Elbit Systems Ltd (ESLT) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems third-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 November 11, 2003. I would now like to turn the call over to Ms. Marilena LaRosa, IR Representative for Elbit Systems.

Thank you. Welcome to the Elbit Systems third-quarter 2003 results conference 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 permission of Elbit Systems. Statements made which are not historical facts may be forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated.

Now please let me introduce Mr. Ilan Pacholder. Ilan, please go ahead.

Thank you, Marilena. Good morning and good afternoon. Thank you for joining us today to discuss our results for the third quarter and the nine-month period ended September 30, 2003. I will begin with a financial review, and then I will hand it over to Joseph Ackerman, who will review and comment on our principal trends and operations during the third quarter. Revenues for the third quarter were $214 million as compared with 210.2 million for the third quarter of last year. Revenues for the nine-month period of 2003 came to $635.2 million compared with $589.1 million for the same period of 2002. Respectively, revenues increased by 2 percent and 7.8 percent from the three and nine month periods ended September 30, 2003. Consolidated net income for the third quarter of 2003 it was $12 million, or 5.6 percent revenues compared with $15.5 million or 7.4 percent of revenues in the same period in 2002. Dilutive EPS for the third quarter of 2003 were 30 cents as compared to 39 cents for the third quarter of 2002. As we reported in 2002, net income in the third quarter included a $2.8 million tax adjustment. Excluding this tax adjustment, net income in the third quarter of 2002 was $12.7 million or 32 cents per share.

The Company's financial results were affected by the changes in share price during the first nine months of 2003 and during the third quarter of 2003. The non-cash effect related to the employees' phantom option plan on the Company's results net of taxes resulted in $2.7 million of expense in the first nine months of the year and $2.4 million income in the third quarter of 2003.

Consolidated net income for the third quarter of 2003, excluding phantom option plan effect, was $9.6 million or 24 cents per share. Consolidated net income for the third quarter of 2002, excluding the phantom option plan effect and tax credit, was $12.5 million or 31 cents per share. Consolidated net income for the first nine months of 2003 was $33.5 million, 5.3 percent of revenues compared with $32 million, 5.4 percent of revenues from the same period of last year. Diluted EPS for the nine months ended September 30th, 2003 was 83 cents compared with 80 cents in the corresponding period of 2002. Excluding the phantom option plan effect, consolidated net income for the nine months ended September 30th, 2003 was $36.2 million, 5.7 percent of revenues, and EPS was 90 cents.

In 2002, the Company's financial results for the nine month period ending September 30th were also affected by a onetime charge related to the agreement with the office of the chief scientist amounting to $9.8 million. Excluding that charge, the phantom option plan effect and the tax adjustment mentioned before, net income for the nine-month period ended September 30th, 2002 was $36.3 million, 6.2 percent of revenues, and EPS was 91 cents.

Gross profit for the third quarter of 2003 was $56.2 million, 26.(indiscernible) of revenues as compared with gross profit of $59.4 million, 28.3 percent of revenues in the third quarter of 2002. Excluding the phantom option plan effect, gross profit in the quarter ending September 30th, 2003 was $54.5 million or 25.4 percent of revenues. Excluding the phantom option plan effect gross profit in the quarter ending September 30th, 2002 was $59.2 million or 28.2 percent of revenues. Gross profit for the first nine months of 2003 was $170.3 (ph) million, 26.8 percent of revenues as compared with $154.9 (ph) million, or 26.3 percent of revenues in the same period of 2002. Excluding the non-cash effect relating to the Company's phantom option plan, gross profit for the nine-month period ending September 30th, 2003 was $172.2 (ph) million or 27.1 percent of revenues. Excluding the nonrecurring charge under the chief scientist's agreement and the phantom option plan effect, gross profit for the nine-month period ending September 30th, 2002 was $164.2 million or 27.9 percent of revenues.

Geographically, third quarter 2003 distribution revenues were as follows. Israel, $74.5 million; U.S., $85.1 million; Europe, $22.7 million; and other countries, $32 million. The distribution of revenues by lines of business for the third quarter were as follows. Airborne Systems, $103.6 million, combat vehicle systems, 42.6 million; C4I systems, $30.8 million; electro-optics, $24.4 million; and other, $12.9 million.

Backlog of orders as of September 30th, 2003 (indiscernible) for the first time at the $1.7 billion mark, reaching 1.702 million as compared with 1.689 (ph) million at the end of the year. 64 percent of the backlog relates to orders outside of Israel, and approximately 58 percent of the Company's backlog as of September 30th, 2003 is scheduled to be performed in the last quarter of 2003 and during 2004.

I will now turn the call over to Joseph.

Thank you. Our third quarter results did not meet our expectations due to timing of specific events which had an impact on our results. First, we experienced delays in the receipt of several orders which we expected to sell during this quarter. Second, seven contracts which are to a long (ph) degree (ph) advanced, have taken longer than expected to deliver, and those delays affected our gross profit. We expect that when these efforts are completed, we should have additional (indiscernible) assets that we contribute in the future. Third, the continued slowdown insurance orders received from the Israeli Military Defense due to budget uncertainties was a factor and the small increase in sales for the third quarter. None of those contracts (ph) were neither terminated nor canceled. And finally, while our results for the nine months are ahead of last year, we have taken steps to further reduce our costs and improve efficiencies. Some of these steps resulted in additional expenses in this quarter. An example of this process is the ongoing reorganization of the C-4I and combat vehicle division into one land system division. We expect this process, which is scheduled to be effective before the year end, to better address the changing market environment and reduce costs.

As mentioned earlier, the backup of orders as of September 30th, 2003 caused, for the first time, the 1.7 billion mark. This is a result of the marketing effort carried out by our people worldwide, and it's comprised of many orders of various sizes. A good example for such order is the contract signed with FedEx for the EPS system that have been (ph) installed (ph) on large aircraft -- world-class aircraft -- to be operated by FedEx Express. It is the first time that a system of this type is installed on a large aircraft, and we believe that future sales related to the system will follow. The continued growth of our backlog is evidence of our ability to continue to grow our business, even during periods of uncertainty with the Israel (indiscernible) budget.

We also continue to carry out our plans to expand and complement our products. In line with this strategy, following the acquisition O.I.P. in Belgium, of which we reported last quarter, we have recently completed our minority share equity investment in AeroAstro, a U.S. provider of small satellite and related technology products. The combination of the two companies, (indiscernible) assets (indiscernible) namely micro spacecraft and electro-optics will enable us to offer attractive solutions to this growing market.

This concludes my presentation, and now, we will be happy to take any questions you might have.

(OPERATOR INSTRUCTIONS). Our first question comes from Shaul Eyal of CIBC. Please go ahead.

Shaul Eyal Thank you. Hi. Good afternoon, gentlemen. A couple of quick questions for me. Ilan, what was the breakout of the short and long-term debt this quarter?

At the end of the quarter, we had short-term debt of $41 million, and long-term debt of $66.8 million.

Thank you for that. With respect to the backlog, what's the exposure out of the remaining backlog for 2003 and 2004 that is due to be delivered in Israel?

You mean what portion of that came from Israel?

That is correct.

I think slightly higher than 30 percent.

Okay. Thank you, very much.

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

Good morning. Now that we are approaching the end of the year, I was wondering if you could give me a little bit of your outlook for next year?

Susan, you know that we don't give guidance. But the steps we are taking, are giving us the confidence that next year will be a better one.

Okay. Thank you.

Our next question comes from Alexa (ph) Parlmutter of ING. Please go ahead.

Hi. I was wondering if you could give some figures also on cash flow, basically operating cash flow and also the figure for depreciation during the quarter?

Operating cash flow for the nine months was $12.7 million. Other cash flow for the year was negative $30 million for the nine months. Of that, investing activities took about $37 million.

I'm sorry. The 12.7 million was for the quarter?

That's for the nine months.

For the nine months. And the second figure you gave was?

Was the total cash flow.

I'm sorry. So it was negative 30?

Yes.

And of that, how much did you say was investment?

37.3 million.

Okay. And also on the onetime charges, well, I guess it's only the phantom options. But could you breakout how much of that went into the gross margin or the cost of revenue line, and how much went into operating expenses?

Yes. Out of the (indiscernible) amount, for the quarter, 1. -- actually, it was a benefit of $1.7 million in the O.P. -- in the G.P., I'm sorry. And about 1.4 million in the O.P.

So 3.1 before tax?

That is before tax. The after-tax amount -- the total after-tax amount is $2.4 million.

Okay.

But on the nine months, basically it about evens out.

Okay. Maybe you can also comment on the expenses. You had different trends in the third quarter, in marketing, selling, R&D than you did in the second quarter. Is there anything we can learn from those trends? Or is it really useful to look at the quarterly figures?

This type of expenses has to be viewed on a longer-term view than one quarter, because we do try to (indiscernible) that.

And would you expect that profitability can improve as early as the fourth quarter, given that some of the impact came from the reorganization or restructuring, and there were added costs in the third quarter. Can you give us an idea of how much that impacted these results, and maybe how much better we could expect for the fourth quarter?

With your permission, I won't quantify. but certainly we expect to have a better profit starting next quarter.

Okay. And if I may, could you address at all the U.S. market and whether you are seeing growth there that you have been expecting, given the higher budget?

Again, without quantifying it, our plan is to have bigger sales in the U.S. next year as we had this year. And the U.S. is one of our growing market in the coming years. In addition to our investment in Europe, and we expect to see also growth in Europe, starting in '04.

Okay. Thank you, very much.

Thank you. Our next question comes from Oray (ph) Oskowvitz (ph) of Lino (ph).

Hi to everyone. A question to (indiscernible). I'm a bit puzzled by the behavior of the Israeli government regarding the contracts. If you could shed some light on what is the current position, what are they telling you guys regarding the current projects, and how is that translated into numbers during the quarter? And maybe just give us a sense of -- I wouldn't say a worst-case scenario, but a scenario where these trends continue, and there is a tight budget monitoring by the Israeli government?

Talking about expected new business and new contracts, nothing has changed yet. What we are told is that all of what we are supposed to get, there is no reason to think that it will happen. What did happen is that we experienced delays in the process. The plan we had was to have some sales already happen in this quarter, which didn't happen due to the delay in putting (ph) the orders. This is what we (indiscernible), and we missed those numbers due to that.

I'm trying to think, this is the Israeli government. I would like to think that they have some honor behind their words or contracts. What is the mechanism that operates here that they just come and tell you, look, let's freeze (ph) this, we're not sure we're going to have the budget for this? Or, I'm puzzled.

No, no. The process -- no reason to be puzzled. The process is as anywhere else, is they have requirements; they conduct a tender, and then they tell you that are you are selected. Then it takes time from the time you are selected to the time they put an order. And then you can record sales. So because of the budget discussions in Israel, it took them more time (indiscernible) to put an order. It has a specific effect on our third-quarter numbers. But we will see those sales in the coming quarters. Nothing was canceled or terminated.

I understand. Do you think that looking forward on new contracts, or I believe what you're talking about is a kind of shifting. Do you know when will these sales -- can you try to quantify them, what was taken off the third quarter? And when do you think they will be shifted to in the future?

We expect those contracts to happen shortly. But what we are going to do now is to be more efficient in adjusting our costs according to those delays. What we should have done is to adjust our costs according to those delays, which we did not do in the (indiscernible).

But, sorry I'm trying to concentrate on this point, but if these contracts are shifted, let's say to Q4 or Q1, I mean a cost-savings is not really necessary, is it?

Yes, but it's also, when we are measuring ourselves on a quarterly basis. So we'll have to adjust our costs and then to add on people when these programs will come.

Okay. Thank you. Next question, regarding the Turkish banks. Where do you think it stands? Is there any change from earlier guidance?

I don't think so. First, the Turkish program is not in our books yet. We do expect to have it this quarter, fourth quarter.

You mean you will announce the signing of the contracts and add the $200, $300 million to your backlog?

I'm not ready to give a specific number. It may change. But it is going to be significant. But, time-wise, the plan as of today, we are negotiating. We're in the final stages of negotiation. And yes, we do expect to get an order this quarter.

Okay. Final question, regarding, maybe an update on the UAV in Great Britain?

It's probably delayed (ph). They say that a decision will be taken somewhere mid-next year.

Mid-next year. Okay. Thank you, very much, and good luck, sir.

Thank you. Our next question comes from Dan Harverd of HSBC. Please go ahead.

Hi. If I understand -- if I heard correctly the numbers on quarterly revenues, it seems that Israeli revenues were about 35 percent of the total, which is actually the highest level on a quarterly basis for a couple of years. So I'm just trying to reconcile that with your comments that there is a slowdown in orders in Israel. Does that mean that you're also seeing a slowdown in other markets?

Talking about this specific quarter, we planned to have more sales from Israel; it didn't happen. The average activity for Elbit to Israel is about 30 percent. But for this specific one, yes, we did expect higher sales to Israel than really happened.

And in terms of other markets, are you also seeing any delays?

In other markets, yes. In addition to that, we also experienced some delays due to some technological (indiscernible) that we had, which we didn't solve on time. And this causes (indiscernible) some delays in this quarter.

Okay then you talked about some headcount reductions. Can you just tell us what departments those are coming from?

It's all over the Company. Since we did realize those delays, we started the process a (ph) month (ph) ago to reduce the headcount all over the Company. I'm talking about few thousands.

Are there any particular recession (ph) development projects which you've decided to discontinue?

Absolutely not.

Okay. Thank you, very much, and good luck.

Thank you. Our next question comes from Gabriel Biza (ph), national consultant. Please go ahead.

Good evening to everyone. Could you again specify the numbers -- quantify the numbers -- of sales that were delayed from the third quarter onward?

With your permission, I won't quantify, but I would say that a few millions of dollars, we missed from Israeli MOD. And I would say the same amount or slightly lower, we missed due to issues in technological R&D program that we did not conclude on time.

Okay. And do you think that you'll see these numbers, at least the numbers that are not concerned with technology, or maybe also the numbers that are connected to technology, in the fourth quarter of this year?

Yes, yes. We foresee these programs to be sold shortly, and certainly, we will be able to sell, including the IMOD (ph) programs. It will happen about into the next quarter and certainly next year.

Okay. Another thing, about the (indiscernible) was very good news to hear ,that you believe you'll sign the (indiscernible) Turkish contract in this quarter. So I understood; am I right?

Yes.

Okay. Could you give us approximately the size of the contract that Elbit will be writing in its books?

Since we are in the final stage of negotiations, I'm sure you understand that I will not mention numbers. But it will be significant. And I'm not sure yet how we will record it. It's not on our books yet. But it will be significant. But I don't know the exact number yet.

Okay. Again, a question that maybe you can answer at this stage (indiscernible), about the Turkish projects, the profitability of the project -- how is it relatively to an average profitability of an average project? Average profit of Elbit?

As I said, we are in the final stages of negotiations.

Okay. At least can you say if it's higher or lower, or anything?

It will (indiscernible).

It will be?

Accretive (ph).

Okay. Another thing. It's quite notable that the operating margins of the Company went quite sharply down. How do you see the next stage, the fourth quarter, and the year end 2004, as you see it just now?

This certainly will be improved. This is what -- we have started to look into that a month ago. And certainly, these numbers will be improved, certainly, in coming quarters and certainly next year.

Do you think that it will be anything like the quarters that were last year, or it will be only a bit better than now?

Again, I apologize, but I won't give any numbers. But we strongly believe and I have reason to say that we will have better numbers. And I'm not in a position to give you any guidance.

Okay. About reducing -- about making the company more profitable, and maybe sending a few employees and so on from the Company. Will you have onetime expenses about that?

Not significant. And I think that we won't record it as a onetime expenses. It is an ongoing process.

Could you again, about the profitability of the project, that sold in Israel -- how are they relatively to the average profitability of the Company?

Say it again, please?

The profitability of the projects that are related to Israel -- sold to Israel? How is the profitability relatively, to the average profitability of the Company as a whole?

There is no I would say -- it varies between either it's an R&D project or a production project, big one or small one. Sometimes you're sharing the same technology between more than one product. I cannot come up with a good answer to that.

Okay. Do you believe that if you did have the sales that were delayed to -- from all kind of reasons, do you believe that the profitability of the Company would have been quite similar to what we had the quarters before?

Very close to that.

Very close to that; good to hear. Tell me, how do you see the average, the normative tax rate that the Company will pay in the near future, in 2004, 2005?

As I say every quarter, we plan to be in the range about where we are. But we always -- (indiscernible) the offer to have the extra number below that. And we are making efforts to reduce the tax rate.

We saw tax rates that are quite not the same, in every quarter, quite another number. Would you say that 25 percent, or 30 percent would be a bit more the normative number?

Between 25 and 30 percent, there is a large (multiple speakers). But we have to remember that our tax rate is a result of the mix of profits that are generated in various tax jurisdictions, and therefore, the rate may change from time to time.

But (indiscernible), you look at 2004 and make your calculation according to where you are going to make your profit. Will it be closer to 30 percent, the tax rate?

We will try not to be there.

Okay. And the last question just for now, the Company that you bought in Belgium, when will we see the numbers of the Company together with Elbit and profit and loss (ph), so on?

It's already incorporated in our numbers.

It's already in the numbers there, for the third quarter?

Yes. But it's not significant. But we expect new orders coming from Europe, based on that Company next year.

Could you just give us -- what are the numbers, sales (indiscernible) and so on of this Belgium (ph) Company that is now in your profit and loss and so on?

The numbers are in single digits. As you know, we bought a Company for a relatively small amount. We actually bought it to combine it with our efforts to expand in Europe. And that is what it is supposed to do. We actually bought it for the future potential and incorporate it into our group rather than (indiscernible) existing revenues. Therefore, it is not material at this point.

I understand. I understand that this Company, the main reason that you bought it is to make a breakthrough in certain European markets. And how do you see Europe in 2004, 2005, the sales to Europe, if everything goes approximately according to your plans?

The plan is to have, to see an increase in new business coming from Europe, '04, '05.

Because we saw quite a big decline in the last (multiple speakers).

That's true. We had some programs which were concluded, and this is why we took a decision to buy this Company. And the plan is to see the results next year and after.

What interpretation would you give to the decline? Is it a (indiscernible) difficulty in making business just that way with the European countries? Or what interpretation would you give to it?

No, I wouldn't say so. It's on the contrary.

The contrary.

Yes. They are really open to us. However, we had to have a presence in Europe in order to lever that, and this is what we do.

Gabriel Biza; Which means that the (indiscernible) presence in Europe really caused this decline, you would say?

The fact that we didn't have a presence there was disadvantage to us, and we fixed it.

And the last question. We can see, maybe the last two questions. We can see that the geographic -- when we look at geographical sales of the Company, we see a big decline also in selling to other countries, which are not specified. How do you see the future? And do you think that it will change, or the decline will continue?

We see the growth. The plan is to see growth in Europe and the United States.

Which means that to (ph) other countries, you don't think that it will change much?

If we will not be successful to exceed the 100 percent.

And the last question about the electrical electro-optical segment, we can see that the decline in the segment continues, how do you see the future of this segment?

Based on that -- I think I mentioned that before -- we have decided to depart the R (ph) vehicle business from the electro-optics. We now have one land division separated from the electro-optics. And by focusing the Company of the electro-optics, we expect to see a change in that trend in the next year.

Thank you, very much.

Thank you. (OPERATOR INSTRUCTIONS). There no further questions at this time. Before I ask Mr. Ackerman to go ahead with his closing statements, I would like to remind participants that a replay of this call is scheduled to begin two hours after the conference. In the U.S., please call 1-866-500-4953. In Israel, please call 03925-5945. Internationally, call 972-392- 5945. Mr. Ackerman, would you like to make your concluding statement?

Thank you. I would like to thank everyone for joining us today. We look forward to speaking to you again next quarter.

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