Elbit Systems Ltd (ESLT) 2004 Q3 法說會逐字稿

Welcome to the Elbit Systems Ltd. third-quarter 2004 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 16th, 2004.

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 yet received a copy of today's release and would like to do so, please call Gelbart Kahana Investor Relations at 1866-704-6710 or 972-3607 4717.

I would now like to hand over the call to Mr. Ehud Helft of Gelbart Kahana Investor Relations. Ehud, please go ahead.

Good morning, and good afternoon to everybody. Thank you for joining us today for the Elbit Systems third-quarter results conference call. Before we begin, I would like to thank Elbit's management for hosting this call.

With me on the call today are Mr. Joseph Ackerman, President and CEO, and Mr. Ilan Pacholder, VP, Finance. Mr. Pacholder will begin with a brief financial review of the third quarter and then Mr. Ackerman will follow on with an overview. We will then open the call for questions. 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 first quarter ended September 30th, 2004. Our third-quarter revenues were $223.8 million as compared with $214.3 million for the third quarter of last year. Revenues for the first nine months of 2004 reached $669.2 million as compared to $635.2 million during the same period last year.

Our results in the third quarter were not significantly affected by the non-cash expense that is recorded in connection with our employees phantom option plan. Although the (indiscernible) effect in the first nine months is more significant. To be consistent with a regular reporting I should inform you both of our reported U.S. GAAP numbers and of the results excluding the phantom option plan effect for both this year and last year.

Our reported gross profit for the third quarter of 2004 was $61.5 million over 27.5 percent of revenues compared with reported gross profit of $57.1 million or 26.7 percent of revenues in the corresponding period last year. Excluding the phantom option plan effect, gross profit in the third quarter of 2004 was $61.8 million or 27.6 percent of revenues compared with gross profit of $55.5 million or 25.9 percent of revenues in the third quarter last year.

Reported operating profit in the third quarter of 2004 was $17.4 million over 7.8 percent of revenues compared with $60 million or 7.5 percent of revenues in the same quarter last year. Excluding the phantom option plan effect, operating profit in the third quarter of 2004 was $17.8 million or 8 percent of revenues compared with $13 million or 6.1 percent of revenues in the third quarter of 2003.

Our operating expenses include the continued investments that we make in the development of new technologies. And this quarter, we spent $21.3 million on R&D compared with $16.2 million in the third quarter of last year. We continue to receive a higher level of participation by various outside sources than we did last year, and therefore, the net increase was only $2 million from $14.5 million in the third quarter last year to $16.5 million in the third quarter this year.

Reported net income for the third quarter of 2004 was $13.7 million or 6.1 percent of revenues. And diluted EPS was 33 cents compared with $12 million net income or 5.6 percent of revenues and diluted EPS of 30 cents in the third quarter last year. Excluding the phantom option plan effect, net income for the third quarter of 2004 was $14.1 million or 6.3 percent of revenues and diluted EPS was 34 cents. This is in comparison with net income of $9.6 million or 4.5 percent of revenues and diluted EPS of 24 percent in the third quarter last year.

I shall now provide you with our distribution of revenues for the third quarter of 2004. We generated revenues of $52.9 million or 23.7 percent from Israel; $91.5 million or 40.9 percent from the U.S.; sales in Europe were $29.2 million or 13 percent of revenues; and $50.2 million or 22.4 percent of revenues were generated from other countries. The largest increase in the third quarter of 2003 was in other countries followed by increase in Europe. Both markets increased over the nine-month period as well, although the U.S. remains our largest market.

Distribution of revenues by lines of business for the third quarter was 2004 was as follows -- airborne systems, $97.2 million or 43.4 percent of revenues; land systems, $46.3 million or 20.7 percent of revenues; C4I systems, 36.2 million or 16.2 percent of revenues; electro-optics generated $29.7 million or 13.3 percent of total revenues in the quarter; and others accounted for $14.4 million or 6.4 percent of revenues. Electro-optics and land systems showed the largest increase percentage wise. And the main contributor to the growth in land systems were sales of the M-60 operating program in Turkey (ph) and revenue program in the U.S.

Our backlog of orders as of September 30th, 2004 reached a new record of 1.96 billion, a $206 million increase over the 1.75 billion in backlog we had at the end of 2003. 66 percent of the backlog relates to orders outside of Israel, and approximately 53 percent or 1.03 billion of this backlog is scheduled to be performed over the fourth quarter of 2004 and over the year 2005. The majority of the balance of the 47 percent in our backlog is scheduled for sales in 2006 and 2007.

This concludes my review and I shall now turn the call over to Joseph Ackerman. Joseph.

Thank you, Ilan. Our third-quarter results continue the trend established in previous quarters of increasing our revenues and profit over last year and at the same time, building our prime (ph) backlog of orders, which again reached a new record. We made a commitment to work on improving our profitability; and I am pleased to note that all gross operating and net margins improved this quarter year over year. Since our last conference call, we announced three important orders in different business areas.

The first to be announced was a $75 million order received by VSI from Boeing for the first full rate production lot of our Joint Helmet Cueing System. This order covered 300 systems and signified entry into full production that brings VSI total JHMCS production to 1000 systems, of which 500 have already been delivered. The new orders will be used by the U.S. Air Force and Air National Guard, as well as by foreign air forces like Australia, Poland, Greece and others. Recently, we received a $300 million order from the government of Israel for airborne and commander control system that also included one (ph) system related to Homeland Security. Many of you have inquired whether this construct (ph) is part of the different arms programs. The answer is that it is not. It is a different program which we are very happy to have received.

Last week, we announced a new project in Romania, providing eight IAR-99 trainers in cooperation with the local industries. It is a follow-on to the IAR-99 project which was delivered successfully and shows the level of cooperation that we have built with local industry in countries where we operate.

In the meantime, we continue to work towards finalizing the contracting process in two major projects. Namely the distal (ph) army in Israel and watchkeeper, together with status (ph) in the UK, both of which are proceeding as expected.

During the quarter, we heard concern from some of you regarding the lack of major announcements. With the numbers out, you can say that although we did not make many announcements, our new business was quite healthy. I can also tell you that at this point in time, our fill (ph) backlog already exceeds for the first time the $2 billion mark. While we see some demand for our legacy systems, we also recognized increased demand for systems in areas that are becoming new growth engines, such as simulators and commercial aviation systems. (indiscernible) digital (ph) growth engines are evidence to our ability to leverage the very large technology-based that exists and continues to development in our groups for new applications.

Another important barometer is our cash flow, and I am pleased to note that in the first three quarters, we generated $85.4 million in operating cash flow. $30 million of that in the third quarters compared to $12 million in the first nine months of 2003. Even with the $82 million paid in dividends so far, this year, we maintained a very low debt ratio and the numbers are actually better than we estimated in our last conference call. This cash creation capability positions us well as we actively continue to look for potential significant acquisitions which remains the major issue for us.

And now, I'd like to open the conference call for questions. Operator.

(Operator Instructions). Suzanne Muench of Smith Barney Citigroup.

I was wondering if you could give me the debt numbers at the end of the third quarter?

Yes. We had, at the end of the quarter, we had $7.7 million in short-term debt, and $66.7 million in long-term debt.

Okay. And was there anything in particular that led to the year-over-year slowdown in airborne?

Yes. We have seen some slowdown. But looking forward, we see this coming back to the previous levels.

Okay. And this is more of a nitty-gritty thing, but it looks like the cost of revenues was restated from last year's third quarter to 157.1 million from 158.1 million. And I was wondering if there was anything in particular there?

Can you repeat the question?

It looks like the cost of revenues for last year's third quarter was restated. In this year's release, it showed at 157.1 million; and a year ago, it was 158.1 million. And I was wondering if there was anything in particular?

No, there was nothing that -- that was nothing that was of any significance. I can double check that you and get back to you.

Okay. Also, what would the average diluted shares have been during the quarter and the number of diluted shares outstanding at the end of the third quarter?

The average number, I don't have with me. The diluted average number -- I'm sorry -- of shares during the quarter was 41,161,000 (ph).

Yulav Bergen (ph) of Pauline Sarr (ph).

My first question relates to the gross margin. Could you provide a bit more flavor regarding the significant improvement to the previous quarter? And what can we expect looking forward?

This result is a result of what we already said in the previous conferences that we assigned a COO, that his main mission is to look into ways to improve profitability. And I think that we are starting to see the outcome out of that. As you know that we don't give focus (ph). But certainly, we see the profit of this year, '04, better than previous years. So we are very optimistic in (indiscernible) of profits.

So do you believe this is a sustainable level?

I cannot -- I apologize. I cannot be as specific as that. But certainly, I can see that on a unit basis, yes, we are going to see an improvement in profit.

My next question relates to the R&D (ph) level. It seems a bit high compared to the previous quarter. (technical difficulty) is there some kind of representative level or --?

As you know the R&D works with the quarters with the plan that we have established, and that is money that was spent in order to develop new technologies and maintain the leadership position that we have in many areas. The level of R&D as a percentage of revenues has been or less consistent. And I expect it will be around that level.

During the summer, you released a figure regarding the stas (ph) backlog. Has there been any significant shifts in this number?

This number stays the same.

Greg Agnew (ph) of Friedman Billings Ramsey.

I was wondering if you could comment on some news coming out of the UK that the watchkeeper program may be shifted a bit to the right so some further testing and analysis can be done. And what impact that may have on you?

We don't know of any ships. We have planned and we are working very intimate with the UK (indiscernible). And we are quite optimistic that together with (indiscernible) will conclude this contract in a few months.

Do you expect 2006 is a good time frame for the program to begin to come online?

Much earlier than that.

Much earlier, okay. And then also, I was wondering if you could just provide a little more detail as to the small acquisition that you noted in your materials this morning? As far as any particular highlights that we should be looking at despite its small size?

What acquisition you are referring to?

I thought I saw there was an acquisition of a company in Connecticut?

Oh, yes. Thank you. Yes, we have acquired a small business line of air data computers, and this is part of our strategy to further develop the commercial avionic business line. So we have acquired this small business line. And we integrated that into our commercial avionics line of business.

Shaul Eyal of CIBC.

This is actually Ire Rhiner (ph) for Shaul. I had a hard time hearing a little bit. Can you please repeat the breakdown of the geography and the product?

Sure. One second. In terms of geography, as follows -- Israel, $52.9 million; the U.S., 91.5 million; Europe, 29.2; and other countries, $50.2 million. In terms of lines, airborne systems, $97.2 million; land systems, 46.3 million; C4I, 36.2 million; electro-optics, 29.7 million; and others, 14.4 million.

Great, thank you. Now in terms of the land systems, can you give us a little more color on what is driving the growth there, and if you see that continuing for awhile?

Yes, as we said previously, we see a growing demand in electro-optics and land activity, and we have been awarded, a year ago, several projects in that area. And we see now the sales are coming on. And we believe that we see that level also looking forward.

Final question. Am I right that watchkeeper is not in your backlog?

Yes, it is not.

That is it for me.

Joseph Wolf of UBS.

I wanted to try and ask the margin question a different way. Ilan, could you explain if there are certain mix issues in the sales of the third quarter that also contributed to the improvement in the gross margin? And whether some of that was as a seasonal effect that we should be looking at going forward? And then as kind of a one step further, as you look at the progress that you've made with the new COO, how much of that can we see on the cost of goods sold side? And then how much of that can we see on the operating expense side?

Joseph, hi. The mix certainly has something to do with it. Because at the end of the day, the result is what you see as the result of the mix of programs that are being sold in a particular period, whether it's a quarter or a year. That would definitely have something to do with the margins that you have seen. At the same time, we continuously make a lot of efforts, and we have done it and will continue to do it, with the purpose of improving the gross profit margin on an ongoing basis going forward. And we make an effort to choose profitable programs. When you put all of it together, it creates an improvement in the margins. But nevertheless, one quarter can be different than another.

Just one quick follow-on. If we look at the way that you described the backlog, you give it by sellable in the next five quarters and then beyond. But is there a way for you to give us a little bit more color into the age of the backlog, meaning certain a percentage of the backlog is newer types of products versus older types of products?

We don't have that split. But we have some of all of those. But certainly those who are follow-on contracts are more profitable than the new ones.

Okay, great. Thank you, gentlemen.

(Operator Instructions). There are no further questions at this time. Mr. Ackerman, would you like to make your concluding remarks?

Yes. I would like to thank you all for participating in our conference call. And I do hope to see you all in our next call in three months time frame. Thank you.

Thank you. This concludes Elbit Systems Ltd. third-quarter 2004 results conference call. Thank you for your participation. You may go ahead and disconnect.