B.O.S. Better Online Solutions Ltd. (BOSC) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the BOS Third Quarter 2019 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 call is being recorded and will be available on the BOS website as of tomorrow. I would now like to turn the call over to Mr. John Nesbett. Please go ahead.

Good morning and thank you for calling in to review BOS’ third quarter 2019 results. Management will provide an overview of the results followed by a question-and-answer session. I’ll now take a brief moment to read the Safe Harbor statement. The forward-looking statements contained herein reflect management’s current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause the actual results to differ materially from those in the forward-looking statements, all of which are difficult to predict and many of which are beyond the control of BOS. These risk factors and uncertainties include amongst others, the dependency of sales being generated from one or few major customers, the uncertainty of BOS being able to maintain current gross profit margins, inability to keep up or ahead of technology and to succeed in a highly competitive industry, and inability to maintain marketing and distribution arrangements to expand our overseas markets, uncertainty with respect to the prospects of legal claims against BOS, the effect of exchange rate fluctuations, general worldwide economic conditions, and continued availability of financing for working capital purposes and to refinance outstanding indebtedness, and additional risks and uncertainties detailed in BOS’ periodic reports and registration statements filed with the U.S. Securities and Exchange Commission. BOS undertakes no obligation to publicly update or revise any such forward-looking statements to reflect any change in its expectations or events, conditions, or circumstances on which any such statements may be based or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements. On the call this morning, we have Eyal Cohen, Co-CEO. I will now turn the call over to Eyal. Please go ahead.

Thank you, John, and thank you all for joining us today. We continue to make progress with the integration of Imdecol, and we are optimistic about the long-term benefit the Robotic acquisition will provide and we see tremendous growth potential for the robotics, particularly as we expand our U.S. presence. However, the first nine months of 2019 were negatively impacted by certain issues in Imdecol Robotics business, which we inherited with acquisition and which we explained in detail in our press release to our third quarter results in late October. We are working our way through these issues, and we believe the robotics division will be our primary growth engine in the coming years. Specifically, we believe the revenue growth will be achieved in the international market, mainly in the U.S., and in our local market, Israel, as well. Regarding the U.S. market. With Imdecol acquisition, we added globally recognized in-mold label robotic systems with a proven capability to successfully integrate with a plastic injection machine to provide automated in-mold label decorating. We currently have more than 500 global installations of Imdecol IML robots, and we believe we are well positioned to more aggressively market our capabilities to U.S. manufacturers, whom we are targeting as our primary market for IML robots. We see tremendous opportunity associated with the North American food packaging industry, which is transitioning from conventional print on package to in-mold label packaging. To date, the majority of IML robots in North America have been supplied by European manufacturers. While these suppliers have a reputation for quality manufacturing and technology, they’re also viewed as having high wait times, inflexible production requirement, and high prices. We believe we have an opportunity to work closely with the U.S. customers to ensure a cost-effective alternative with a quick – quicker production timeline. With this in mind, we are establishing a Dallas sales office with a dedicated sales manager, who brings more than 20 years of sales and marketing professionals in the U.S. plastic industry. He has specific experience in selling IML packing, and we believe this will allow us to more readily capitalize on new opportunities to increase our market share and drive growth. Regarding the local market, Israel. In Israel, we will continue to sell tailor-made robots for the automation of the industrial processes. As opposed to IML robot, which is a product that requires relatively minor modifications, the tailor-made robots are developed and produced from scratch according to customers’ demand. Currently, tailor-made robot machines have relatedly high risk for delays in delivery and unexpected costs, and it is those factors that adversely affected our financial result in the third quarter. We believe in the growth potential for this line of solution, and we are working extensively to improve production efficiency and decrease the risk associated with the tailor-made robot [indiscernible]. This initiative is led by our recently hired General Manager of Plant Operations, who brings an extensive experience as a senior-level engineer with 15 years track record of innovation. Once we reduce the risk to a reasonable level, we’ll start to offer tailor-made robots outside of Israel as well. In parallel, we’re investing in marketing activities to expand the recognition of BOSC’s robotic offering to potential customers in our target markets. In regard with our legacy businesses, our legacy RFID performance for the first nine months of the year were below our expectations, and we are implementing a cost reduction plan to reduce operational costs to improve its profitability. The supply chain division is currently surpassing our performance expectations, and with its relatively strong backlog, we believe it will continue to perform well as we move through the fourth quarter of 2019. During the first quarter of year 2020, we plan to provide guidance for full year 2020 as well as target for the year 2021 that will reflect our expectations for the progress of the strategic initiatives we are undertaking. While we have encountered challenges during the first nine months of 2019, we are optimistic about the opportunities we are seeing in the market in which we operate, and we remain focused on capturing new customers and greater market share as we move forward. That completes my review. And now, I’d be happy to take your questions.

Thank you. Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. [Operator Instructions] The first question is from Mike Hussey of Catamount Capital. Please go ahead.

Yes. Thank you. You mentioned that you have an installed base of more than 500 robots worldwide. What are the main installation territories for the robots?

Yes. We have installations in Brazil, Mexico, Australia, and New Zealand who will maintain the client in those territories, but our main focus will be to expand our presence in the U.S. market.

Okay. And just two follow-ups. When do you expect your U.S. sales plan to yield significant level of revenues, and also if you could comment on the current level of the backlog for your two divisions?

We are setting the U.S. sales office earlier than we planned. We expect it will gradually and consistently increase our robotic backlog in year 2020, but because the delivery time of IML robot is around five months, the increase in revenues will follow in year 2021 upon delivery. We plan that our legacy businesses of the supply chain and RFID will perform well to support the sales and marketing investments in the U.S. market in year 2020. Regarding the backlog, the current backlog of the supply chain is about $10 million, which is more than 50% of its annual revenues, and the current backlog of the RFID robotic is about $3.6 million, but in addition it has about $5 million annual revenues – annual recurring revenues from services. And we believe that the backlog of the division will gradually and consistently grow underlying the penetration to the U.S. market.

Thank you.

[Operator Instructions] The next question is from Ethan Etzioni of Etzioni Portfolio Management. Please go ahead.

Yes. Can you please give us a little more color on the contract you got in Mexico?

The contract in Mexico is an example of a model of order that we will be willing to accept an increase in the U.S. market or in America market. It’s an order for IML robot, and as I mentioned before, the IML robot is more like shelf product of Imdecol with a minor modification. And the IML robot is actually – will walk and integrate with the injection machine in order to produce – to address the plastic packing.

So, this was pretty much an off-the-shelf product?

Yes, yes, with minor modifications.

And you manufacture it in Israel and ship to Mexico or manufacture in the states or how does this work?

The manufacturing is in Israel, and then we install it in the customer’s site in Mexico. And this client actually has several sites in the U.S. as well. And once we deliver successfully, the – those three robots [indiscernible], I believe we’ll gain more orders in the future from this client.

What you see the margin in this order?

The margin, relatively, this is a shelf product and the margins are much more higher than the margin on the robots for automation. And actually, we did not disclose this information, but it should be around 30%.

And do you see potential for more orders like this in the future?

Because of this potential, we opened the U.S. sales office in order to extend our penetration to the U.S. market, because actually this order came to us while our sales personnel are in Israel. And we believe that this order and the previous one that we got from American plastic manufacturers orders of about $1,900,000 reached while our sales pernonnel were in Israel. We believe that once our sales force will be in the U.S., U.S. salespersons in U.S. sales office will realize the great potential of – from the American market.

Okay. Thank you and good luck.

Thank you.

There are no further questions at this time. Before I ask Mr. Cohen to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available on the company’s website, www.boscorporate.com by tomorrow. Mr. Cohen, would you like to make your concluding statement?

Yes, thank you. Thank you for joining me in the call today and for your questions. This is an exciting time for BOS, and we are focused on making the long-term investment that we believe will gradually yield consistent and sustained growth in revenues. We look forward to your long-term support. Thank you.

This concludes BOS’ third quarter 2019 results conference call. Thank you for your participation. You may go ahead and disconnect.