Elbit Systems Ltd (ESLT) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems Limited first quarter 2004 results conference call. [OPERATOR-INSTRUCTIONS] I would like to hand over the call to Mr. Ehud (ph) of Gelbert Kahana Investor Relations.

Good morning for those of you in US and Canada and good afternoon to those of you who are based in Europe. I would like to thank Elbit Management for hosting this first quarter 2004 results conference call.

With me on the call today are Mr Joseph Ackerman, President and CEO, Mr. Ilan Pacholder, VP, Finance and Mr. Joseph Gaspar, Chief Financial Officer. Ilyan, would you like begin please?

Thank you, Ehud. Good morning and good afternoon. Thank you for joining us today to discuss our results for the first quarter, ended March 30th 2004. I will begin with a brief financial review and then hand the call over to CEO, Mr. Ackerman, who will review and comment on our principle trends and operations during the quarter. Our fist quarter revenues were $213.7 million as compared to $202.2 million for the first quarter last year. Gross profit for the first quarter of 2004 was 56.9 million, similar to that of last year with a gross profit margin of 26.6% as compared to 28.1% last year.

Operating profit in the first quarter of 2004 was $15.8 million as compared with $14.9 million in the same quarter last year and the operating margin was similar in both quarters at 7.4%. We continue to invest in the development of new technologies as spent this quarter $60.5 million in R&D, close to $1 million more than we did last year. In the first quarter of 2004, we had a higher level of participation by the various branches of government and therefore our R&D expense is lower than last year's on a net basis.

We continue to benefit from the contribution of investments in affiliates and had net in contribution of $1.4 million for the first quarter of 2004. Last year we had $1.9 million contribution in the first quarter, mainly due to significant sales that were made in that quarter by certain of our affiliates. Overall, we expected this affiliate to continue and contribute to our net income.

Consolidated net income for the first quarter of 2004 was $12.7 million as compared to $12.3 million in the first quarter last year and the EPS was 31 cents similar to that of the first quarter of last year. Operating cash flow generated in the first quarter was $25 million and these together were $78 million operating cash flow generated in the fourth quarter of 2003 enabled us to reduce further and to bring make us to a net cash position of $18 million at the end of the quarter.

This quarter distribution of revenues was as follows. Israel. $53.9 million or 25.2% of revenues, US $79.5 million or 37.2% of revenues, Europe was $32.1 million or 15% of revenues and revenues in other countries were $48.2 million or 22.6% of revenues. Overall our revenues increased in all of our strategic market. The highest increase was achieved in Europe were we generated revenues from new programs, plans to Europe also included this quarter, the revenues of our recently for the European subsidiaries YB, which was not consolidated in the first quarter last year.

And back to the folders as of March 30th 2004, brought a new record of $1.82 billion compared with $1.75 billion at the end of 2003. 64% of the backlog is related to all those outside of Israel and approximately 74% or $1.3 billion of the companies backlog achieved at the end of the quarter is scheduled to be performed in the last three quarters of this year and in 2005. This concludes the financial review and I will now turn the call to Joseph Ackerman.

Thank you. The results were reported today for the first quarter of 2004 were the best results ever reported for the first quarter in Elbit systems, in terms of revenues, new business net income and cash flow. During the quarter, we made several of our important projects announcement that signify a variety of business flow coming into the Elbit group, in all of our major business lines. Among them were two electro-optics projects received by (inaudible) including an order exceeding $10 million, to generation compose of various systems. This is an initial order for the system and we expect more to follow.

A larger electro optic order was received as a ground thermal fact system amounting to $63 million, which follow a $53 million order for the sales system that was received just before year end, both demonstrates the leadership position of Elbit system, have gained in the international market. Our ESW (Ph) a period received a $32.6 million contract to provide common data entry electronic unit, which is part of the corp. display for F16. These contracts marks the continued development of the ESW's recognition as an important provider of advanced air borne and ground system in the US market. The US market is the largest defense market globally and one where we made a sufficient decision to continue and increase our market presence.

In February of this year, the US air force received the first of its 102 F16 aircraft. Seven companies of our group including Elbit systems, El-Op, PSW and the cyclone have system on board on this aircraft, ranging from structural assemblies to mission computers, air displays, display possessors, helmet bound displays and other systems. These systems have additional revenue potential that will be delivered through other F16 customers. An important decision taking by usually MOD with respect to UAVs was the selection of our mini UAV Sky-X system as the system was easily ground forces. While no revenues have been accounted for yet, this selection sanctions Elbit position as the UAV provided of MOD and at the same time, we continue to pursue significant UAV programs worldwide.

Our all-vehicle business received two important contracts, the first was $20 million contract for the mark 4 in Israel and the second was the long awaited $183 million contract for the Turkish M60 upgrade program which was announced shortly after our 2003 year end conference call.

I believe that all these new contracts show the validity of our long-term strategy of investing in development of new technologies, focussing our effort in exploring visible opportunities in growing markets. While looking to utilize the synergies that exists in our group. We continue to develop overall in the security business, where Elbit system has participated for years, with our UAV systems, surveillance and reconnaissance, command and control and other technology. We see ongoing interest in our system for various applications globally.

The growth profit margin achieved this quarter is in line with our expectations and we can reconfirm our estimate given during our last conference call of average 2004 gross profit margin, being over 25% is possible quarterly variations. Overall, we feel that the result published today reflect our continued commitment to the performance of the company and we continue to expect 2004 to be a better year than 2003. With that, I shall now open the call for questions.

[OPERATOR-INSTRUCTIONS] Our first question comes from Stephen Levey of UBS, please go ahead Sir.

Hi good afternoon gentlemen and congratulations on the pretty good set of results today. Few questions for me, first of all, with respect to phantom options, can you tell us what the expense of phantom options was in Q1 compared to Q1 of last year please?

The effect was not material, not significant in either quarter, this quarter was a couple of 100,000, last year, and it was a bit higher.

Thanks and second of all, on the asset issue that you made and the consolidation, can you give us a rough idea of how much of that acquisition contributed to the revenues this quarter, just hope to give a good year over year comparison in terms of revenue growth?

The contribution I presume, you are referring to OIP.

Yes.

That contribution was not that significant in term of revenues this quarter.

OK, you will see question on margins, I know you don't give guidance, you just commented that your gross margin is still think would be about 25% but frankly, I think you would probably surprised a lot of people today with a very good performance on the gross margin levels, I am trying to figure out is that just one off mix of revenues this quarter, is that cost cutting and we can expect that you see this kind of level of gross margin going to the year, 25% based on where you are today, would probably be quite disappointing there, is that really a very conservative bit of guidance in terms of where gross margins are going to be?

When we called last time, I said that it wont is less than 25% annually and now I feel more confident that we will make it.

Is this the number that you would feel comfortable with going forward to the next few quarters around the 26.5%, 27% level or is this a particularly good quarter in terms of business mix?

I would rather still refer to the annual numbers and certainly, it would be higher than 25 but I cannot comment on the quarterly but annually, we will succeed to be over the 25%.

OK and just on the R&D expense, you commented on the good participation from the few scientists this quarter and certainly, the R&D number was pretty low in Q1, it was lower than it was in Q4 on higher revenues, can you give us a sense for what you are seeing in terms of participation from the G-scientists in 2004 and in terms of percentage of revenues, what will be a fair assumption for our net R&D expenditure?

Steven, I think that R&D will go about at the same rate as you see and I think that the total participation this year, from Elbit Systems customers and another agencies, will be at a higher level than it was last year.

Sorry, can you explain what you mean by the growth and the similar growth of the R&D spends if we compare Q1 over Q1, I would understand.

I am saying that the gross R&D expenditure will be in terms of percentage of revenues will be about when you see it now, but you have to remember that it fluctuates up and down. It is about the same area.

As a percentage of revenue, you are saying that the net R&D spends might well be lower than last year, but the gross number would probably be about the same.

Depending on the level of participation, from outside, from third parties, which at this point, we would expect to be higher than it was last year, then the net may be lower than it was last year, but I would still have to go through here.

Seem like right now, that this wasn't a kind of one off aberration this quarter?

At the year end, will be I think again, it is not the one of the participation level is higher, the rate of how much higher you give them last years we still have to see it will be higher than last year

OK, that is it for me, thanks guys, well done.

Thank you, our next question comes Dan Harvard of HSBC, please go ahead Sir.

I was working on the numbers, even covers most of the areas I was going to ask about, perhaps you could just talk about the (inaudible) agreement with Galac (ph) Satellite that was announced recently, what markets it is focussing and when you would expect to see material revenues?

The regular market is only present market and others but we don't foresee sales in 2004, we will start seeing result starting '05. As of now, we are putting together a joint system, joint solution, joint strategy and we will start seeing results only next year.

Right, OK, just turning to the P&L financial income was lower than I have seen in previous quarter, any reason for that?

No, we had finance expanse if you compare it to same quarter last year, finance expanse was lower than it was last year and we had more cash, we had less borrowing, that is the main reason.

Given that you now have net cash precession, should we except to see financial income rather than financial expanses going forward?

No, it depends, first of all depends on the cash position, going forward, which we at this point, I don't think we can discuss, and in addition, last year we had the sources for financial income that we may not have this year, so its not - I am not sure what it will be this year.

Is there any reason why you have - de-leverage the balance sheet?

Balance sheets, you mean-

In terms of moving from net debt position to the next half?

We had good cash, we repaid that we thought should be repaid. I think that the level of debt that we have today is not significantly different than what we had in the past and I think that the balance sheet, now the leverage ratio that we have opens a lot of opportunities for the strategic terms that we have.

OK, thank you very much

Thank you, our next question comes from Shephard (inaudible) of UBS, please go ahead.

Hello Mr Ackerman and Mr. Pacholder. I was wondering about the - anti missile system that was padded 12 to 18 months ago, we haven't heard much about it, and I believe we are expecting a few performance milestones this year and possible FIA certification, could you comment please?

Yes, we have a some ongoing activity, then we are going to be a funded and its own plan and since this is a kind of sensitive product both in Israel and other places, we cannot disclose too much of details but it is on plan and we hope to be the first launch in this kind of the system.

How do you feel the - your product stands on the competitive landscape out there, we have been hearing about some other similar infrared technologies out there, could you comment please?

I think we are very much aware of what's going on worldwide, I think we are at least as good as.

Thank you very much.

Thank you and do we have a question from Susan Lynch of Solomon Smith Barney.

No, my questions have been answered, thank you.

OK, my next question comes from Nabi (Ph) (inaudible).

Good afternoon to everyone, two questions, I would like to know is there any news about the Watch Keeper project in England and when do you think that you will hear the results of who won this contract, that is the first question. The second one is how do you see the potential of AMS aware project in the next few year, you specified that the contract that you now won, $20 million, how do you see the continuation of this project, thank you very much.

On the Watch keeper, it is on schedule, it is on plan and the decision hopefully will be before yearend.

I wonder you said that Galac has opened a company that is going to deal with a such a - I think was a project, they said something like it, could you tell us some more details about it, I read it in the newspaper?

I think Galac is going to make some announcement in the coming days. Sharing with you and everybody what are they planning, obviously to win, certainly, we are part of that, so if you can just wait one or two more days.

OK, what about the other questions?

They were on schedule and on plan and I foresee more orders in the -

But the same amount - how many million dollars do you believe?

I think we will have few tens of million dollars more orders on the -

Thank you very much.

Thank you. [OPERATOR-INSTRUCTIONS] At this time, we have no more questions. I would like to ask Mr. Ackerman to go ahead with his closing statements. I would like to remain patricians that this call scheduled to begin two hours after the conference in the US please call 1866-27-1002, in the UK please call 0800-169-8104 and in Israel please call 03-9255-984. Mr. Ackerman?

Thank you very much and looking forward to seeing you on our next conference call.