Elbit Systems Ltd (ESLT) 2003 Q2 法說會逐字稿

Welcome to the Elbit Systems second quarter 2003 results conference call. All participants are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder this conference is being recorded, August 12th, 2003. I would now like to turn the call over to the IR representative for Elbit Systems. Please go ahead, ma'am.

Thank you. Welcome to the Elbit System Limited second quarter 2003 conference call. Before I read the usual forward-looking statements, I would like to bring to your attention that today's call will be led by Mr. Elan Pockholder, Elbit System VP of Finance, since Mr. Joseph Ackerman is currently on vacation and unable to host this call.

At this time, I would like to remind you that this call is the property of Elbit Systems and may not be recorded for broadcast without the written confirmation of Elbit Systems. Statements made which are not historical fact may be forward-looking statements, as the terms defined in the private securities reform act of 1995. Such forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from those currently anticipated. Now please let me introduce Mr. Elan Pockholder.

Thank you, Marlena. Good morning and good afternoon. It is my pleasure to announce the results for the second quarter ended June 30th, 2003, which reflect the continued growth of our company.

A number of events marked the development of our business during the quarter and recently. I would like to give some examples. We received recent -- we recently received $47 million contract from Israel ministry of defense for the supply of systems for the Israeli forces. Our current capabilities of extensive experience in the area of UAV systems, which is one of our core businesses that contributed to the award of this important contract. However, we have witnessed recently a slowdown in order received through the Israeli ministry of defense, which has resulted to a small increase in our backlog at the end of the quarter.

Including the UAV business, we were awarded a contract from E FW Inc., in support of the U.S. government joint valuation program in Nevada. We are pleased that our UAVs were selected for this important mission and we believe that this will contribute to the continued growth of Elbit Systems with the U.S. military and Elbit Systems in this important business area.

Now the contracts we received during the quarter were $6.5 million order to provide information assistance to Israel money laundering prohibition authority which is a good example of the capabilities offered by our IP systems. During the quarter we announced that our subsidiary Elop has completed a critical stage in the development of the a breakthrough system MUSIC, which stands for Multi-Spectral Infrared Countermeasure, the ability to protect civilian aircraft from shoulder fired missiles. MUSIC address the increasing local threat of commercial airline passengers which have become targets of terrorists organizations worldwide. MUSIC is a concept based on advanced level of technologies which are suitable for the environment. In line with our M&A strategy, we acquired on June 30, Optronics Instruments & Products MV, based in Belgium from Delft Instruments. We expect this acquisition will contribute to our customers in Europe, through an enhanced access and support and at the same time contribute to our extension into this important market.

I would like to review our conservative financial results for the second quarter for the past six months of 2003. Revenues for the second quarter were $219.8 million, as compared with $193.2 million for the second quarter last year. An increase of 13.2%. Revenues for the first six months of 2003 were $420.9 million, compared with $379 million for the same period in 2002. Net earnings for the quarter were 9.2 million, or $4.2% of revenues, which is 23 cents EPS as compared with $4.8 million, 2.5% of revenue in the second quarter of 2002, or $.12 of EPS.

I should mention that the company's financial results were affected by the increase in the company's share price during the first six months of 2003, due to the non-cash expense related to the employees phantom option plan. Excluding the phantom option plan non-cash expenses net income in the second quarter of 2003, $13.3 million or 6.1% of revenues, and the diluted EPS was 33 cents. Net income for the second quarter of 2002, excluding the current charges under the agreement with the office of scientists was and the phantom option plan was $12.4 million or 6.4% of revenues of 31 cents per share.

Net earnings for the six months ended -- I'm sorry, net earnings were $21.5 million, 5.1%, as compared with $16.5 million, 4.3% of revenues in a six month 2002. Diluted EPS was 64 cents compared with 41 cents for the same period in 2002. Excluding the phantom option plan, and non-cash expense in 2003, net income for the six months ended June 30th, was $26.6 million, 6.3% of revenues, and the EPS was 66 cents. Excluding the non-recurring charge under the trips scientific agreement and the phantom option plan effect net income for the first six months of 2002 was $23.8 million or 6.3% of revenues and the EPS was 60 cents.

The gross profits for the second quarter was $57.4 million, or 36.2% of revenues as compared with gross profit of $43.3 million or 22.4% of revenues for the corresponding quarter of 2002. Excluding non-cash expenses related to the company's phantom option option plan, for the second quarter 2003 was $60.4 million or 27.6% of revenues. Excluding non-recurring charges under the OCS agreement and the phantom option plan effect, gross profit in the second quarter was $52.9 million, 27.4% of revenues. During the same period of 2002 was $39.9 million or 24.4% of revenues.

Geographically our second quarter 2002 of revenues was as follows. We sold 28.1% of revenues to Israel, 37.7% in the U.S., Europe accounted for 12.6%, and other countries were 21.6%.

The division of revenues by line of business for the second quarter were as follows: Airborne systems 102.3 million, combat vehicle systems $43.5 million; 32.6 million; Electro-Optics 27.5 million, and other $12.9 million. Our back log of orders , as of June 30th, 2003, was $1.695 billion, of which 61% was orders outside of Israel. Approximately 71% of the backlog is scheduled to be performed during the next two quarters of 2003, and during 2004. This concludes my presentation and I now would like to take any questions you may have.

Ladies and gentlemen, that the time we will begin the question-and-answer session if you have a question, press the star, followed by the one on the touch-tone phone. If you would wish to decline from the process please press the star followed by two, your questions will be called in the order they are received.

And our first question he comes from Steven Levy of UBS. Please go ahead.

Hi, how are you doing? A couple of questions. First of all, you mentioned the impact of the phantom option plan, was the optimum level. Could you explain to me how you account for the phantom options at the gross level and how much are at the operating level?

Yes. The -- the difference between the gross profit and the operating expenses out of $5 million expense before taxes we had in the quarter, in the quarter, we had $3 million in the cost of goods, and balance was in the opening stages.

I thought it accounted for between the two, and in the past it was at the operating level.

We had taken another look, together with our accountants and there had been some shifts.

Can you give us then, if you would, a look back for the same quarter and see what your gross margin had been taking this new approach to the accounting of phantom options and excluding the chief scientists what the gross margins would have been in the second quarter of last year?

I have -- I can give you the number. I have not recalculating the distribution, but the numbers last year were less -- less material. In the three month -- in the second quarter of 2002, it is only about $200,000 worth of phantom effect. So the significance is -- the difference is not significant.

Okay. The gross margin, the clean gross margin was kind of down about. About 28% for the last few quarters. Is the shift -- one quarterly shift in the breakdown of revenues that brought the gross margin down a bit or is this the impact of what's going on in Israel at the moment? What's -- in terms of orders, what is driving the gross margin and where do you see it going in the next couple of quarters.

The gross margin, as you know, is as a result of a mix of programs that we work on at the facility at any given time. This was -- this gross margin is in line with our business plan. And we'll -- we think that we can maintain it.

Okay. Last question from me, can you explain a little bit on the comment you made and the comment in the press release regarding orders of the ministry of defense in Israel. Can you give us some idea of how significantly that's impacting obviously your backlog this quarter, despite that, does that mean that we should be expecting going forward a major shift in geographical revenues. Should we be expecting inventory to decline or are you going to be able to make up the difference from international business? Basically what will be the impact going forward if the current state of slow orders continues?

Well, first of all, we believe that the Israeli particular situation should change and that orders will be placed going forward. Obviously more a slowdown than cancellation.

Sure.

At the same time, we haven't affected the revenues in other markets. U.S. the revenues have gone up significantly. So we think the mix that we have between Israel and outside of Israel will -- will be very helpful for us going forward.

You think you can keep -- you think your backlog will continue to increase, though? Are you going to be able to make up the difference and your backlog will continue to grow for the rest of the year.

We definitely hope so. Assuming that the Israel let us know -- is slow slow, rather than a cancellation, we don't think it will happen. We do have solid backlog as I indicated. If you look at the next six quarters, we have in the book an average of $20 million per quarter.

There's a lot of talk of a major cap on the defense project for 2004, do you sense from the ministry of defense, another letdown from revenues from Israel or are you kind of level now 28% of revenues this quarter that can stay stable going forward.

We have very good connection. I no he it was a long question but can you repeat it.

Sure. The talk is of further defense cuts in the budget for 200 4rk do you sense that there could be another letdown in revenues from Israel next year or are you at a level that you feel quite comfortable that you feel you can maintain domestic revenues.

As we said before, we believe this is only I slowdown in business, and therefore, I don't -- I should not expect this going forward.

Just last one from me quickly. What was your revenues from Israel in the second quarter 2602.

If you bear with me for one minute. I think it was about the same, but -- one second. In the quarter, Israel accounted for about the same percentage, 25.5% and the six month was 25%.

So actually from the numbers, therefore, one may be feeling an impact in terms of backlog in terms of actual booked revenue so far that you haven't seen a decline in revenues from Israel --

Yeah, because we -- we still have a backlog with them. So the effect was on the backlog.

Okay. I'm just wondering whether we're going to feel it in the revenue line over the next couple of quarters. That's all.

As you know, our backlog has a lie level of transparency. For things to affect the top line, you know, we do have $20 million per quarter in the book for the next six quarters on average. So as I said, if we -- if it is slowdown, it will not affect us in the future.

Ok. Thanks very much.

You're welcome.

Thank you. Our next question comes from Martin Nassar CIB.

Thank you. Hi, Elan.

Hi, Martin.

How do you feel about business going forward beyond 2004, let's say 2005?

Well, we -- besides the Israeli situation, which is a -- which happens at this point in time, we constantly look for new business opportunities at any given time, continue to look for both for new marketed, develop new products and invest quite substantially in the future of the company. And the investments we make both in R&D and marking and sales are made in order to ensure that we have a good 2005 and 2006 and beyond. One example is the acquisition that we make in Europe, recently. That acquisition was -- gives us technology, it gives us even more a -- access to Europe, which is an important market. We believe it will enhance our presence and business development there. So we do make efforts every day to ensure that futures will be secured.

Sure. One other reason [ Inaudible ] To be executed by 2004 so it will be short-term use, and give nice liquidity. I was wondering how that will look beyond that point.

I think the distribution of the percentagewise have not changed significantly.

Okay.

I don't -- at this point I'm not concerned.

Okay. Very good. Noted on your balance sheet, there are a number of entries in the fourth quarter they were up a little in the fourth quarter and they ticked up again. Are those levels you feel comfortable with or they are now about 20% about of your quarterly sales.

We feel comfortable with the quality of the inventory. As you know, we produce orders and we -- the inventory is raw materials and work-in-process. Everybody wants to have inventory. It's always -- as a given, you always want it to be lower than it is. At the same time, you want to make sure that you can deliver on time.

Yes.

You want to make sure you have the right inventory for the delivery in the coming quarters. And as you know, normally, the second half of the year brings with it higher level of sales than the first half of the year. Inventories that we have at the end of the second quarter are designed to be sold in the same quarter. But as the company grows the inventory levels will as well.

Were there any special or significant currency effects that had an impact on the second quarter.

As a large exporting company we enjoy a stronger dollar. We do have some Israeli exposures, and we took some measures to protect against some of the exposures. And we noted -- we noted it in our management report that we did -- we did have some -- it did have some effect on our finance expenses, for example, but the interest we made helped us.

Okay. Thank you, Elan. Good luck going forward.

You're welcome.

Thank you. Our next question comes from CIBC World Markets.

Just a quick question. Can you break down the short and the long-term debt?

Yes yeah. At the end of the quarter we had $21.8 million of short-term debt. And $73 million of long-term debt.

Okay. Thank you very much.

You're welcome.

Thank you. Our next question comes from Susan Minch of Smith Barney. Please go ahead, ma'am.

Hi, Elan. You know, I noticed that airborne systems was up 31.8% year-over-year, and I was wondering what drove the strength there.

It's -- these are some programs that we have been awarded in recent months and we're now going to -- now going to the revenue. It takes a while from the point in time where we are awarded until we -- until we start a program. And, you know, some of -- a lot TV has to do with the type of business in the U.S. As you know, last quarter we announced we were awarded a significant program, so we have business in the Lockheed Martin systems and elsewhere. It's a combination of many problems.

Okay. And likewise, in C4I, sales were up 19%, year-over-year. Was there anything inparticular there?

The C4I is sales that we expected to grow and one of our core businesses. And as you know, we've even split a few months ago where the division that managed the UAV, we separated business for them, for each one to concentrate on the different areas. And I think we're beginning to see the fruits that were made to develop that business.

Okay. In contrast, Electro-Optics was down 21.4% year-over-year. Was there anything in particular there that led to that shortfall in sales?

Electro-Optics we -- we have to remember that Electro-Optics we have Electro-Optics sold to directly systems of subsistence. We have Electro-Optics that are integrated into systems that are sold within the group. It falls under the development business sales, the whole system. Some of the Electro-Optics are incorporated into other systems and you don't see it as Electro-Optics per se. But having said that, I -- I think that Electro-Optics in the future will increase.

Okay. And then selling expense was quite a bit higher this quarter, 8.7% of sales versus 7.9% last year. Was there anything in particular there, is that where you're putting the phantom option program? Or was there something else that drove the selling expense?

The phantom expense, first of all, just to get the phantom issue out of the way, included about $1 million of phantom expense.

Mm-hmm.

I would like to explain some of these differences. Then we had an expense that comes every second year and that is the Paris issue, which is relatively significant expense for us in the particular quarter. And in general we do -- we do invest more in marketing in order to get the business. It takes a little bit longer to get the business. We spend more time and travel to gain it.

Okay. And one last question. The tax rate was higher in this quarter and I was wondering if the blended rate of 27% for the first half was a guide for the second half.

I know -- there's a lot of items that go into what the tax rate would be. We think of a number and we always try to reduce it.

Mm-hmm.

So -- but it -- you know when we talk about an area, it -- it should stay something like that.

Okay. Thank you.

You're welcome.

Thank you. Our next question comes from Mia [inaudio] of SG Cowan.

Hi.

I have a question. Correct me if I'm wrong, I think EFW was on a team that won a program for about $200 million to build digital video recorders for the f-16. Can you tell us about the ramp up of work on it?

Yes there is such program, but we have not made any -- any formal announcement on that, so -- but in our case, the -- our contact is not tremendously significant. It is not -- it's not a major program.

Okay. Sorry. I must have misunderstood. All right, thank you.

Thank you. Our next question comes from Patrick McArthur.

Can you give us some sort of status, or an updated status on the watch keeper program? And then also Rockwell recently announced some work with general dynamic, and I was wondering if visual systems was involved in that.

With regards to the watch keeper, there's no change. There's still a target date in 2004 for announcement of the winning team. Both -- both teams now work to that goal, and we hope we will be the one that gets the project, but it's still out there. And can you repeat the second question?

Yeah, Rockwell recently announced they were doing some work for general dynamics on the U.S.'s objective force program and I was wondering if vision systems was involved in that.

I'm not -- I'm not familiar with it.

Okay. Thank you.

Thank you. Our next question comes from [ Inaudible ]

Good afternoon. One quick question. Different thoughts about the Elop industries. I know there were some talks in Israel, and the government will have some withholding in the company. Do you see yourself in the future participating in that kind of process and a follow-up question to this question, and the questions that were answered previously can you give us more guide on the future acquisitions? What are the category that you are looking for in order to establish a further growth in your business?

I think the second question is probably easier than the first. We -- in terms of the Israeli aircraft, if you read the same newspapers, we're working on the process and I think that when the process takes place, it will probably be a good time to explore your question.

Okay. Thanks for trying.

As you all know, we are very much for consolidation of the defense industry in order to make it more efficient. I'm not sure if consolidation does it, but we are very much for consolidation. Yes?

Do you think -- I'm sorry, a follow-up on this. Do you think -- I know it's very slim just to comment on that but do you think if the government would turn part of its holdings, do you think this would -- this part that you just talked about, do you think it will contribute to further -- further, let's say opening up the market?

The -- a privatization is the only privatization and we don't know yet what it means and I think that privatization is not necessary to say. I think the discussion is very premature.

In terms of your second question, we always try to find situations that will provide us with access to new markets that are important for us, as we have indicated as target markets, access to technologies that compliment what we do, and that's -- that's what we're looking for. At the same time, it is very important for us to make sure that whatever acquisition we make, is -- is made on economical basis, that at the end of the day will be accretive and contribute to the bottom line and the shareholders' value, and that is why we try very carefully with the acquisitions we make. But we do have a strategy and we are looking for potential acquisitions.

Okay. Thanks.

You're welcome.

Thank you. Is there any additional questions? Please press the star followed by the one on your touch-tone phone and if you wish to cancel your question, press the star followed by two. One moment, please.

There are no further questions at this time. Before I ask Mr. Pockholder to go ahead with his closing statements. A replay of this call is scheduled to call 1-866-500-4965. In Israel please call 03-925-5945. Internationally call 972-3925-5945. Sir?

Thank you very much. I would like to thank everyone for joining us today, and we look forward to speaking to you -- with you again in the next quarter.

Thank you. This concludes Elbit Systems second quarter 2003 conference call. Thank you for your participation. You may go ahead and disconnect.