Elbit Systems Ltd (ESLT) 2005 Q1 法說會逐字稿

Welcome to the Elbit Systems Limited first quarter 2005 results conference call. [OPERATOR INSTRUCTIONS] I would now like to hand over the call to Mr. Ehud Helft of Gelbart Kahana Investor Relations. Ehud?

Good morning and good afternoon to everybody. Thank you for joining us today for the Elbit Systems 2005 first quarter results conference call. Before we begin, I would like to thank Elbit's management for hosting the 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. Mr. Pacholder will begin with a brief financial review of the first quarter, and then, an Mr. Ackerman will follow 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 to all of you, and thank you for joining us today. We will first summarize the results of the first quarter for those of you who have not seen the full report that was published this morning, which is also available on our web site.

Before we begin the financial review, I would like to remind you that, as reported with our 2004 year-end results, during the fourth quarter of 2004 we adopted the fair-value resolution provision of SFAS No. 123 effective as of January 1, 2004, using the Black-Scholes formula to estimate the fair value of stock options granted to employees. Accordingly, compensation cost is recorded over the vesting period on a straight end basis. Following the adoption of SFAS 123, the financial results are no longer materially affected by the impact of changes in the Company's share price on employee's stock-based compensation. In accordance with SFAS 123, our 2004 financial comparative results have been adjusted respectively to reflect the adoption of the fair value recognition provision, effective as of January 1, 2004. And all of the 2004 numbers that will be reported by me in this call are already based on that reduction.

Our first quarter 2005 revenues, reached $230.7 million, an 8% increase over those of the first quarter of 2004, which stood at 213.7 million. Gross profit for the first quarter of 2005 was $61.6 million, as compared with gross profit of $56.6 million for the same period last year. Gross profit margin improved to 26.7%, as compared to 26.5% in the first quarter last year. Operating profit in the first quarter 2005 was $17 million or 7.4% of revenues, compared with $15.2 million or 7.1% of revenues in the first quarter of 2004.

Our gross investment in R&D during the first quarter of 2005 was 8.6% of revenues, compared with 7.7% in the first quarter of 2004. However, with increased third-party participation in R&D, the net R&D expenses were 6.6% of revenues, as compared with 6.2% in the first quarter of 2004. Marketing and sales expenses ran at a lower rate than in the first quarter of 2004, standing at 7.2% of revenues, down from 7.7 % in the same period last year, while G&A expenses were slightly higher at 5.5% as compared to 5.4% in the first quarter of last year. In the first quarter of 2005, we had $1.7 million in financing expenses compared to half a million dollars in the first quarter of 2004, the main reasons for the difference being currency fluctuations, higher borrowing and higher general interest rates.

Net income for the first quarter of 2005 was $13.1 million or diluted EPS of $0.32 per share, compared to $12.3 million or diluted EPS of $0.30 per share in the first quarter of 2004. Division by revenues -- top revenues by lines of business for the first quarter of 2005 was as follows: Airborne Systems, $101 million or 43.8% of total revenues; Land Vehicle Systems, $26 million or 11.2% of revenues; C4ISR Systems, $44 million or 19.1% of revenues; Electro Optics, $43.2 million or 18.7% of revenues; and others accounted for $16.5 million or 17.2% of revenues. With the exception of Land Systems, which decreased compared to last year due to delay in receipt of certain orders, all areas of operations have shown an increase over the revenues generated in the first quarter of 2004.

Geographically, our first quarter 2005 distribution of revenues was as follows: Israel, $67.2 million or 29.1% of revenues; U. S. account for $89.5 million or 38.8% of revenues; our first Europe accounted for $16.2 million or 7% of revenues; and other countries accounted for $57.8 million or 25.1% of revenues. This distribution shows a strong interest in Israel, the U.S. and other countries, while revenues in decreased temporarily as a result of timing of sales. Cash generation this quarter was quite high for a first quarter, as we generated $49.6 million in operating cash flow.

Following the record increase in 2004, our firm backlog again set a new record, increasing 10.2% in the first quarter and reaching $2.37 billion as of March 31, 2005. This increase translates to $460 million in new orders received in the first quarter, including the portion of the Digital Army Program contract awarded in the fourth quarter of last year. It was not included in the year-end backlog, as orders were received during this first quarter. 65% of the backlog relates to orders outside of Israel and approximately 63% or $1.5 million -- billion of the Company's backlog at the end of the quarter is scheduled to be sold in the next three quarters of 2005 and over the year 2006.

With that, I shall now return the call over to Mr. Ackerman.

Thank you, Ilan. The first quarter results we reported today are a direct continuation of the performance we have shown in year 2004. This quarter's revenues and net profit were the highest ever for the first quarter, and our backlog increased essentially to yet another new record. I should note that the backlog does not include the Watchkeeper Program, which has not been signed yet.

We marked several important events since the beginning of the year in terms of both new business and strategic developments. Among the new business developments, we can count our orders exceeding $100 million for advanced imagery intelligence systems for various customers. These advanced systems result from extensive R&D efforts made by our fully-owned subsidiary, ELOP, and position us as the leader in imagery intelligence and 24/7 all-weather solutions. Another orders I would like to highlight is a $20 million order received from Gulfstream for our enhanced vision system that is being installed on all Gulfstream large cabin models, and is an important building block as we expand our role in commercial aviation.

One more reason for the strong increase in backlog was the receipt of the actual orders comprising of the Digital Army Program in the first quarter. We still expect additional orders to be received in the future, as we report progress in this important program for us. Systems like these are an example of the success of the synergy that has been developed in our group among companies that complement each other and work toward the same goals. We expect to see similar synergies and contribution as we proceed with the second stage of the acquisition of the Tadiran Communication shares, and we are pleased with the accomplishment of the first phase of this transaction. Following the closing of that phase, we now own approximately 20% of Tadiran shares, and the work toward the completion of the second stage continues. As I have said before, we see this transaction as a win-win for all companies involved and their shareholders and we hope this will close successfully.

In the first quarter, we also accomplished another small acquisition, that of the government-owned Israeli Military Industries, or IMI, aviation business. While the business is small in size, this acquisition is important as it proves that privatization can take place and a government-owned defense business can be sold to private industry. We hope that this is a beginning of more significant steps and that privatization of defense industry in Israel will be accelerated. We announced, following media policy on the subject, that a partnership equally owned Elbit Systems and Israel Aircraft Industry signed an agreement to conduct a product with a local company for the Turkish Army. We have not provided further details about this program, and we will do so at the proper time, as the effective date of the agreement is still subject to the fulfillment of further conditions.

As you can see by our numbers, we continue our investment in R&D and new technologies, and we stick to our long-term strategy of concentrating on our core business, (inaudible), supported by selective MNA activity that is intended to enhance our capabilities and our shareholders value. As I mentioned in our previous conference call, we expect revenue in 2005 to reach the $1 billion level for the first time. At the same time, we will continue to focus on efficiency improvements and improve our possibility. And, overall, we feel confident about our prospects and future growth.

And now, I would like to open the conference call for questions. Operator, please go ahead.

Thank you, sir. Ladies and gentlemen. at this time we will begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question is from Susan Muench of Susie Group. Please go ahead.

Hi, good afternoon. I'm wondering if you can tell me what led to the 50% decline in land systems sales year-over-year.

The declining in that segment was temporary and we expect to recover over the remainder of the year.

Okay. Were there any particular programs that concluded?

There was a deferment of (inaudible) in the program, and once that is achieved it will be back to normal.

Okay, thank you.

You're welcome.

Thank you. Our next question is from Yoav Burgan of Poalim Sahar . Please go ahead, sir.

Hi, my first question refers to the Watchkeeper project. Has any progress been made in regards to the decision-making process to the main gate decision?

Oh, yes. We are continuing the process of very extensive negotiation with the customer, and I am very optimistic that we can even advance and accelerate the closing of the deal. Certainly this will be accomplished, according to the customer, before the year end.

Before the year end?

Sure.

Okay. And in your previous conference calls, you mentioned the soft backlog figure. What's its level today?

It's as we say last time. It didn't change.

Okay. And now my last question is on the transaction, the Koor, Tadiran Communications, Elisra transaction. It seems that the second stage of the deal is pretty much stuck. And you also, in one of your also on the 18th of April, you mentioned that the skim -- time schedule, sorry, for the completion of the second stage has been extended by up to four months. What are your current estimates on this whole subject?

Yes, this is actually is not a simple one. We have accomplished the first phase and as I said, we own now 20% of Tadiran shares. We gave more time to Tadiran and Koor accomplish the Elisra deal and, as you probably know, Elbit not part of this dialogue. We made our promise to support it, but we are not part of this negotiation. And we hope that this will be concluded shortly and then we'll go forward with our second stage. And at that time, we own more than 40% of Tadiran. I'm very optimistic that all this will be concluded, as planned. Maybe we'll have to give it several more weeks.

Okay, great. Thank you very much.

Thank you. Our next question is from Joseph Wolf of UBS. Please go ahead, sir.

Hi, thank you. I just wanted to do a quick follow-up. I don't know how sensitive it is, just if there is any truth to the reports in the local press that the antitrust commissioner is actually opposed to the completion of the deal. Any insights you have to that? Or whether that's just been speculation of the press. And then, a question on the operating -- on the ongoing business. Just I'm looking at the absolute spending on the R&D front, and I'm just wondering if you could give us some insight into where you think that -- what you guys are spending on, if there are any specifics we could have, and where you think a reasonable level for the year would be, given the spending of the first quarter?

I'll start with R&D. We need to look at that on a yearly basis. R&D for '05 will be in the same neighborhood as '04, and all this is as planned. This is in our core business, mainly electronics, UAVs, and Command and Control. That's for R&D. As for the Elisra deal, if you look at the government website, you'll see that, if the anti-trust published it, they are not against the deal. They may come up with some requests, which we are aware of, but I think we have more than one way to complete a deal as anti-trust is referred to.

Okay. Thank you very much.

Thank you. Our next question is from Nehr Hamikan (ph) of Bank Hapoalim. Please go ahead, sir.

Hi and thank you. This question is about the operating margins, the margins overall, and I guess it is connected to the R&D question before that. How do you think, looking forward, you have a target of -- the operating margins. What's the targets, tell us something about it?

You know that we don't give guidance, but what we can say, in all aspects, sales, margins and backlog, year '05 will be better than '04.

Okay. Then looking further than '05, you're working on improving that? Because the R& D, I guess, is something that is affecting it, also to look forward?

As we said last time, we have a long-term plan to improve our efficiency. We assigned a senior manager to become our COO, and his main goal is to look into ways for improving the effectivity of the Company. And we are starting to see the results of what he has been doing. It is a long process, but we are starting to see the outcome of it.

Great. Thank you. And another question about the cost and the structure. After the Tadiran deal and everything, I guess you have kind of a chance to look ahead and see what the capital structure that you see the Company going forward?

As you know, we have financed the first stage out of the operating cash-flow, and at the end of the quarter we still maintain fairly low leverage ratio. Should we be at the point where we need to raise funds one way or another, I'm sure that we'll be able to do it.

Okay. Thank you.

Thank you. Our next question is from Yayer (ph) Reiner (ph) of CIBC. Please go ahead, sir.

Hi, most of my questions have been asked at this point. But one question I do have is, with respect to the recently signed Iraqi supplemental appropriations bill in the States, do you see any direct orders coming out of that in the next year? Did you hear the question?

Okay. Yes, we see an increase in demand in United States and, as you know, we have a fully-owned subsidiary and they are taking advantage. And we see more orders coming to us through there. And, as you can see, the U.S. portion of our business is growing.

Okay. Another question with respect to the DAP program. At this point , would you say that half of the program is now in your backlog? How should we understand the portion the DAP program that you foresee already being in backlog? And how much more do you see potentially coming into the backlog over the next year?

We see --we see more -- more business coming to us as part of the DAP program. It is going to be significant. As you know, this is a multi-year program, so we will record the new orders as it comes. But the additional business are going to be significant to our Company.

Would you say more than the amount so far has shown up in backlog or perhaps less than 50%?

It's at least what we've got.

Okay. Very good. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] We have a questions from Greg New of Friedman, Billings, Ramsey. Please go ahead, sir.

Yes, just two quick ones. First, I was wondering with respect to the Tadiran deal, has that impeded your ability to continue to evaluate acquisition opportunities within the U.S. market?

Absolutely not. We are continuing to look for good opportunities for a company in the U.S. and elsewhere, and once we see a company who could be accretive, we'll do so. And, looking in our balance sheet, you know that financially we can support it.

And how is that pipeline shaping up as far as U.S. acquisition opportunities?

We are looking at opportunities. The issue is to find the right opportunity in terms of complementing our organization and a price the we think will enhance the value.

Okay.

We continually look and when we find something, you'll know about it.

And then last question. I was wondering, you seem to be having some success with your commercial avionics product with Gulfstream. I was just wondering if you could discuss other business development opportunities that you're working on there?

Oh, yes. We -- we -- this is one of the growing business for Elbit. And we have business with Gulfstream, . we have a growing business Federal Express, and we see demands from other customers. So the commercial avionics is the result of converting technology that was originally designed for (inaudible) application into the commercial marketplace. And we feel this business is one of the fastest growing businesses for us.

Okay. Great. Thank you.

Thank you. We will now take a question from Bernard Manor of Bank Yahas (ph). Please go ahead, sir.

Yes, hello guys. I would like to know how do you see the deal between Elisra and Tadiran Communications, in regard, you know, the price Elisra would like to have in that merger into Tadiran Communications?. And another question about homeland security opportunities. How do you see that develop in the near future in the U.S. or other countries? Thank you.

As I already mentioned before, Tadiran-Elisra is a business between Tadiran, as a public company and Elisra, as part of Koor, being a public company. Elbit is not an active part of this dialogue. And I think that this will be concluded, as planned, and they are negotiating the price as can be expected. And whatever will be decided, we are going to support it. We I mean Elbit. And this is was -- this is actually was the original plan, as we announced when this contract was signed.

As of homeland security, homeland security is part of every -- almost every -- the vision that we have in Elbit, I mean, Electro Optics, Command and Control, UAV. Under every one of these activities. you can see activity in homeland security. I think that the homeland security activity represents, let's say, between 10 and 15% of our business, but we do that as part of our (inaudible) business.

Thank you.

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 1-877-332-1104. In Israel, please call 03-925-5945. And internationally, please call 972-3 -9255945.

Mr. Ackerman would you like to make your concluding statements?

Yes. I would like to thank all of you for joining us today and I'm looking forward to seeing you in our next conference call. Thank you.

Thank you. This concludes Elbit Systems Limited first quarter 2005 results conference call. Thank you for your participation. You may go ahead and disconnect.