Elbit Systems Ltd (ESLT) 2005 Q4 法說會逐字稿

. Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Limited fourth 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, March 15, 2006. 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 972-3-607-4717. I would now hand over the call to Mr. Ehud Helft from Gelbart Kahana. Ehud?

Yep. Mike, you with me?

I am with you. You can go ahead, sir.

Good morning, and good afternoon to everybody. Thank you for joining us today for the Elbit Systems 2005 fourth quarter and full-year 2005 results conference call. Before we begin, I would like to thank Elbit's management for hosting this conference call. With me on the call today are Mr. Joseph Ackerman, President and CEO, Mr. Ilan Pacholder of VP Finance, and Mr. Joseph Gaspar, Chief Financial Officer. Mr. Pacholder will begin with a financial review of the fourth quarter and the full year. And then Mr. Ackerman will follow with overview for the year. 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. I will begin with a financial review of the fourth quarter, and year-end results, and then hand the call to Mr. Ackerman. I will start my review with details on the effect that the recent acquisitions had on our financial results for the fourth quarter and the year. As you know, on November 30th, 2005, we completed the acquisition of 40% of Tadiran Communications that took place in several stages commencing Q4 2004. On the same date, we also acquired 70% of Elisra Electronic Systems. Accordingly, and as we have announced on several occasions in the past, our fourth quarter and year-end 2005 results were affected by one-time and other charges resulting from these acquisitions. A total effect of the charges is within the range advised in our announcement dated February 13th, 2006. I will now detail the events of the [inaudible] results. First, In-Process R&D is written off as a one-time item during the quarter in which the acquisition is made. The IPR&D expense related to the Tadiran acquisition for the fourth quarter of 2005 and the year, were $3.3 million and $8.5 million respectively. Since the Tadiran holding is accounted for under the equity method, all of the numbers related to this holding are included in our income statement, as part of the equity and net earnings of the affiliated companies. We also had one-time charges related to the initial acquisition. These one-time charges totaled $11 million before tax and are comprised of $3.5 million, one-time write-off expense, which was included in our cost of goods sold for the fourth quarter, and $7.5 million in IPR&D one-time write-off included in our operating expenses. All of the Elisra-related one-time charges that recorded in the fourth quarter of 2005 amounted to $10.1 million, net of taxes.

In summary, our annual financial results were affected by $18.6 million one-time acquisition-related write-offs, and our fourth quarter results were affected by $13.3 million one-time acquisition-related write-offs of inventory and equipment. Both numbers are net of taxes. The excess paid over book value for the Tadiran and Elisra shares resulted in amortization of the various tangible and intangible assets, over a period ranging between the immediate write-offs and 20 years. The remaining balance of the amount paid in excess of book value for both acquisitions amounting to $69.5 million is defined as goodwill that is not amortized, but is subject to any impairment review.

In order to provide the clear view as to how our ongoing business is performing and compare the results with past periods, I provide not only the reported U.S. GAAP-based results but also our ongoing pro forma operational results for the quarter and in the year excluding the one-time expenses. Following are the main numbers for the fourth quarter and the full year. In the fourth quarter, we achieved revenues of $321.8 million, 18.8% year-over-year increase, as compared with [$217.8 million] in revenues for the fourth quarter of 2004. This revenue figure includes $15.7 million worth of Elisra revenues. That consolidation only became effective as of December 1st. Accordingly, our fourth quarter revenues without Elisra's contribution were $306.1 million, representing a 13% year-over-year increase.

Revenues for the full-year 2005 reached $1.07 billion, $130 million, or 13.8% increase over the $940 million in revenues we reported in 2004. If we exclude the revenues from the contribution from Elisra in December, our revenues were $1.05 billion, representing $114 million increase or 12-point -- sorry 12.2% increase year-over-year. Both the quarterly and the annual revenues without the Elisra contribution represent an all-time high for Elbit Systems. Reported gross profits for the fourth quarter 2005 was $78.5 million, or 24.4% of revenues, as compared with the gross profit of $72.6 million or 26.8% of revenues in the fourth quarter of 2004. Reported gross profit for the full-year 2005 was $279.8 million, and the gross profit margin was 26.1%, as compared with $250.3 million, and gross profit of -- I'm sorry, gross profit margin of 26.6% in 2004.

Excluding one-time write-off related to the Elisra acquisition, our pro forma gross profit for the quarter was $81.9 million, and the pro forma gross profit margin was 25.5%. For the full-year, our pro forma gross profit excluding the one-time write-off was $283.3 million, and our gross profit margin was 26.5%, similar to that of last year. Reported operating profit in the fourth quarter of 2005 was $12.4 million, compared with $17.2 million in the same quarter of 2004. For the full-year 2005, we generated operating profit of $67.3 million, as compared with $65.7 million in 2004. On a pro forma basis, excluding the one-time acquisition related IPR&D expenses and write-offs, our operating profit for the fourth quarter of 2005 was $23.4 million, or 7.3% of revenues, as compared with a 6.5% margin for the fourth quarter of 2004. Our full-year pro forma operating income excluding one-time expenses related to the acquisitions was $78.3 million, or 7.3% operating margin, as compared to last year's $65.7 million, or 7% margin.

For the fourth quarter of 2005, we reported a net loss of $5.7 million, or $0.14 per share as compared with net income of $13 million, or $0.31 per share in the fourth quarter of 2004. However, when excluding the one-time expenses related to Tadiran and Elisra acquisitions, which amounted to $13.3 million in the fourth quarter, our net income for the quarter was $7.6 million or $0.18 per share. Our reported net income for the full year 2005 was $32.5 million, or $0.78 per share, as compared with a net income of $51.9 million, or $1.26 per share in 2004. Excluding the one-time IPR&D write-offs related to the Tadiran and Elisra acquisitions in 2005, our net income for the year was $51.1 million, or $1.23 per share, compared with $52.9 million, or $1.29 per share in 2004.

Our fourth quarter expenses were affected also by $5.4 million value impairment charges related to our investment in ImageSat International, in which we hold a 14% minority stake. While this charge is not classified as a one-time expense under the accounting rules, it is not directly related to our ongoing operation. In addition, Tadiran's financial results in the last quarter of 2005 were affected by unusual events including the loss of approximately $20 million in revenues due to a seven-week strike that had ended and expenses related to earlier retirement of employees. Our share in Tadiran's fourth quarter loss was $2.3 million. The effect of the ImageSat value impairment and the Tadiran loss on our financial reports -- I'm sorry on our financial results in the fourth quarter was $7.7 million, and it has not been added back in the pro forma presentation I have just given to you.

All of the effects of our holding in Tadiran are reflected on the equity and net earnings from affiliates line on the profit and loss statement, which showed as a result of the items mentioned above, a $1.6 million loss for the full year. It is important to note that our other major affiliated companies, including VSI in the U.S. and Semiconductor Devices in Israel continue to generate profits, and if we exclude the Tadiran-related one-time IPR&D effect on our results, our share in the affiliated companies' earnings would have shown $6.9 million profit for the full year.

Distribution of revenues by lines of business for 2005 were as follows. Airborne systems generated revenues of $420.8 million, or 39.3% of revenues. Land systems was $117.4 million, or 11% of revenues. C4ISR systems, $217.3 million, or 20.3% of revenues. Electro-optics was $242.3 million or 22.7% of revenues. And Other accounted for $72.1 million, or 6.7% of revenues. All business areas with the exception of land systems showed significant growth. We expect the land systems decline to be temporary in revenues and expect it to increase in 2006, as sales under certain programs are recognized. As we have indicated in the past, strong sales growth was anticipated in the C4ISR systems, which almost doubled over the 2004 level, and in the Electro-optics division, which increased revenues by 21% over 2004.

Geographically all areas with the exception of Europe have increased in revenues led by the United States, with $397.5 million or 37.2% of revenues, Israel, with $315.4 million, or 29.5% revenues. Revenues in Europe were $104.2 million, 9.7% of revenues. And other countries accounted for $252.8 million or 23.6% of revenues. We expect European revenues to grow as percentage of total revenues as we begin to recognize revenues from several contracts including the U.K. Watchkeeper program and the recently announced land systems contracts in Europe.

Our backlog of orders increased by a record 55% or close to $1.2 billion during 2005, and as of December 31st, 2005, reached $3.35 billion compared with $2.15 billion at the end of 2004. This backlog figure includes the backlog contributed by Elisra, which amounted for $340 million at year end. Elbit Systems strong backlog crossed the $3 billion mark for the first time even before including the Elisra contribution to the backlog. 72% of the backlog is for orders outside of Israel, and approximately 65% or $2.175 billion is of our backlog [inaudible] is scheduled to be sold in 2006 and 2007, with the majority of the balance scheduled for sales in 2008 and 2009. My last comment before I turn the call to Mr. Ackerman is regarding our cash flow from operations, which is, in 2005, reached a record $187.6 million, more than double the $81.5 million generated in 2004. With that, I should now return the call to Mr. Ackerman.

Thank you, Ilan. 2005 was one of the most important years in our history where we set new records in term of revenues, new orders, and operating cash flow, signed many important contracts, and achieved long-term strategic goals. During the year, we continued to execute acquisition of the Tadiran, and at the end of November, reached a holding of 40%. At the same time, we also completed acquisition of 70% of Elisra shares. With these two important acquisitions, we have created the largest defense group in Israel, and added several important elements to our group technologies that are important to our continued growth, including communications, electronic warfare for various applications, electronic intelligence systems, and data leaks. With these technologies added to our portfolio, Elbit Systems is capable of offering an even more extensive portfolio of advanced defense electronic systems on the global defense market.

Throughout the year, we have continued our R&D and marketing efforts, enabling us to bring the new solutions to our existing markets and to new markets we continue to develop. Our recently-announced wins show the importance of these investments. The two most significant programs signed in 2005 were the Israeli Digital Army and the the U.K. Watchkeeper programs, amounting to [$20 million], and GBP370 million, which is around $550 million, respectively. But in addition, we had many other important programs, and I would like to review some of these wins announced since our last conference call, four months ago.

We signed a EUR57 million contract for a helicopter upgrade program with the Bulgarian Ministry of Defense. This concept is one of several in which we are upgrading [inaudible] helicopters, making them fully operational, conforming to NATO standards. El-Op was chosen for supply the CoMPASS payload for the U.K. Watchkeeper UAV program as part of the GBP317 million contract awarded to U-TacS, our U.K. subsidiary jointly owned with Thales U.K. This win is a good example of the synergies that exist the Elbit Systems Group companies. In December, our U.S. subsidiary Kollsman was awarded an initial order in the amount of $33.6 million to provide high performance thermal binocular system, and long-range thermal imager for the U.S. Marine Corps. That contract had the potential value of up to $250 million in the future. In addition, El-Op has been selected by the Korean Air Force to supply realtime long-range oblique imagery system for the F-16 aircraft. The contract is valued at approximately $50 million.

In January, Elisra completed the finalization process of a contract valued of approximately $80 million to supply full EW suite for fighter aircraft to an international customer. In February, Elbit Systems was selected to supply unmanned pilot system for the Belgium [arm] infantry vehicle program in cooperation with Mowag, a General Dynamics Swiss subsidiary. We have not yet disclosed the contract amount but it is expected to be material. Our subsidiary Ortek which leads the homeland security business for the group, completed the deployment for a company in Asia of its first $8 million [inaudible] coastal security system. Such system incorporated the various capabilities of our group, and we expect more of these projects to follow.

Also in February, we signed a second major contract to supply unmanned pilot system and fire control system, and this time, to the Portuguese Army for approximately $32 million in cooperation with STEYR, Austria, also a General Dynamic subsidiary. As we had mentioned in the past, we expect the unmanned system for various applications to continue and be one of our main growth engines and this recent land system project are a good example of how our new technologies are being accepted in the international markets.

2005 was the 10th consecutive year in which we achieved increased revenue and growth in backlog in all of the orders year-over-year. Our organic growth rate in 2005 exceeded 12%, and our [inaudible] backlog of orders increased by a record of 55%. As Ilan already mentioned, we finished the year with a $3.35 billion backlog of orders providing a high level of confidence in our continued growth into the future, backed by our continued investment in R&D and marketing to ensure continued development of our businesses. And now the records achieved in '05 was operating cash flow, which helped in financing the various acquisitions.

We have already begun working on the synergy that Tadiran and Elisra bring to our group with their outstanding employees, complementary technologies, and market presence, and we enjoy the full cooperation of both companies and their management teams, as we all work toward achieving the common goals of [inaudible]. We have already initiated [inaudible] activities with the aim of improving performance where necessary, and we believe that both acquisitions will be [approved]. We trust that we will see the fruits of these steps soon, and we are confident that our activities in 2005 lay a solid foundation for the further growth and development of Elbit Systems. We will continue to invest in the development of new technologies and markets, and to execute our long-term plan of profitable organic growth, while pursuing new acquisition opportunities in Israel and globally. I would like now to open the call for questions and answers. Operator?

Thank you, sir. [OPERATOR INSTRUCTIONS] The first question is from Yoav Burgan Poalim Shaar. Go ahead sir.

Hi. First, regarding the gross margins, even excluding the one-time Elisra restructuring expenses, the gross margin, at least on a quarterly basis, seems a bit disappointing. Could you provide some insight on this issue?

Yes, one comment I would like to make is that if you take the equity profit of it, I mean VSI and SCD, this companies are a part of our ongoing business. This growth in profit there should be in a way added to our gross profits, because this is the way we operate with these two companies. They are part of our program. We are the prime and they are the sub, or vice versa. So we should add this growth all to the gross profit. But the way we presented that, it is under the line. Second, we had all kind of expenses that Ilan mentioned that affected our gross profit. However, in 2006, we expect better GP than '05.

Okay. And just a second question. The backlog, even again excluding Elisra, increased very significantly in Q4 by about $600 million. I would like to know, how much of that is due to the Watchkeeper project? And in other words, how much of the Watchkeeper project has been already recognized as backlog?

The whole program was recognized as backlog in 2005, and this is the contract of the value of $560 million.

Okay. So I can just take your part in U-TacS, and add all of the orders you received throughout the quarter that you reported?

Yes.

Okay.

Yoav, I'm sorry. It's Ilan. U-TacS is a subsidiary of Elbit and is consolidated in our books, so the full order is in our books.

The full order, not just a percentage?

The full order of U-TacS, which is, as I said -- consolidated in

-- is consolidated -- okay.

-- already consolidated in the Elbit books.

Okay. I see. And the Digital Army Program for the IDF, has this already been fully recognized?

It has been. The numbers that we announced last year have been recognized in the backlog, and it has obviously been also recorded in the revenues that is part of the growth in the -- the [inaudible].

Okay. Okay. Great. That's all for me. Thank you very much.

Thank you. Next question is from Joseph Wolf of UBS. Go ahead, sir.

Thanks. Good afternoon. First of all, thanks for going through the pro forma numbers. It helps to put the business in perspective. But the one thing I think is still a question is when we do the integration, if we exclude the one-time charges, what sort of numbers should we be looking at on the profitability side for 2006, in terms of thinking of the company in a whole -- a whole basis when the integration is done?

You know that we don't give specific guidance but what -- what we can say that certainly we are going to see a better year in all financial barometers, including gross margins, and EPS, since we took some measurements already. And we are quite sure that we will see a better year in '06.

And just as we think about, you went through some of the programs that you've won. I was hoping to get just maybe by -- are there -- when you think about the opportunities globally, and you look at the mix of business geographically, you mentioned obviously the contract in the U.K. driving Europe, but are there other -- within that Other 23.6% of the business, are there specific geographies you can point to where we should be looking for good opportunities for Elbit next year?

Yes, when we -- we foresee a growing demand worldwide for C4ISR type of program, means defense electronic type of programs and this is is what Elbit has been doing and is doing. So we are quite optimistic that budgets will be allocated toward that direction. And you will continue to see us growing in the United States and not just -- will continue to be the largest market for Elbit Systems. Europe, we're going to see in '06, a Europe portion growing. Today, it is about 10% for '05. We think that it will be in the neighborhood of 15% in '06, and in the areas of unmanned, air, ground, and sea, and command control, we see this areas continue to grow in the future.

And just one final question about the local market here. Now that we've -- you've got the consolidated sector to a certain degree, and there has been some reports in the local press about perhaps IAI relinquishing their stake in -- or selling their stock in Elisra, can you just talk about the local competitive market, and whether the consolidation and the way that you look at the market has actually helped your prospects here in Israel?

In Israel, the next step will happen only if the customer -- or the government will take the state-owned industry private. And at this moment, I cannot tell when this is going to happen, but what I can say, that if this will happen, and we will see this accruted [sic] to Elbit Systems, certainly we look at this [inaudible] but while we're waiting for this decision to be taken, we are looking outside of Israel, and especially in Europe, and the United States, and we see an accrutive [sic] opportunity for Elbit, we will look into that, but meanwhile, I anticipate small acquisition to be done.

Great. Thank you.

Thank you. Next question is from Yair Reiner of CIBC.

Good afternoon. Just a couple of questions from me. First some housekeeping. Can you give us the share count and the total debt for the quarter?

The share count on a fully diluted basis for year-end was 41 million 6 hundred and twenty -- sorry 41,623,000

Okay. .

Net debt for year-end was $160 million.

Very good. A question about the restructuring that you referred to. I think operating expenses were a bit higher than I had anticipated. Can you give us a sense of what kind of consolidation savings you might be looking at, and where those might be? I think the general and administrative expenses were quote a bit higher than many of us were anticipating.

You know that once we are consolidating this Tadiran in Elbit, certainly there duplications in marketing, in R&D, and in the management, so in this area, we are looking very, very carefully and anticipate savings there.

And how long do you think it will take to realize those savings? Do you think this project is a matter of another quarter or two, or is it going to be perhaps a year before you can kind of stretch out those savings?

We have started that already in '05, and we see the results starting in '06.

Very good. That's it for me. Thank you.

Thank you. The next question from Greg Agnew of Friedman Billings Ramsey.

Yes, hello. I was wondering, I know you don't give specific guidance, but last year, you did give revenue guidance in general terms. Given the backlog growth that you've seen as well as the acquisition of Elisra now, I was wondering if you could give somewhat similar characterization of what we could expect for 2006.

What I can say is that our backlog is going to continue to grow, even from this record debt level that we have today. Certainly, we'll see a growth in our revenues. I already said that we will see an improvement in our margins. Improvement in the EPS.

Okay. Yah. Last year, I think you were even as specific to say, I think it was in the second or third quarter that were you going to do revenue in excess of $1 billion, and should we expect revenue in excess of $1.1 billion, $1.2 billion organically, then plus the acquisition of Elisra? Or is that too specific?

It will be, sir, above $1.3 billion.

Above 1.3, okay. And then just from housekeeping standpoint, do you expect the implementation of SFAS 123-R under U.S. GAAP to have a material impact in 2006?

No, we don't.

Okay. Great. Thank you very much.

Thank you. If there are -- oh, we have another question from [Shaeed Shahki]. One moment, please. He has removed his question. [OPERATOR INSTRUCTIONS] We have a follow-up question from Greg Agnew from Friedman Billings Ramsey. Go ahead, sir.

Yes, just one more quick one. It looks like revenue in the land systems group for the fourth quarter was quite low and you've explained that, or could you explain that? And then also with some of the new contract wins, you could explain how we might see that group's revenue ramp up throughout 2006?

As I mentioned before, we expect it to increase in 2006, as revenues are recognized in certain programs, we already have, and in addition, we generate revenues on the new programs, such as the ones that we recently announced. For example, the unmanned pilot systems.

But from a timing standpoint, should we expect to see the ramp begin in the first quarter or is it weighted more towards the middle of the year?

It will be over the year.

Middle of the year. Okay. Great. Thank you very much.

Thank you. Next question is from [Shaed Take] of [Maytev].. Go ahead, sir.

Thank you for taking my question. Regarding the gross margin guidance, if I remember correctly, and we were never shown an exact number, but Elisra is that a problematic gross margin, I think, substantially lower than Elbit Systems so just if you could specify your guidance, if we should take the 26.5 and gross margin of '05, and expect something better in '06?

For Elisra [inaudible] we, at least in '06, we expect Elisra to have a lower margin than Elbit in general. But we are going to see some improvement in Elisra compared to the past.

Okay, but on a consolidated basis, what should we expect?

As I said before, it is going to be better than this year, than '05.

Better than the 26.5? I sorry that I'm trying to be specific.

Yes.

Okay. Okay.Thank you.

Thank you. There are no further questions at this time. Before I ask Mr. Ackerman to go ahead with his closing statements, I would like to remind everyone that the replay of this call is scheduled to begin two hours after the conference. In the U.S. 1-888-269-0005. In the U.K. please call 0-800-917-4256. In Israel, please call 03-925-5945 Internationally 972-3-925-5945. Mr. Ackerman?

Yeah. I would like to thank all of you for joining us today, and I hope to see all of you in our first quarter of '06 conference call. Thank you.

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