Elbit Systems Ltd (ESLT) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems fourth quarter and year-end 2003 results conference call. All participants are presently in a listen-only mode. Following management's formal presentation, instruction will be given for the question-and-answer session. As a reminder, this conference is being recorded March 10th, 2004.

I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to all contents of this conference call. If you have not received a copy of today's release and would like to do, so please call [Gilbert Kahana] Investor Relations at 1-866-704-6710 or 9723-607-4717.

I would now like to turn the call over to Mr. [L. Pes] of [Gilbert Kahana] Investor Relations.

Good morning. For those of you in the U.S. and Canada, and good afternoon for those of you based in Europe, Israel and [inaudible]. I would like to thank Elbit's management for hosting the fourth quarter and full year 2003 results conference call.

With me today on the call are Mr. Joseph Ackerman, President and CEO, Mr. [inaudible], VP of Finance and Mr. Joseph Gaspar, Chief Financial Officer. [inaudible], would you like to begin, please.

Thank you. Good morning and good afternoon.

Thank you for joining us today to discuss our results for the fourth quarter and the year ended December 31st, 2003. I will begin with the financial review and then hand the call over to Joseph Ackerman, who will review and comment on our principal trends and operations during the fourth quarter.

Fourth quarter revenues were $262.8 million as compared to $238.3 million for the fourth quarter last year. Revenues for the full year reached $898 million as compared to $827.5 million over -- in 2002. Fourth quarter revenues increased by 10.3% when compared with the fourth quarter 2002, and year-over-year revenues increased 8.5%.

Gross profit for the fourth quarter of 2003 was $64.1 million with 20.6% of revenues as compared with gross profit of $67.2 million or 28.2% of revenues in the fourth quarter of 2002. Excluding the phantom auction plan effect, gross profit in the fourth quarter of 2003 was $54.8 million or 20.9% of revenues, compared with the gross profit of $67.2 million or 28.2% of revenues in fourth quarter 2002.

For the full year 2003 was $224.4 million and the gross profit margin was 25% as compared with $222.1 million and gross profit margin of 26.8% in 2002. Excluding the non-cash effect related to the company's phantom auction plan, gross profit in 2003 was $227 million or 25.3% of revenues. And excluding the nonrecurring charge under the Chief Scientist Agreement and the phantom auction plan effect, gross profit in 2002 was $23.4 million or 28% of revenues.

Consolidated net income for fourth quarter of 2003 was $12.5 million or 4.7% of revenues, compared with $13.1 million, or 5.5% of revenues in the same period in 2002. Diluted EPS for fourth quarter of 2003 was 31 cents as compared with 33 cents for the fourth quarter of 2002.

Our financial results were affected by the change in share price during the reported periods. The non-cash effect related to the employee's phantom option plan on the company's result net of taxes was $1.1 million, expense in the fourth quarter of 2003 and $3.8 million expense over the full year.

Consolidated net income for fourth quarter of 2003, excluding phantom option plan effect, was $13.6 million or 34 cents per share, compared to $13.1 million, or 33 cents per share in the fourth quarter of 2002. Consolidated net income for the full year of 2003 was $45.9 million or 5.1% of revenues, and diluted EPS was $1.14, compared with a net income of $45.1 million or 5.5% of revenues and diluted EPS for $1.13 in 2002. Excluding the phantom option plan effect, consolidated net income in 2003 was $49.7 million or 5.5% of revenues, and the EPS was $1.24.

In 2002, our financial results were also affected by one-time charge relating to the agreement with the Chief Scientist, which amounted to $9.8 million before tax, and in addition, our results were affected by $2.8 million tax adjustment. Excluding the one-time charge, the phantom option plan effect and the tax adjustment, consolidated net income in 2002 was $49.4 million, it was a net margin of 6% and EPS of $1.24.

Geographically, 2003 distribution of revenues were as follows: Israel was $255.7 million or 29% of revenues. U.S., $332.3 million or 37% of revenues. Europe was $109.4 million, 12% of revenues. And other countries were $200.5 million or 22% of revenues.

Distribution of revenues by lines of business for year 2003 were as follows: Airborne Systems, 373.6 or 42% of revenues. Combat vehicle systems, 199.8 million or 22% of revenues. C4I systems, $133.9 million or 15% of revenues. Electro-optics, $140.5 million, 16% of revenues, and other was $50.2 million or 5% of revenues.

[inaudible] as of December 31st, 2003 reached $1.75 billion, compared with $1.69 billion at the end of 2002. 63% of the backlog relates to orders outside of Israel, and approximately 80% or $1.4 million of the company's backlog. A [inaudible] is scheduled to be performed in 2004 and 2005.

I will now return the call over to Joseph. Go ahead.

Thank you, [inaudible].

2003 was a year with many challenges and many achievements. This year, we achieved record sales just below the $900 million mark and generated more than $950 million in new orders. We also generated net earnings of $49.7 million, excluding phantom expenses, and an operating cash flow of $91.4 million.

However, although we have done well in all of our other parameters, we did not reach our target goals profit margin, which was unusually low in the last quarter of the year. This was due mainly to costs associated with war that was performed for cutting edge technology projects in the areas of air reconnaissance, space systems and advanced airborne systems. While these costs affected our current results, we expect that when these efforts are completed, we shall have additional technological assets that will contribute to the future. Another factor that affected our gross profit was appreciation of the Israel shekel against the U.S. dollar.

In addition, as you all know, over the years, we have invested [inaudible] and efforts in developing core technologies and systems that for various reasons are handled in companies owned 50% by Elbit. Under U.S. GAAP, reportings of business results of these core operations mainly in electro-optics and airborne systems areas are not consolidated in our financial reports and accordingly are reflected below the gross profit and operating profit line. These businesses, mainly VSI and SEV, generated net profit close to $15 million in 2003, on which 50% is reflected in our results.

We have continued our efforts to increase the efficiency of our operation. We successfully completed the creation of our new land system division combined with our vehicle and C4I divisions. And in recent months, we have also reduced our head count where necessary.

As mentioned before, our revenues increased by 8.5% over last year. The main driver for this growth was our vehicle division, where sales were made to programs such as Merkava, main battle tank in Israel, [inaudible] in the United States. Electro-optics were saved in recent quarter were relatively weak, achieved $61.4 million in the fourth quarter.

During the year, we made three relatively small but important acquisitions. Acquiring 100% of OFP in Belgium, 8% of AeroAstro, which in the U.S. micro and nano space of company and 54% of aero design development, an Israeli company in the unmanned vehicle business. These acquisitions are important for the company growth strategy in these select areas, and we expect each one of them to contribute to our success in the future. And at the same time, we will continue to look for strategic acquisitions that meet our return criteria.

As mentioned above, the new business generated, enabled us to end the year with a significant increase in our backlog. New business included a a relatively large number of contracts, including a $40 million order for electro-optical system in Asia, and a $47 million order for UAV system for to use in the Minister of Defense, and $57 million for night vision system. Although VSI, the helmet-mounted system, U.S. company, we own jointly with [inaudible], received orders amounting to $60 million for JH and CS helmet-mount systems, as well as an 84.6 million orders under the joint strike fighter program.

With that, I shall now open the call for questions.

Thank you, sir.

Ladies and gentlemen, at this time we'll begin the question-and-answer session. If you have a question, please press the star followed by the 1 on your touch-tone phone. If you wish to decline from the polling process, please press the star followed by a 2. Your questions will be polled in the order they are received.

And our first question comes from Steven Levy of UBS [inaudible]. Please go ahead, sir.

Good afternoon, guys. Just a couple of questions from me.

First of all, regarding government grants for R&D project, the grants you received in 2003 look to be significantly higher than the year before. Do you have any visibility or clarity as to what kind of grants you'll be receiving from the government this year? And with that in mind, can you give us a sense for how you see your next R&D budget in 2004?

Steven, yes, it's a good point. We actually increased our investment in R&D this year, and we did have additional support by the Israeli government. We expect the support in the future to be higher than it was last year, and hopefully, we can get to a number close to what we had this year.

The next R&D budget in '04, despite the increase from the government, you still expect net R&D to be higher this year than last year?

We have a long-term program of investing in R&D. The net number will depend on the support that we get, and obviously, we'll try to get as much support as we can.

Joseph, you mentioned some cost cutting that you've been doing. Can you give us a bit more detail? I noticed in the results, your sales and marketing in Q4 was at a similar level to Q2, yet your revenues were significantly higher. So I'm suspecting there's been some fairly drastic cost cutting, and I want to know how that's going to show up in the numbers in 2004.

Yes. What we did is we went through cost cutting exercise in all parameters, not necessarily in those you have mentioned, and we expect to see the result in '04, and we let some people go. We saved some costs in all kind of parameters, and hopefully we'll see the results in the coming year.

Can you quantify what the cost savings should be annually?

It's quite difficult, because we did that in many areas. In head count, in other expenses, in some marketing expenses, in some shows, in eliminating applications, but it's quite difficult to quantify each one.

We're talking about on an annual basis, about millions of dollars here or hundreds of thousands, about 10 million? Just to give a kind of sense.

This -- some of this cost cutting, we are going to put back into R&D. So basically, we expect the margins -- the results for next year will be better than this one. I mean, '04 will be better than '03 thanks to those measurements.

Just want to touch on the gross margins. From the comments that you made in your opening statement, the impression you're giving is that the issues that you face in Q4, in terms of ongoing projects, were all accounted for in the fourth quarter. Does that mean that we should see gross margins go back to normal in 2004, or is this going to be an ongoing -- are there going to be ongoing costs related to these projects that we might see left over for the first couple of quarters?

This was a one-time event. This 20%, or whatever number it was, is a one-time event, and certainly, next year, will go back to the typical numbers.

Just maybe an explanation. The way we do it is -- what we did is a kind of estimate is complete for 7 programs. And we saw some overrunning there, and the whole impact, we incurred in the fourth quarter.

The last question from me, obviously, there's been a lot of discussion, a lot's written about the state of the Israeli defense budget, Can we assume that both short-run and long-run, with the good revenue numbers you had this quarter and the good backlog numbers, that that is now an issue in the past, that [inaudible] defense is ordering and also paying you, and your booking revenues from them is normally again?

Yes. What I can say is that we managed to enter into R&D projects, which the Israeli [inaudible] found it interesting. So we were not affected by the [inaudible] budget this year, and we anticipate to get the same volume of orders also in '04.

Thanks a lot.

Thank you. Our next question comes from Gabriel [Viv] of National [inaudible]. Please go ahead, sir.

Good afternoon to everyone.

I would like to ask, could you give us, from a guidelines and highlights, to the year 2004, revenues, gross margin and so on? That's the first question.

Second one, could you talk about the main generators that will give you the main business in the year ahead? And if you can mention if you have them.

The third question, we can see that the profit from affiliated companies is start being very important figures in your statements. Could you tell us about what are the built-out of -- what kind of -- about the revenues, about the margins, and so on? And the main thing, of course, what do you -- how do you think that they'll look in the near -- or in the far future, the profit from the affiliated companies?

Thank you.

Thank you.

We usually don't give guidance, as you know, but what I can tell you is that for '04, we see a continued increase in the sales. I already made my point on the GP, on the gross profit. The main growth we foresee in the United States for '04, on those affiliates, we are talking now about an electro-optic company in Israel named SED. Yes, we do foresee a continued growth in that company, and this is in our core business. They do all kinds of electro-optics devices and technology, and they are very much related to what we do in our electro-optic division.

The second company is DCI. They are in the helmet business and they are very much related to our airborne system programs, and we also foresee there growing business. And certainly, we'll see the impact in '04.

Generally speaking, I would say that we foresee '04 as a better year than '03 in all parameters.

If you could just refer to the revenues, here we can see only one line of sales, only the net profit of these companies. If you could give us more of the dimensions, the figures of these companies, which means the revenues of the companies, operationally -- operating profit and so on, so we should have some more feeling of what's going on in these companies, the growth of the revenues and so on.

This, since we have partners with those companies, usually we don't give too much of details there, and I apologize for that. What we can say that both of them will continue to grow next year. We are talking about tens of millions of dollars for each company. Profitable companies. The profit will increase next year, both the electro-optic company, due to a large investment that we did there in the last five years.

The VSI, the helmet company, due to U.S. contract, both JSF and others, will continue to see this company growing as well. Not necessarily in Q1, but certainly through the year of '04.

The last question, if I may, you said about the impact of the shekel on your profit, could you quantify the figures approximately, the shekel against the dollar.

Yes. I think that's about few millions of dollars.

Few million. Okay. Thanks.

Thank you. Our next question comes from Alexis [inaudible]. Please go ahead, ma'am.

Good afternoon, Joseph.

I was wondering if you could comment about the Turkish tank deal. On the last call, you did say that you expected to have a contract, I think you said closed, by the end of 2004 -- sorry, 2003. And I havn't actually seen anything on it. So I'm just wondering if you can give an update?

Yes. One, is not in our backlog. Second, this will happen very shortly.

Okay. Another thing, just going back to the gross margin and profitability in general, Q3 results were not particularly good either, and at the time, you did say that that was also a one-time event. And my understanding was that Q4 would already be better, and obviously, that hasn't been the case, and so that has implications for, you know, assumptions next year, because we now have two quarters, which were surprisingly weak. So I wonder if you can address that point and maybe give some confidence to the fact that there will be improving figures.

Yeah. I appreciate the question very much. Yes. I did say in the last quarter, quarter three, that we'll see an improvement, and if we compare now the fourth quarter to the third one, you see that we grew our sales from 114 to 269 -- 262, by $50 million. If you go to the bottom line, to the EPS, without the phantom, we grew the EPS for 24 cents to 34 cents.

Okay. I agree, the revenue figure was very strong, and that's obviously not where the problem is, but the gross margin, it's a very significant drop.

Yes. You're right. I'll get to that, but first, I want to emphasize that we did improve the results, both in the sales and in the EPS. Certainly, we did not meet our expectation in the gross profit, and I already gave the reason for that, but certainly, this is not an indication whatsoever for '04. We know the reason, we understand the reason, and certainly, this is not any indicative for 2004.

So can we expect, at least, levels that we did see in 2003, even as high as the first quarter of 2003, or say, is the last couple of quarters the more reasonable trend level?

What I would say, that -- talking about the annual numbers, '04 won't be lower than '03, the margin.

On average.

Yes. Won't be lower.

Okay. Thank you.

Your welcome.

Thank you. Moving on to [Guy Ziser] of [inaudible]. Please go ahead, sir.

Hi. Good afternoon.

Could you be more specific about the [inaudible] breakdown according to years? Because under [inaudible] assumption, I tried to see the growth in the revenue in 2004. This is my first question, so --

Guy, we normally do not -- we do not give the breakdown in years. In other words, we cannot give the breakdown that will show you what portion of the backlog will be sold in 2004 itself.

I see.

But I think that if you go back to history, you will see that the distribution of revenues is not linear.

I see.

And I think that we are at the point where we have the highest backlog we ever had, and we do have $1.4 billion in the [inaudible] of year end, and you also mentioned theTurkish problem, which expected, is not in there.

Okay. My second question is, there is a gap between -- a gap of almost $65 million between your actual revenue and your former breakdown to Q4. Could you say where those incomes mainly came from?

Can you elaborate, just explain the numbers again?

As I calculated, the breakdown of the revenue for before the -- for Q4, I found that the amount of income that came -- supposed to come from the backlog is almost a $200 million, as well -- when your actual revenue was $263 million.

So my question is the gap, where most of the revenue -- where the rates came from. Was it service or other things?

Most of the revenues in 2000 -- in the Q4 came out of the backlog. But I'm not sure -- the information that I believe we had given was the -- again, similar to what we have given now. In other words, the backlog at the end of the last quarter, Q3, and how much will be sold in Q4 and the year of 2004. So I'm not sure how you got the number.

Okay. So I will check it later.

And my last question is, the provision with tax in the quarter was very low. Could you say why?

Yes. First of all, the annual tax rate was similar to a normal rate.

Okay.

In the fourth quarter, we had a better tax rate. In other words, lower tax rate due to benefits that are related to approved enterprise zone in Israel and tax benefits related to export transactions in U.S. companies.

Okay. Thank you, and good luck.

Thank you.

Thank you. Your next question comes from [inaudible] of CIBC.

Hi, guys. Just a couple of quick questions from me.

First, can you comment on what would be the -- your expected tax rate for '04?

I think that it will be -- we would like it to be somewhere around what it -- where it has been, depending on the type of benefits that we get during the year.

So that's between the 25-27 level?

Hopefully below that, but again, you have to look at average rates. So it could change from one quarter to another. But on the average, it should be around -- below that.

Okay. And when do you expect a final decision regarding the big UAV project in the U.K.?

This was formally announced. This will be around the end of the year.

That's it for me. Thank you very much.

Thank you. If there are any additional questions, please press the star followed by the 1 on your touch-tone phone. If you wish to cancel your request, please press the star followed by a 2. One moment, please.

We have a question from Patrick McCarthy of Friedman, Billings and Ramsey. Please go ahead, sir.

Good afternoon.

I was wondering if you could add a little bit of color to both the armored vehicles business and the electro-optics business. Both of them seem to have a very strong fourth quarter relative to the first three quarters. And if you have any background on that?

Yes. We have been pursuing these programs for many years, and we incurred all those expenses, and finally we got them all in the same quarter. This is what happened both in the new business, and then we managed to sell some of it in the fourth quarter.

So are these closer to what you'd expect to be a run rate on a going-forward basis, or are these one-time blips that we shouldn't really read too much into.

Say it again, please.

Is this kind of the -- is this the new run rate that we should be thinking about on a going-forward basis, or are those just kind of one-quarter --

I will say, I think you should look into that on an annual basis. But I want to add to that that we also saw some growth in the airborne systems, but this was in our affiliate company.

So you're saying the armored vehicles business is a $200 million business now, or thereabouts?

Around, yes.

Okay. Thank you.

And we have a follow-on question from Gabriel [Viv]. Please go ahead.

Okay. If we leave for a minute the [inaudible] of the last quarter and look more specific, the way of looking at the company, I asked this before, but I'll ask it again, could you talk about the main activities that will give you -- your future revenue and so on in the next few years, and if you could think of how do you see your -- how will we see the growth of the companies in these years because of these activities? Thank you very much.

Thank you. We see our growth in the areas of UAVs, C4I, electro-optics and airborne systems. Geographically, the main growth we see in the United States. And this is exactly where we put our R&D money. And we are starting to see the results there.

Excuse me?

We can hear you, Gabby.

Could you -- out of these activities, what would you think that your growth -- the growth of the company will be in these few next years? Thank you.

The plan is, we are talking without major acquisition.

Without major acquisition.

Well, we expect to have one-digit number growth annually.

Thank you very much.

Thank you. There are no further questions at this time. Before I ask Mr. Packholder to go ahead with his closing statement, I would like to remind participants, a replay of this call is scheduled to begin two hours after the conference. In the U.S., please call 1-877-332-1104. In Israel, please call 03-9255-945. Internationally, call 9723-9255-945.

Mr. Packholder, would you like to make a concluding statement?

This is Joseph Ackerman speaking.

I would like to thank our staff for their hard work in 2003, and you, our investors, for your continued support. We also would like to thank you for joining us for this conference call, and we hope to see you all again in three months' time.

Thank you and good-bye.

Thank you.

This concludes Elbit Systems Ltd. fourth quarter and year-end 2003 results conference call. Thank you for your participation. You may go ahead and disconnect.