines and you could get on with business. Good luck, guys.

[Dror Sharon:]

Thank you, Sam.

[Operator:]

There are no further questions in the queue, I'd like to hand the call back to management for closing remarks.

[Dror Sharon:]

Okay, thank you operator. On behalf of the management of Magal, I would like to thank you for your continued interest and long term support of our business. I look forward to updating you next quarter. Have a good day. And keep safe. Thanks.

[Operator:]

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