Elbit Systems Ltd (ESLT) 2004 Q4 法說會逐字稿

Welcome to the Elbit Systems, Ltd. fourth-quarter and year-end 2004 results conference call. [OPERATOR INSTRUCTIONS]. As a reminder this conference is being recorded March 15, 2005.

I would now 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 press release please contact Gelbar Kahan Investor Relations at 1-866-704-6710 or 972-3607-4717.

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

Hello and good morning and good afternoon to everybody. Thank you for joining us for the fourth quarter and full year 2004 results conference call.

Before we begin, I would like to thank Elbit 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. Mr. Pacholder will begin with a brief financial view of the fourth-quarter and full-year 2004 results, and then Mr. Ackerman will follow with an overview. We will then open up the floor for questions. Ilan, would you like to being please?

Good Morning and good afternoon to all of you and thank you for joining us today. I will begin with a financial review of the fourth-quarter and year-end results, and hand the call over to Mr. Ackerman who will review and comment on our principal plans and operations during the fourth-quarter and the year.

Our main numbers for the fourth-quarter and full year for those of how have not yet seen the full report issued this morning. The report is available on our website.

Our fourth-quarter revenues were $270.8 million as compared with $262.8 million for the fourth quarter of 2003. Revenues for the full year reached $940 million, a 4.7 percent increase over revenues of $898 million in 2003. Gross profits for the fourth quarter of 2004 were $72.6 million or 26.8 percent of revenues, as compared with gross profits of $54.1 million, or 20.6 percent of revenues in the fourth quarter of 2003. Gross profits for the full-year 2004 was $250.3 million, and the gross profit margin was 26.6 percent as compared with $225.3 million, and gross profit margin of 25.1 percent in 2003.

Operating profits in the fourth quarter 2004 were $17.2 million or 6.5 percent of revenues, compared with $10.8 million or 4.1 percent of revenues in the same quarter 2003. For the full-year 2004, we generated operating profit of -- sorry $65.7 million, as compared to $54.3 million in 2003, and our operating margin increased from 6.1 percent in 2003 to 7 percent in 2004. The largest single cost line in the operating expenses during the last quarter was our continued investment in the development of new technologies, which reached the net amount of $23.3 million.

Our gross R&D expenses for 2004 was $86.4 million as compared to $65.5 million in 2003. Taking into account the increased participation received from third parties in 2004, our net R&D expense was $66.8 million or 7.1 percent of revenues, still a full percentage point higher than the $54.9 million net R&D expenses in 2003. We decided to increase our investments in R&D mainly in the fourth quarter of 2004 to support the strategic business opportunities in U.S. airborne programs, as well as electro-optics-related opportunities.

We kept our other operating expenses in check with marketing and sales expenses decreasing from 7.8 percent of revenues in 2003, to 7.4 percent in 2004, while G&A expenses in 2004 remain flat at 5.1 percent of revenues. Reported net income for the fourth-quarter 2004 was $14.1 million or $0.34 per share, compared to $12.5 million or $0.31 per share in the fourth quarter of 2003. Excluding the noncash effect of the Company's option plans, EPS in the fourth quarter of 2004 was $0.35, as compared to $0.34 in the fourth quarter 2003.

Net income for the full year 2004 was $53 million or 5.6 percent of revenues, and diluted EPS is $1.29, compared with net income of $45.9 million or 5.1 percent of revenues. And diluted EPS of $1.14 for 2003. Excluding noncash effect of the Company's option plan, 2004 EPS was $1.36, as compared to $1.24 in 2003. As you know, in recent years, our financial results have been affected by the noncash expense that is recorded in connection with our employee's option plans due to fluctuation in our share price.

During the fourth-quarter 2004, we adopted the fair value of the traditional provision of FAS #123 effective from January 1, 2004. This method of using the Black-Scholes formula to estimate the fair value of stock options granted to employees, and compensation cost is recorded over the vesting period on a straight-line basis. Following the adoption of FAS 123, our financial results will no longer be affected by the impact of changes in our share price on employees' stock base compensation.

The division of revenues by [methods] of business for 2004 were as follows: Airborne Systems, $367.9 million, or 39.1 percent of total revenues. Land vehicle systems, $199.2 million, 21.2 percent of revenues. C4ISR systems, 108.9 million, 11.6 percent of revenues. Electro-optics, $200.3 million, 21.3 percent of revenues, and others accounted for $63.6 million, or 6.8 percent of revenues.

Do note the changes are the $25 million decrease in [Super Arasoft] systems which is due mainly to the completion of deliveries under certain programs when new major programs, such as the Digital Army Program were received but not yet sold in the period, and the $60 million or 43 percent increase in electro-optics sales which is in line with what we shared with you in previous calls.

Geographically, our 2004 distribution revenues were as follows: Israel, $241.6 million or 25.7 percent of revenues. U.S. accounted for $348.5 million, 37.1 percent of revenues. Europe was $124.1 million, 13.2 percent of revenues. And other countries accounted for $225.7 million or 24 percent of revenues. This distribution is substantially similar to that of 2003, with a small decrease in Israeli sales and a larger increase in sales to Europe and other countries.

Our backlog report has increased by a record 23 percent or $402 million during 2004. And as of December 31, 2004 backlog reached $2.15 billion, compared with $1.75 billion at the end of 2003. 66 percent of the backlog relates to orders out of Israel, and approximately 74 percent or $1.6 billion of the Company's backlog at year end, is scheduled to be sold in 2005 and 2006.

It should be noted that only a portion of the Israeli Digital Army Program was included at the year-end backlog, since some of the administrative orders were still in process at year end. I will now turn the call over to Mr. Ackerman.

Thank you, Ilan. As we report now our fourth quarter and year-end results, we mark the end of a very important and positive year in the history of our Company. 2004 was the ninth consecutive year in which we achieved increased revenues, profitability and backlog of orders, while continuing our investment in R&D and new technologies, in order to support our future growth.

We achieved our sales goals for the year. We saw $50 million organic growth in our revenues, and expect continued growth in year 2005. In terms of profitability, as we said in our last conference calls, we improved our gross, operating, and net margins over last year, and we continue to work hard to further increase our profitability, as we focus on margin improvements.

We achieved an unprecedented volume of new business, which grows our backlog number for the first time ever to over $2 billion mark. As you all know, we maintain a conservative count of our backlog, and that's the total backlog, including soft backlog is now more than $3 billion. This number provides us with a very good top line of expenses, as we take a look at our 2005 plans.

While we continue this trend of growth in all parameters, we mark several important achievements in 2004, and especially in the fourth-quarter of the year. These developments both in terms of products, wins and strategic acquisitions lay a solid foundation for the further development of Elbit Systems. Among the important concepts won in the fourth quarter were, a $300 million contract to supply airborne system and monitor control system to the Israeli MOD and the filing of Digital Army program contract, valued at approximately $200 million as the program [plans the factors]. This program, the Digital Army plan, which is expected to grow significantly with the addition of U.S. [ApaLAC] Contracts is a milestone in terms of the technologies, innovations, and integration work that will be delivered with the [IBS] over a ten-year period. And all this will provide Elbit with computerized systems down to the single [soldier] level, including real-time situation picture transmission at all levels.

It should be mentioned this kind of program has interest out of Israel, and we expect more programs of this kind to be signed in the future. Another major win in 2004 was the Watchkeeper program in the UK won together with Thales. This is a key program for the British Armed Forces and the largest UAV program in the world. We are in the process of forming a joint process with Thales for the execution of the Watchkeeper program, and currently the project is expected to be signed in 2005.

On the acquisition side, we signed this year a very important agreement to acquire 32 percent controlling shareholding in Tadiran Communications. This transaction is a crucial part of our strategic plan and will bring Elbit Systems at the end of the process, that includes also the acquisition by Tadiran of 70 percent of Elisra shares to become the largest private Israeli [fes group] with an extensive technological portfolio, that will be supported with radio, communication system, and electronic warfare technologies. The transaction was strongly supported by our public shareholders during our recent shareholder meeting. We appreciate that support and believe that this is a win-win transaction that will provide us with an important force multiplier in years to come.

In summary, we believe that the investment made in the development of new technologies and the strategic steps taken in 2004, are expected to contribute to the continued development and growth of Elbit System, in accordance with our long-term business plan, which until now has proven to be successful. We feel confident about our future growth and as we look at 2005 we expect our revenues to reach the $1 billion mark for the first time in our history. And now, I would like to open the conference call for questions.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Please stand while we poll for your questions. Our first question is from Yulaf Bergen of [Poaline Sahar ] Please go ahead, sir.

Hi, and congratulations. My first question is a quick balance sheet question. The item available for sale securities in the investments, does this relate to the -- about 6 percent that you currently hold in [ Inaudible ]?

I -- I don't hear so clearly. Can you repeat the question please?

The -- in the balance sheet, the available for sale securities item.

Yes.

18.07 million dollar.

That includes the -- that includes the holding of the 31 shares that we bought, outside the transaction that Mr. Ackerman discussed.

Okay. So that's -- okay. The second question relates to the -- relates to the backlog. You mentioned that -- that the firm and soft backlog today approximates about $3 -- $3 billion?

That's true.

Actually there has been a shift from the soft backlog to the firm backlog?

The firm backlog which is an accurate number is 2.15, and the firm backlog is in the neighborhood of $1 billion.

Okay. The gross margin, there still seems to be a pretty high level of volatility regarding the -- gross margin on a quarterly level. There is a bit, a significant decline from the previous quarter. What -- should we expect looking forward?

As you know, -- we have long-term projects and sometimes a different mixture of -- -- this is why you see -- some changes in gross margin, but if you take -- the three first quarters year to year, you will see it is quite -- quite flat and growing. But I would like to take this opportunity to mention that we put a lot of emphasis in improving our gross margin year-over-year, and we have hired a COO to deal with that, and I think that this year we are starting to see the results.

Okay. And -- and regarding the Watchkeeper program, is this included in -- in the backlog, the firm or soft?

No, not at all.

Not at all. Can you elaborate a bit on the indications of the delay -- the current delay of the main gate decision?

Oh, yes, -- there is a -- there is a -- a very detailed process in the UK, which both Thales and us follow, and it takes time. But this program is the first on the priority list of the UK MOD, and as I said we expect this to be signed -- before the end of this year.

Okay. So -- you -- you don't see any probability of this project being cancelled or significantly cut?

According to the discussion we are having in the UK, we don't see this kind of signal. The other way around.

Okay. Is the UAV -- actually revenues, are they included in the C4ISR segment?

Yes, it is

Great, thank you very much.

Thank you. Our next question is from George Shapiro of Smith Barney.

Yes, Suzanne is going to ask some of the questions.

Good morning. I was wondering if you could give some indication as to the run rate for R&D in 2005 given how high it was in the fourth quarter?

Hi, Suzanne. Certainly we give a lot of importance to our R&D investment, and as we said in the fourth quarter '04, we have decided to invest more, and to support our -- our opportunities there and some of the results are already reflected in the '04 new business and backlog, we'll continue to be serving in R&D, and keep behind R&D compared to our peers in the U.S. But I cannot give an exact number but will continue to be strong in R&D spending, yes.

Okay. And -- can you tell us whether you will have another special dividend in 2005?

What I can -- we don't have a dividend policy, Suzanne, but we have a long history of dividends, and, yes, we give dividends every quarter. And I don't see why -- but why we will continue to do so, but we don't expect a special dividend, as we did the last time.

Okay. Thank you.

You are welcome.

Thank you. Our next question is from Gudy Berko of [Apax].

Congratulations guys on the great results. I wonder if you can elaborate on the electrooptics segment. I see an increase in Q4. Can you talk about the future, and another question on R&D, a question you just answered, can you see any implication of the Israeli R&D decision to cut the government support to the Elbit Systems project?

First question on electrooptics, yes, we did see growth in that line of business, and mainly thanks to growing in Homeland Security business, which is part of the electro-optic business. What was your second question?

Regarding the R&D, the Isreali government will cut -- the R&D participation? We it have some kind of an implication on Elbit, or will you reduce the R&D spending or will you continue to spend it at the high level?

We -- we have -- we have a process how to decide how much to spend, and certainly part of it is done jointly with other -- with other people like MOD, but we have also other third-party partners in our research and development spending. Certainly we have to -- to see what is their contribution, but generally speaking, we have our own plan of strategy.

Okay. Thank you. And regarding electro optics again, what was the largest project in Q 4?

We have -- we have several observation systems to protect our borders, especially in night vision capabilities.

It was to an Israeli customer?

Isreali [inaudible]

Okay.

This is part of our Homeland Security strategy.

Okay. Thank you.

You are welcome

Thank you. Our next question is from Near Amikin of Bank of Poalin.

Good afternoon and good morning. First question is about the privatization of the Isreali military industries, Ilan talked about wanted you to buy different plans like the [sleventh] plans. What is the up take on this issue for these working for you. Are you interested in this?

Thank you. As -- as you know, after that acquisition of Tadiran, Elbit group holds a majority of the non-government-owned industry in Israel. And certainly when we are looking -- at our next step in Israel, it should involve privatization.

And the real decision of Israel to go on privatizing some of the defense industry, and as -- as reported, IMI is now the first on the list, and, yes, it was a committment -- Elbit will take part in this process. And if we see this contributing to our bottom line numbers, the [overall] strategy will be more than willing to consider that, and we know IMI pretty well, and we will start the dialogue, but we cannot announce anything specific.

But I guess it's a different mix, you know, it's -- less profitability even if the bottom line you still have the profit I guess, it is more [Iloan] has less technologies or something like that. Are you looking at this as something that will effect your decision on purchasing?

Talking about IMI? We know IMI pretty well in the numbers, and certainly we'll have to see what is the way if we acquire IMI it should not affect negatively our bottom line numbers, and it's going to affect certainly the -- the acquisition price. We have already, you know joint approval with IMI. In Turkey, there are some other very synergistic areas in IMI to Elbit, but we will have to look at it very, very carefully to make sure that it has -- it will be accretive to our bottom-line numbers.

Okay, another question about the [RNA idea], nobody asked about it. About one of the things that you talked about the last conference call, was about the civilian airborne company that you bought in the U.S. Is it something that -- because of that you -- are looking for -- more civilian ways to increase the business?

It's -- it's -- it's also that. Let me -- let me elaborate on that. We -- we saw after the first half of '04, several very interesting opportunities for Elbit Systems, mainly in the areas of avionics and electro-Optics, in order to win those we had to make a decision to invest more in research and development to be better prepared for that competition, and this is what we did, and this is reflected in the fourth-quarter numbers, and also reflected in our backlogs.

So we were quite successful in doing that, and the next opportunity you see also the result in our '05 numbers. Part of it is -- yes, the Commercial avionics mainly in the U.S. We invested a significant amount in R&D toward that line of business, and we see this business growing rapidly in '04, and we'll see more in '05.

And the R&D that you expect in the future years will decrease as a percentage of sales?

I cannot give you the exact number, but it will stay high.

Stay higher than '03.

No, stay high -- I didn't say higher, it will stay high.

Okay. Thank you.

You are welcome

Thank you. Our next question is from Stewart Scharf of Standard & Poor's. Please go ahead, sir.

Good morning. Can you talk a little -- about the contract in Bulgaria for helicopters that has been cancelled?

What -- what do you want to hear?

Can you elaborate on it?

Oh, yes. You know in order to get the backlog -- of $3 billion, you have to pursue hundreds of opportunities.

One of them was the Bulgarian opportunity, and you know sometimes you win, sometimes you lose. Certainly it was not in our books, and in this case, we have been selected due to our technical and operational proposal, and the customer selected us. But for many reasons, mainly budget constraints and other reasons, internal reasons in Bulgaria, they have decided to postpone that, so we got that announcement and we announced it, but we are still optimistic it will be reopened again, and when this will be opened, we expect Elbit to have a fair chance to get it back.

Okay. Could you also talk a little bit about your potential joint venture for a radar systems company versus acquiring radar systems company?

Yes. We have quite a wide portfolio now after the acquisition of Tadiran Elisra. We have quite a wide portfolio of technology. We don't have radar.

You are absolutely right. There are two ways to accomplish that, either by acquiring a radar company or to team with these kind of companies, and as of now we are teamed with several radar -- companies, in Israel and out of Israel, to support our programs.

Okay. Thank you very much.

You are welcome.

Thank you. [OPERATOR INSTRUCTIONS] Please stand by while we poll for more questions. Our next question is from Michael [Klar] of UBS. Please go ahead, sir.

Hi. You said that you would be looking towards margin improvement in '05 and beyond. Can you give us any idea how that can be achieved, is it a result of a change in product mix, cutting costs, can you give us any feel for that?

It should be all of those. We -- you know that we have quite a high backlog. Our sales are in the neighborhood of $1 billion, and we are looking to every single cost element to see how we can do better, how we can improve efficiency, how we can improve our prices. We are now investing heavily in process improvement. So all of that together I think already -- already I think we could see the results in '04 and we expect to see the same results in '05.

Thank you.

Thank you. Our next question is from Shaul Eyal from CIBC.

This is actually [Getae] Rider for Shaul. A quick question about Tadiran. Can you give us an indication of when we kind of model this -- I know you can't give guidance, but given the idea how we should be looking at Tadiran's contribution to your overall numbers.

Maybe -- I'll refer only to the first stage. The first stage is Elbit having 40 percent of Tadiran, and Tadiran having 70 percent of Elisra. So in this case, what we are going to see, is certainly increasing of the cooperation between the companies, which will contribute to the success of both Elisra, Tadiran, -- and Elbit, and this year '05, will be a kind of a transition period. '06 and '07 certainly will see a higher contribution to our bottom-line numbers. And this related to the situation when we have only [4 bits] of Tadiran. Once this phase is accomplished, we will talk about the next one.

Until that happens, the numbers are not going to be consolidated?

If we are -- no. Until we have more than 40 percent, we will have to -- we will have to do it on an equity level.

Okay. That's my question, Thank you.

Thank you. Our next question is a follow-up question from George Shapiro of Smith Barney. Please go ahead, sir.

Hello, it is Suzanne again. I was wondering if you could give me the total debt at the end of the year?

Yes. We had -- at the end of the year, we had short-term debt of $8.5 million, and long-term debt of $86.2 million.

Okay. And will you be providing restatements of 2004 quarters to reflect -- the FASB options rule?

We -- what it is -- we -- we provided the 2004 numbers already under the new rules.

Okay.

So that is what you see already.

Does that answer your question?

Yes.

Okay. Thank you. Our next question is from Greg Agnew of Friedman Billings and Ramsey. Please go ahead, sir.

Greg Agnew from Friedman Billings. I was wondering if you could just elaborate a little more on the strength in the electro-optics division. In addition to the Homeland Security sales, your management discussion says that night training systems, as well as European sales were both strong in the quarter. I was wondering if you could elaborate as to, or just give a little more detail into orders of magnitude for each of those?

Yes. Well, when we are talking about electro-optics, this includes reconnaissance programs, surveillance, Homeland Security, and [fiber Inaudible ] Systems among others. And a typical -- typical programs could be in the neighborhood of $30 million to $50 million, and, yes, we -- we experienced growth in those areas in the last -- in the last quarter.

Just to mention that we also have EO elements as part of our other divisions activities. So, yes, we do see requirements are increasing in the marketplace for -- for our technologies in that area.

And then -- with respect to the night targeting system, that -- that sounds like something that may be experiencing a little bit of surge in demand here with respect to U.S. operations in Iraq since the sales are to the U.S. Marine Corps. I was wondering if you saw any search sales related to supplemental funding there, or is that something that you view as sustained.

I cannot refer to this specific program, but, yes, we have something to do with that.

Okay. Great, thank you very much.

You are welcome.

Thank you. [OPERATOR INSTRUCTIONS] Please stand by while we poll for more questions. There are no further questions at this time.

Before I ask Mr. Ackerman to go ahead with his closing statement, we 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 1-877-332-1104. In Israel, please call 03-925-5945. And Internationally please call 972-3-925-5945.

Mr. Ackerman, would you like to make your concluding statement?

Yeah, thank you very much all of you for being here with us today, and I am looking forward to having you with us in our next conference call. Thank you so much.

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