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Mexico
is a funny country. Mexico and India are two, what I believe, two major markets,
developing markets for our business, and strong markets. However theres a very big
difference between the two. Mexico is very erratic and tail heavy, and India is much more
stable and ongoing on a quality basis, much more organized. The Mexican market is typical
by having three quarters of almost no business and the last quarter of having most of the
business of the year. That was the case in the last few years. Obviously, you remember
that last year the company had announced a big project that was canceled at the end, but
also that project was in the fourth quarter of the year. So this year is no different. We
will know within the next quarter if we are going to have a very strong year in Mexico or
very, very weak year in Mexico. The prognosis, the way it looks, is that three very, very
large projects, or maybe four projects that may make it a very good year, but the flu they
had there, which the effect was more than in the rest of the world, actually held things
back for at least eight to 12 weeks. So were waiting. As much as our European
markets, U.K. is in a good shape and Central Europe is seeing a slowdown similar to North
America. However, the numbers in Europe, U.K. and Central Europe are small numbers in
comparison to the rest of the company so that the effect is not as huge. So that leaves us
with what were doing in Israel from Magal. And Magal in Israel, rather than Senstar
which is the name of the rest of our operations, is mostly in the project business. And
the project business from Israel is actually having a not-so-bad year at all. The projects
were doing from Israel, which is basically in the following areas. Its Eastern
Europe, Africa, Southeast Asia, one or two in North America, and thats about, and
some Australia. So actually, thats about it. Mostly, oh, sorry, India, of course.
Those are the markets that we do projects, and we have, if you remember, we released $8.5
million of new backlog that we had during the month of May, which is a very strong May,
which leads us to today, probably one of the largest backlogs the company ever had in
projects. And when I say backlog, again, just to make it clear, its signed contracts
that were not executed yet. So if we have a large backlog today, and expect it to be
executed for the rest of the year and maybe even spilling into 2010, thats the
meaning of backlog. So not a bad year at all. And its about half of the business of
the company. However, margin behavior is very different. Because when we talk about
projects which having not a bad year, were talking about low margin business. All
the rest of the markets I spoke with you about, that includes Canada, United States, even
Mexico, for sure the European markets, are mostly sales of products or what we call in the
20F, for reflow, which is products and very small projects, its almost like products
and product installations. That area has much higher gross margins, and that area is the
area thats very weak this year. So if youll end up looking at this year, and
well end up with a top line actually being compensated, the strong compensating the
weak. However in the margin line, the strong is a weak margin, and the weak is actually a
large margin, so we have an issue with margins. That leads me to the next subject, which
is expense reduction. Because of what you just heard from me, and we have seen it earlier
in the year, somewhere in December, we started to see it, November or December, I already
saw what is happening, we decided to go on an expense cutting campaign which included very
extreme steps. First of all, we merged our North American subsidiaries. The U.S.
subsidiary operations, marketing manufacturing and R&D, were merged into the Canadian
operations. We closed operations in California, and were moving, we moved everybody
to Washington, which is a much smaller and less expensive, more efficient location. In
Israel we reduced 10% of the work force, reduced the rest of the workforce 10%
of their salary, close to 10%, 8.5%. In Canada, were doing the same
thing right now. Both reductions, similar reduction in work force and similar reduction in
salaries. So all in all, if you look at what we achieved and that took obviously three,
four months, especially because of the geographical moves, so all in all, we saved on an
annual basis about $3.4 million. Now, thats a major number, because if you look at
the company, lets say our company is a $70-$80 million revenue base, and lets
say if we are running our business well, we should bring $7 to $9 million to the EBITDA
level, if we managed to cut within the last six months, $3.4 million run rate on an annual
basis, we increased our EBITDA by 50%. And thats a major change. Obviously,
this year we will not see a reflection of all of it because we just, were still in
the process. So I hope to see two quarters of it kicking in. And that hopefully will
balance this year margin squeeze up, plus I want to tell you, I believe that the overhead
of the company still has enough fat in it to squeeze out moving forward. And in a funny
way, when you have turnaround like this and in tough years like this, you, if you do the
things right, you get out of it much more leaner, meaner, and efficient. I wouldnt
expand more than that, because it will make the call be too long, but if you want to ask
questions about technology and new products, M&A activity, which is intensive,
marketing, new marketing positions, please ask in the Q&A session, and well be
happy to answer. At this point, I would like to call for the operator to start the Q&A
session.
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