Elbit Systems Ltd (ESLT) 2005 Q3 法說會逐字稿

Thank you for standing by. Welcome to the Elbit Systems Limited third quarter 2005 results conference call. All participants are 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 15, 2005. 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 press 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 like to hand over the call to Mr. Kenny Green of Gelbart Kahana Investor Relations. Kenny.

Thank you, Barry. Welcome, everyone, to the Elbit Systems third quarter 2005 conference call. With me today on the call are Mr. Ilan Pacholder, VP of Finance; Mr. Joseph Ackerman, President and CEO; and Mr. Joseph Gaspar, CFO. Mr. Pacholder will open and discuss the financial results of the quarter followed by Mr. Ackerman, who will then discuss the various trends and developments in the quarter. We will then open up the call for a question-and-answer session. Ilan, please go ahead.

Thank you, Kenny. Good morning, good afternoon to all of you and thanks for joining us today. Before we proceed with the financial review, I would like to remind you that during the first three quarters we completed the first two stages of the process of Tadiran Communications share purchase from Koor Industries. At the end of the second quarter, we owned 21% of Tadiran, and in the third quarter we acquired an additional 5%. As we advised you earlier in the year, the excess paid of the book value for the 31 shares resulted in motivation of various tangible and intangible assets over a period ranging between two and 15 years while in-process R&D is written off as a one-time item during the quarter in which the acquisition was made. The balance was defined as goodwill that is not amortized pending annual impairment tests.

The one-time IP R&D expense associated with the 31 shares for the third quarter of 2005 and for the nine months of 2005, was $1.2 million and $5.3 million, respectively. Shares that we are holding is accounted for under the equity method. All the numbers related to this holding are included in the equity net earnings in affiliated companies in our income statement. In order to provide you with our ongoing operational results for the quarter, I will provide you on the call with the net income and EPS information, both including and excluding the one-time IP R&D expense that I mentioned.

Our third quarter 2005 revenues increased by 22.3% over the third quarter 2004 and reached $273.6 million, the highest quarter revenues in our history. We also marked an important milestone in that our last 12 months' revenues appears for the first time the $1 billion mark, and we are on track to achieve our first fiscal year revenues in excess of $1 billion as was expected.

All of our business areas have shown increased revenues over the same quarter of last year and were led by airborne systems with revenues of $150 million followed by $54.4 million in electro-optics, $45 million in C4ISR, $39.5 million in land systems, and $20 million in other businesses.

In terms of geographical distribution, our largest market continues to be the United States accounting for 41.8% of our revenues in the third quarter with 22.4% in Israel, 24.4 in other countries, and 11.4 in Europe.

Both our European revenues and our land systems have begun to show the increase we had expected in previous calls.

The gross profit for the third quarter of 2005 increased by 20.3% to $73.7 million as compared with gross profit of $61.2 million in the first quarter of 2004. Our gross profit margin in the quarter was 26.9% compared with 27.4% in the third quarter of last year, which was higher than our average rate. However, for the nine-month period, we improved the gross profit margin slightly from 36.6% in the first nine months of 2004 to 26.9% in the first nine months of this year.

Operating profit in the third quarter of 2005 increased by 18.5% to $20 million, or 7.3% of revenues compared with $16.9 million or 7.6% of revenues in the third quarter of 2004.

During the third quarter, we continued to invest in research and development and in the quarter spent a net amount of $20.5 million on developing new technology and products compared to 16.5% in the third quarter of last year. The rate of R&D spending since the fourth quarter of 2004 is above [unintelligible] averages, and we believe that such investments, which have been made mainly in the areas of airborne, land, and electro-optic systems coupled with marketing efforts that accounted for 7.4% of our revenues this quarter would assure our technology leadership position and secure continued growth.

As I mentioned before, the full effect of Tadiran share purchase is included in the equity and earnings of the company's item, which in the third quarter of 2005 showed a profit of $1.5 million compared with a profit of $1.6 million in the third quarter of 2004. Its results, as I mentioned before, include the effect of the $1.2 million one-time IP R&D write-off resulting from the purchase of the 5% of the Tadiran shares in August.

Our reported net income for the third quarter of 2005 was 14.6 -- sorry -- $14.6 million, or 5.3% of revenues, and diluted EPS was $0.35 compared to $13.3 million, or diluted EPS of $0.32 in same quarter of 2004, excluding the unrelated one-time IP R&D write-off, our net income for the third quarter of 2005 was $15.8 million, and our EPS was $0.38.

Cash generation continues to be strong, and in the first nine months of this year, we generated $96.4 million in operating cash flow. Our backlog of orders at the end of the quarter increased to a near record of $2.405 billion, however, it is important to note that in this figure we do not include several important orders received and announced after the end of the quarter. Sixty-five percent of this backlog was for orders outside of Israel, and approximately half of this backlog, or $1.2 billion, is scheduled to be performed in the next five quarters.

With that, I shall now end the call with Mr. Ackerman.

Thank you, Ilan. The third quarter results are the right continuation of the growth in all parameters that we have exhibited for many quarters, and I am pleased to report yet another quarter with increased revenues, profit, and backlog, both over the last quarter and year-over-year.

Many events have occurred since our last conference call and with the exception of one they have all been positive. So I would like to start with that particular one first. We mentioned in our quarterly report a letter received recently by one of our subsidiaries from a customer informing that unless certain deficiencies identified by the customer in an airborne system are remedied, the customer intends to terminate the contracts which is technologically the first of its kind. The value of the contract is approximately $35 million. We are engaged in clarification with the customer in order to address its concern in a satisfactory manner, and we believe that the potential outcome of the notice received will not have a material adverse effect on our financial statements.

At the same time, many positive developments have occurred since we last spoke, and I would like to mention some of the important ones. Since we last spoke, we announced three important orders that held position Elbit Systems as strong international contenders in the fast-growing UAV business, which, as you know, we had identified in the past as one of our important growth engines. For one, the long-awaited Watchkeeper contract, which we anticipated being signed before year-end was received by U-TacS, our UK subsidiary. This is actually the largest single contract in our history amounting to £317 million or about $560 million.

Another reported UAV contract received in September is the $150 million contract to supply the Turkish Ministry of Defense with UAV systems in cooperation with the Turkish aerospace industry. The $150 million contract will be supplied by a partnership owned equally by Elbit and IAI with equal work share of approximately $75 million each.

On a much smaller scale in terms of amount but an important contract in its own right is the recently announced contract to provide the Australian army with Skylark mini-UAV system that will go into immediate operation by the customer. This order and others for our Skylark system including the Israel army, confirmed the need for such total a system and position Elbit Systems well in this market.

Our business in the United States, our biggest market, which accounted for almost 42% of our revenues in the third quarter continue to generate important contracts, and we recently received a $57 million ANVIS/HUD system for U.S. Army helicopters over a five-year period.

Our Helmet Mounted System business in the U.S. continues to develop nicely and VSI, our subsidiary jointly owned with Rockwell Collins received recently several new contracts with a potential total value of more than $100 million for additional JHMCS systems. And only a week ago our U.S. subsidiary, ESW, was awarded a $70 million contract from the U.S. Marine Corps to supply systems over a relatively short time that will be developed and installed into a variety of U.S. Marine Corps vehicles filling an urgent need that exists today.

We are proud that Elbit Systems and Elbit Systems American companies have become an important part of the U.S. defense market, providing advanced, sophisticated systems for the variety of front-line platforms and will continue to make the required effort to attain this position and expand it.

On the M&A front, we received our shareholders approval for the Tadiran Elisra deal, which was followed by the purchase of an additional 5% of Tadiran shares. We now await these [unintelligible] commissioners' approval of the transaction. And we believe the approval will be received in the near future. Following the approval, we will proceed with completing the process and hope to be owner of 40% in Tadiran and 70% in Elisra before year-end. We will advise you of the one-time effect of this reduction on our results as we progress.

We have and will continue to make the necessary effort to increase our margins in the long run and to achieve improvement, over time. All this while continuing to invest in research and development to develop new leading technologies and marketing in order to ensure continued growth and improved profitability.

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

[OPERATOR INSTRUCTIONS] Yoav Burgan, Poalim Shaar.

Just a few questions -- first, is the Turkish Army project included in the backlog?

Yes, it is.

Okay, and regarding the R&D, should we expect the R&D level to keep going up absolutely or is this a sustainable level -- the current --?

It will say approximately at the same level.

Regarding the Watchkeeper, the joint venture, are you the majority shareholder in this joint venture?

Yes, we are.

Okay, and what was the exact percent of your holdings in Tadiran Communications by the end of September?

As of now, we hold 26% of Tadiran.

Joseph Wolf, UBS.

I have a question on the UAV business. Now that the UK program has been officially announced, could you just give us some direction -- how many opportunities you're pursuing with that product line? Which sides of the UAVs are doing the most -- are you working on the most with the customers right now and whether it's too early or this is the right time to start thinking about non-military or commercial types of applications for UAVs?

First, I'll start by saying you're right, it's too early to talk about, I would say, a non-military UAV. It's too early for that, but we do see a growing need for UAV in the defense and paramilitary needs. As you know, the Watchkeeper is one of the largest UAV in the world, and we see a lot of -- many countries showing interest in that program. So I wouldn't be surprised if we see more contracts take advantage of the experience we are gaining in the Watchkeeper [unintelligible].

So you're looking at the UK project as a test case for other --?

Absolutely.

Nir Amikam, Hapoalim.

Congratulations on a good quarter. My first question, you talked about the profitability -- we didn't really see it in the last few quarters. It seems to be about the same. Can you give us an estimate or your target for the long run?

If we compare dollar-wise, quarter-over-quarter, or nine-months-over-nine-months, you will see an improvement in the profitability, although I would agree that we need to do more in that, and we are planning to show improvement in profitability in the coming quarters.

You don't have guidance or something like that or a plan that you can give us something to look forward to?

We do have our goals, but, as you say, you're right, we don't give guidance.

Okay, and the last question about Israel, the U.S. relationship and the new agreement and everything -- can you give us some insight about the sector of the company, especially other countries -- not the U.S. that you work, they were very good, but I guess the [unintelligible] the company in other countries?

In other countries outside of the United States?

Outside of the United States, yes.

I can say that we have business in the United States, and I think that we appreciate what the potential, they are open to us, and we will follow their request from us. I don't see major effect of U.S. regulations on Elbit.

Yeir Reiner [ph] of CIBC.

First of all, congrats on the very strong quarter. A question for you -- I know you don't provide forward guidance, but the kind of growth you had during this quarter is more typically what we'd expect in the final quarter of the year. Should we anticipate you're going to have the typical kind of seasonality in this final quarter of the year, or maybe a lot of orders got pushed into third quarter and maybe we'll see a little bit of a letdown coming into the last part of the year?

I think that this year will behave as previous one. I mean, the coming fourth quarter will be higher in sales than the fourth quarter of the previous year.

And can you give us a share count for the quarter?

On a fully diluted basis, we had at the end of the quarter -- actually, average for the quarter was 41.6 million shares.

[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 1-888-269-0005; in Israel, please call 03-925-5945; and internationally, please call 972-3925-5945. Mr. Ackerman, would you like to make your concluding statements?

Yes, thank you all for joining us today, and I'm looking forward to seeing you all again in our next quarter conference call.

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