Elbit Systems Ltd (ESLT) 2004 Q2 法說會逐字稿

(technical difficulty) Ltd. 2004 results conference call. All participants are at present in a listen-only mode. (Operator Instructions). I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to all content of this conference call.

If you have not received a copy of today's release and would like to do so, please call Gelbart Kahana Investor Relations, at 1-866-704-6710 or 972-3607-4717. I would now hand over the call to Mr. Ehud Helft of Gelbart Kahana Investor Relations. Mr. Helft?

Good morning for those of you who are in the U.S. and Canada. And good afternoon to those of you who are based in Europe, Israel and elsewhere. Thank you for joining us today for the Elbit Systems second quarter results conference call.

Before I begin, I'm glad to thank Elbit's management for hosting this conference call. With me today on the call are Mr. Joseph Ackerman, President and CEO; Mr. Ilan Pacholder, VP of Finance; and Mr. Joseph Gaspar, Chief Financial Officer. Ilan, would you like to begin please?

Thank you Ehud. Good morning and good afternoon. Thank you for joining us today to discuss our results for the second quarter ended June 30, 2004. I will begin with a brief financial review and then hand over the call to Joseph Ackerman, who will review and comment on our principal transit operations during this quarter.

Our second quarter revenues were $231.6 million, as compared with $218.8 million for the second quarter last year. Revenues for the first 6 months of 2004 reached $445.3 million, as compared to $420.9 million during the same period last year. The increase in our share price during the second quarter affected our financial results, due to the non-cash expense that is recorded in connection with our employees' phantom option plan.

Therefore, as I review the results, I shall inform you both of the reported U.S. GAAP numbers and of the results excluding the phantom option plan effect for both this year and last year.

Excluding the phantom option plan effect, gross profit in the second quarter of 2004 was $60.4 million, or 26.1 percent of revenues, compared with gross profit of $60 million or 27.6 percent of revenues in the second quarter of 2003. Our reported gross profit for the second quarter of 2004 was $58.5 million, or 25.3 percent of revenues, compared with reported gross profit of $57.4 million or 26.2 percent of revenues in the corresponding period last year.

Excluding the phantom option plan effect, operating profit in the second quarter of 2004 was $17.2 million or 7.4 percent of revenues, compared with $17.8 million or 8.1 percent of revenues in the second quarter of 2003.

Reporting -- reported operating profit in the second quarter of 2004 was $13.8 million, or 6 percent of revenues, compared with $12.7 million or 5.10 percent of revenues in the second quarter last year. We continue to invest in the development of new technologies and have spent $16.3 million on R&D during the second quarter, compared with $15.2 million in the second quarter of last year.

During 2004 we received a high level of participation by various on-site sources. And therefore, our R&D expense was actually lower than last year on a net basis. That, in addition to other reports made by the Company, helped in reducing our operating expenses as a percentage of revenues, both in the quarter and in the 6-month period ended June 30, 2004 when comparing the results of 2003.

Excluding the phantom option plan effect, net income for the second quarter of 2004 was $14 million, or 6.1 percent of revenues. And diluted EPS was 34 cents. This is in comparison with net income of $13.3 million, or 6.1 percent of revenues, and diluted EPS of 33 cents in the second quarter of 2003.

Reported net income for the second quarter of 2004 was $11.3 million, or 4.9 percent of revenues, and diluted EPS was 28 cents, compared with $9.2 million or 4.2 percent of revenues, and diluted EPS of 23 cents in the second quarter of 2003.

We generated $29.7 million in operating cash flow in the second quarter of 2004. This cash flow, which currently, in addition to the $25 million generated in the first quarter of this year, enabled us to reach a net cash position of $28 million at the end of the quarter.

Our Board of Directors declared an extraordinary dividend of $1.80 per share, which was doubled at approximately $72 million. Following payment of the dividend based on June 30, 2004 numbers, our net debt will be approximately $45 million. And shareholders equity will be approximately $405 million.

Accordingly, our net debt-to-equity ratio will be about 11 percent. And our equity in total assets will be approximately 41 percent. As I mentioned, these estimates are based on our June 30, 2004 balance sheet. And they show a fairly low leverage, even following payment of the dividend.

I shall now provide you with our distribution of revenues for the second quarter of 2004. We generated revenues of $56.6 million, or 24.4 percent, from Israel; $87.3 million, or 37.7 percent, from the U.S.

Our sales in Europe were $33.7, million, or 14.5 percent of revenues. And $54.1 million, or 23.4 percent of our revenues this quarter, were generated from other countries. Overall, our revenues in the U.S., Europe and other countries increased vis-a-vis (indiscernible) as well.

Our distribution of revenues by lines of business for the second quarter 2004 were as follows -- airborne systems, $98.7 million or 42.6 percent of revenues; land vehicle systems, $50.5 million or 21.8 percent of revenues; C4I systems, 27.8 million or 12 percent of revenues.

Electro-optics showed the largest increase over the previous year and generated revenues of $38.5 million, or 16.6 percent of total revenues in the quarter. Others accounted for $16.1 million, or seven percent of revenues.

A (technical difficulty) report (ph) is as of the June 30, 2004 reached a new record of $1.9 billion compared with $1.75 billion at the end of 2003. 68 percent of the backlog relates to orders outside of Israel. And approximately 63 percent, or $1.2 billion of this backlog, is scheduled to be performed over the next two quarters of 2004 and over the year 2005.

The majority of the balance of the 37 percent is scheduled for sales in 2006 and 2007. This concludes the financial review. And I shall now turn the call over to Joseph Ackerman. Joseph?

Thank you Ilan. Since our last conference call, several major events took place. For one, we made several important project announcements that confirmed the validity of the strategy that we adopted of investing in developing technology that are required by the defense market and incorporating major defense companies in Israel and abroad.

We received a $40 million contract to operate and maintain the Israeli Air Force flight school helicopters over a ten-year period. Services (ph) has been one of our growth engines. And this contract, which comes on the top of the T5 (ph) program we already have for providing aircraft flight hours for the Israeli Air Force flight school.

In yet another validation of the outsourcing concept that we expect to continue and grow, another area that is becoming a growth engines for Elbit Systems is commercial aviation -- in our case, application of high-end aviation systems to commercial applications.

A good example for that would be the contract awarded to our U.S. subsidiary and Honeywell to supply Head-up Display units, HUD for short, to the commercial transport (ph) market, which started with the contract to provide the major cargo carrier wide body fleet with the advanced HUD.

With that contract, our recent orders for the commercial transport aviation market now exceed $60 million. And we expect this market, where we also sell our unique enhanced video system, to continue to build.

A lot has been said about the need to protect civil and military aviation from shoulder-launched missiles. And we have already seen one recent example where a missile was launched against a commercial aircraft. We have been developing an electro-optical system designed to identify and protect airplanes against such threats.

In order to expedite the time to market, we formed a team with Rafael, an Israeli company, to complete the development manufacture and marketing of this system called MUSIC. The MUSIC system will use assets of both companies and was selected by the Israeli Minister of Defense and Transportation as a long-term solution for the Israeli civil aviation protection plan.

The unmanned airborne vehicle, or UAV business, has been an important part of Elbit for many years. Our position in the global UAV market was strengthened by two recent events. The first one was the pilot program run for the Department of Homeland Security in the U.S., where we provide the customs and border protection authorities with our (indiscernible) UAVs, including ground control station and personnel in order to improve day and night surveillance along the Arizona/Mexico border and provide better respond capability for the Border Control.

Still in the UAV business, the UK Minister of Defence announced during the Farnborough show a few weeks ago its selection of the Thales UK team as the preferred bidder for the Watchkeeper program in which Elbit Systems has a significant part.

While no details in terms of dollar amounts or a timetable can be disclosed at this stage, and until Thales finalizes negotiation with the UK Minister of Defence, we see this selection for a program plan to provide essential intelligence, surveillance, pilot acquisition and reconnaissance based on a tactical UAV system to the UK missile defense as a major recognition of our capabilities in this growing business.

We have been asked recently about the Israeli Army ground force digitalization program. As you may recall, we announced in the past the selection of Elbit Systems as prime contractor for this program, which is based on hardware and software C4I technology that has been developed by Elbit Systems involving multidisciplinary integration and computerized, and control systems.

We have since been negotiating this program with our customer and (indiscernible) that this contract, if signed, to be material both in terms of size and technological advancements.

Reaching a new record of our backlog of orders, with estimated initial follow-on orders that are not in our backlog of around $1 billion, gives us a great deal of confidence in our future growth. At the same time, we are focusing on improving our profitability.

And as part of enhancing the Company structure in order to streamline our operations we have appointed Mr. Itzhak Dvir, who headed our UAV division, to become the new Chief Operating Officer with the aim of focusing on improving our profitability.

Another event that has been taking place recently was the sale of around close to 30 percent holding in Elbit Systems to The Federmann (ph) Group based on $1 billion Company value. This was actually carried out between two shareholders in a friendly manner. It is behind us. And the Company continues to work toward its stated goals of growth and improved profitability. And with that, I shall now open the call for questions. Operator?

(Operator Instructions). Michael Klahr, UBS.

Congratulations on an excellent quarter. Just a couple of questions from me, the first regarding your G&A expenses after excluding phantom options for the quarter. They were quite a bit below what we were estimating. Is this indicative of what we can expect going forward? Is there any key reason for the lower G&A expenses? That's my first question.

My second question is regarding what are the key terms -- or can you give us any color on the key contracts and key tenders that you are competing for over the next 6 to 12 months? Thank you.

I will answer your first question. It's Ilan. I would like to say first of all the difference in the operating expenses as a percentage of revenues has been mostly on the R&D -- on the net R&D as I mentioned before, and on the G&A expenses.

Rather than discussing the future of those expenses, I would like to say that it's a result of efforts that are made. And as Mr. Ackerman said before the Company is committed to make efforts to improve profitability.

Would you repeat, please, your second question?

Yes. My second question is can you give us any color on the key contracts that you are competing for -- the key tenders both for the next 12 to 18 months?

With your permission, I will eliminate only on two of those. One is the Watchkeeper that I already mentioned. We have started negotiation with the UK Mod. And as we were told, we expect these to be concluded by the end of the year. The size of this for Elbit is material.

The second one would be a C4I contract that we have been selected by the Israeli MOD -- and we again are in the phase of negotiation. And once this is concluded, certainly we will announce it. And this is also very sizable for the Company.

Thank you.

Susan Lynch, Salomon Smith Barney.

Good quarter gentlemen. First I want to ask you -- is the lower tax rate that we have seen in the first half, a blended rate of 26.2 percent for the first half, a run rate for the year now?

As you know, we always try to have the tax rate as low as possible. The range -- it should not be significant in our belief during the year. As you know, we made investments and we have invested currently in the -- and we have plants in approved enterprise (ph) zones, which helps keep our tax rate down.

And when you're giving the balance sheet figures, I missed what you said for total debt at the end of the second quarter.

Okay. The total debt at the end of the quarter was as follows -- short-term debt was $7.3 million. Together with account maturities of long-term, it would be about $14 million. And long-term debt was $48 million -- 48.7.

Okay. Thank you very much.

Shaul Eyal, CIBC World Markets Corporation.

Congratulations on a very, very impressive quarter. A couple of quick questions from me. On the backlog, can you provide us with some sort of a breakdown of you know -- give us some flavor of geographies or maybe of revenue mix of the current backlog?

Shaul, with your permission, I would like to speak to our normal information that we give on backlog in terms of geographical distribution. I just mentioned that of the number that we had the $1.9 billion, which is our current backlog, 68 percent of this number is scheduled for sales outside of Israel.

Is it also fair to assume, on the heels of Joseph's prior comment on the possible contract -- 2 possible contracts, that backlog could exceed let's say about 2 billion, if not more, in the next 3, 6, maybe 9 months or so?

We, Shaul, anticipate the backlog to grow.

Fair enough. Gross margins level slightly -- no it's down sequentially. But you expect it to persist approximately at those levels heading into the third quarter?

Yes.

Okay thank you very much. Good luck and congratulations again.

Patrick McCarthy, Friedman, Billings Ramsey & Co.

I was wondering if you guys could just speak about cash flow for the first 6 months for a minute. It seems to be tracking ahead of where I would've expected it at this point of time. Was there anything that was pulled into the first half that you were expecting in the second half? Or is it pretty much just running along based upon what your expectations were? And then finally, if you could just maybe address what your expectations are for the full year on run the cash flow line. Thank you.

Patrick, there were no extraordinary events that created cash flow that is not in the regular cost of business during the first half. When you look at the run rate, which was -- the operating cash flow of $64 million, last year we had $91.5 million for the year. So in terms of run rate, it's still within our regular business honestly.

Okay. Thank you. And then I was wondering if maybe -- do you guys have any plans to outline what the expectations are out of the new COO, particularly on the line of how much profitability you think you can wring out of the business with the new management team there?

We don't have any qualified goals for this person. But certainly, we are now in the process of restructuring some of our divisions. And we expect him, with his well-known experience, to help us in improving our efficiency.

Okay. And I guess my final question -- on the ground force digitalization program, do you have any sense as to the timing of that contract? The signing of it --(multiple speakers)

You know, (multiple speakers) we cannot tell. It's up to the customer to decide. But we hope that this will happen relatively soon.

Okay. Thank you very much.

Gabriel Beave (ph), NC (ph).

Best wishes on the nice results. Could you tell us a bit more about the Watchkeeper -- about all the industry around it? By the way, how do you think -- how do you see the future of this very important area in the Elbit earnings (ph)? Thank you very much.

As I said before, this is a big programs for the UK. And indeed is a very important program for both Thales, Elbit and UK missile defense. I mentioned the fact that we expect to start this program by the end of this year. Because of the importance of this UAV program, we expect other countries to show interest in what we're doing there.

Actually, some of that already happened during the Farnborough Air show. So, for us it's a very promising line of business. And we expect more business to come.

How many years do you think this contract will take place, the length of it?

It's around 5 to 6 years.

Thank you.

Patrick McCarthy, Friedman, Billings Ramsey & Co.

I'm sorry, just a couple of follow-up questions please. First, the electro-optics business was particularly strong in the quarter. And I wondering if you could maybe just detail a couple of things that hit there that were influential.

I would mention that the fact that we see a growing amount in the intelligence markets and in night vision. You know that customers are now looking for a day and night capabilities. Certainly this gives a lot of prospects to our EO Company. And this is one of the reasons why we see growth in that line of business.

Okay. Thank you. And then just my final question. On the other revenue line, that appeared to me to be a little bit stronger, particularly as a percentage of total revenues than previously. And I was wondering if there was anything there in particular that was new and interesting that we should be thinking about?

Not in particular.

Okay thank you.

Amit Yonay, ING.

Could you give us an idea of the Watchkeeper deal (technical difficulty) was incorporated into the backlog? I missed that.

It was not.

Okay. Thank you.

(Operator Instructions). There are no further questions at this time. Before I ask Mr. Ackerman to go ahead with his closing statement, 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 1-866-276-1485. In the UK, please call 0800.169.8104. In Israel please call 03.925.5948. Mr. Ackerman?

Thank you. I would like to thank you all for listening and participating in our second quarter results call. And I hope to meet you all in our third quarter results call in 3 months' time. Thank you.

Thank you sir. This concludes Elbit Systems Limited second quarter 2004 results conference call. Thank you for your participation. You may go ahead and disconnect.