Elbit Systems Ltd (ESLT) 2006 Q1 法說會逐字稿

Welcome to the Elbit Systems Ltd. first-quarter 2006 results conference call. All participants are presently 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 May 16, 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 Gelbert Kahana Investor Relations at 1-866-704-6710 or 9723-607-4717. I will now hand the call over to Mr. Ehud Helft of Gelbert Kahana.

Good morning and good afternoon to everybody. Thank you for joining us today for the Elbit Systems 2006 first-quarter results conference call. Before we begin I would like to thank Elbit's management for hosting this conference call. With me today on the call 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 financial review of the first quarter and then Mr. Ackerman will follow with an overview. We will then open up the call for questions. Ilan, would you like to begin, please?

Thank you, Ehud. Good morning, good afternoon to all of you and thank you for joining us today. I shall first review the highlights of our first-quarter results and then pass the call to Mr. Ackerman. Our first-quarter 2006 revenues reached $334.4 million, a 45% increase over the revenues generated in the first quarter of 2005 which stood at $230.7 million. As you know, we began to consolidate the [original] results as of December 1, 2005 and accordingly the first quarter of 2006 is the first quarter in which we consolidated results for the full quarter.

The increased revenues are a result of both (indiscernible) contribution and organic growth contributed by the various Elbit Systems business units. Gross profit for the first quarter 2006 was $87.5 million as compared to the gross profit of $61.6 million for the same period last year, a 42% increase. As expected the 26.2% gross profit margin in Q1 2006 was lower than a 26.7% margin of Q1 2005, mainly the result of the initial consolidation and it is in line with our 2006 expected gross margins as indicated in our last conference call. As a reminder, our cost of goods sold includes around $0.5 million per quarter in amortization expenses related to the ELISRA acquisition.

We continued the research and development efforts and spent in the first quarter 2006 $8.7 million more than in the first quarter 2005. We've increased third party participation, and the year-over-year net increase in R&D was only $2.4 million and with percentage revenues we actually spent less than in Q1 2005 at 6.4% of revenues as compared to 6.6% last year. The largest operating expense in Q1 2006 was sales and marketing which accounted for 7.8% of our revenues. These expenses are related to the higher level of revenues and to the efforts made to obtain new business in (indiscernible) new markets where the fruits of the expense revenue (indiscernible) in future periods.

Operating margin was affected also by the consolidation of ELISRA and was 6.2% of revenues compared with 7.4% of revenues in the first quarter 2005. However, our operating profit increased by 22.7% in the first quarter 2006 and reached $20.9 million compared to $17 million in the first quarter 2005. The financing expenses increased from $1.7 million in Q1 2005 to $4.2 million in this quarter mainly as a result of the ELISRA consolidation, higher growing amounts and the [interesting] interest rates for the Israeli shekel and the U.S. dollar.

Our affiliated companies and partnerships continue to do well and they contributed $2.3 million to our net profit in the first quarter of 2006. The contribution of our affiliates is net of more than $2 million third quarter ongoing amortization of intangible assets, expense related to (indiscernible). Net income increased by 14% to $14.5 million and diluted EPS in the first quarter of 2006 was 35% compared with $0.40 last year.

As indicated in our financial report, the first quarter 2005 EPS was adjusted from $0.32 to $0.30 following the change in the (indiscernible) of our holdings in Tadiran from available (indiscernible) securities to equity (indiscernible) accounting after we increased our shareholder in (indiscernible) 2005. (indiscernible) revenues for (indiscernible) in the first quarter 2006 were as follows. Elbit Systems generated revenues of $138.6 million, a 37.3% increase over the same period last year and accounted for 41.5% of our total revenues.

[Land] Systems contributed $41.8 million or 12.5% of total revenues. (indiscernible) revenues reached $83 million or 25% of total revenues, an 88.7% increase over the revenue generated in last year's first quarter. Electro optics contributed $44.1 million which accounted for 13% of total revenues and other businesses generated revenues of $26.9 million or 8% of total revenues. As you can see, all business segments demonstrated an increase over last year with the largest increase generated by airborne and the (indiscernible) division.

In terms of geographical contribution, the U.S. continues to be our largest market with revenues of $111 million in the first quarter followed by Israel with $94.2 million, other countries with $74.6 million and Europe was $54.6 million. While revenues in all areas increased Europe demonstrated the largest year-over-year growth generating revenues more than three times higher than in the first quarter of 2005 mainly the result of (indiscernible) that began in the (indiscernible) program.

We continue to generate operating cash flow which in the first quarter 2006 reached $75.4 million, [62%] higher than last year. At the end of 2005 our backlog of orders passed the $3 billion mark for the first time. With $176 million increase in the first quarter 2006 we have now crossed the $3.5 billion mark for the first time. Almost $2.2 billion of this backlog is scheduled to be sold in the next three quarters of 2006 and over the year 2007. With that I shall now turn the call over to Mr. Ackerman.

Thank you, Ilan. I am very pleased that as we report today our first results for 2006 we continue to set new records in revenues, net profit, backlog of orders and cash flow. The consolidation of ELISRA full quarter numbers for the first time helped the 45% increase in revenues, but it is important to mention that Elbit's organic growth rates in the first quarter continue to be double-digit as achieved through 2005.

While increasing revenues we also generated over $0.5 billion of new business during the quarter, increasing our (indiscernible) backlog by $176 million and crossing the $3.5 billion mark for the first time. In the first quarter we won several important contracts in new markets including Belgium and Portugal and based on new technology such as (indiscernible) and we also saw new business coming into Israel. I believe that the new business generated in a variety of markets and technologies is a sign of strength for our group.

At the same time we continued to work on the integration of ELISRA into Elbit Group. And as we had indicated in the past, we believe that the acquisition will be accretive within one year. Our $3.5 billion backlog is important not only in terms of securing our topline growth, but it also enables us to concentrate on improving our possibility and sets the foundation for coming years.

We continue to look for expansion opportunities in our core business and look to develop new growth engines that will enable us to lever in technologies that we have in-house by finding new applications such as commercial aviation. This new growth engine will supplement the current main business lines and we expect to see them contributing to our future growth.

Our plans are supported also by the strong operational cash flow that we continue to produce which was in the first quarter of 2006 over 50% higher than the cash flow generated in the first quarter of last year. In summary, we are committed to our long-term strategic goal of growing Elbit Systems both organically and through selective acquisitions and maintaining our position as the leading global defense technology solution provider. I would like to open the floor for questions, please.

(OPERATOR INSTRUCTIONS). Joseph Wolf, UBS.

Can you hear me? Good afternoon. A question on the expenses side. You mentioned that the R&D was up but it was down as a percentage of sales. As we scale through 2006 could you give us some indication of whether you're targeting a specific dollar spend or whether we should be looking at R&D as a percentage of sales? And the same with the sales and marketing SG&A now that ELISRA has been consolidated fully?

These R&D expenses are according to our long-term plans and what we spent in the first quarter is as planned originally and will contribute also in the future.

Just as a follow-up, should we be thinking -- are you targeting a percentage of sales? Should we be growing R&D as a percentage of revenues? Is the 21.4 a flat line for the rest of the year in terms of dollars? That's kind of what I'm looking for.

We don't anticipate this percentage to be decreased for the full year.

Okay, thank you.

Yoav Burgan, Poalim Shaar.

Good afternoon. I was wondering if you could talk a bit about (indiscernible) communications and your cooperation with them. It seems you have overcomes some major hurdles regarding (indiscernible) management and their union issues. I'd like to know how do you see the combined strategy today of Elbit and Tadiran looking forward?

Actually it is going forward pretty well, maybe even better than I expected. Firstly, I am the Chairman of Tadiran Communications and we do see these days in many areas a lot of cooperation between the two companies and I anticipate this even to be further improved in the coming future. There are already some joint activities both in Israel and out of Israel.

And today as for the whole group, do you regard their Tadiran as the tactical radio house?

Yes, we are trying to avoid duplication between Elbit and Tadiran which will take some time because we have already some R&D and some [issues] already within these two companies. But as we go forward we are trying together with Tadiran management to avoid duplication between the two companies.

Okay. And my second question is regarding ELISRA. As you posed in the previous quarter you didn't provide the contribution of ELISRA to revenues. Could you give us some details, any details regarding ELISRA's growth, profitability and your goals are in these areas?

This quarter, first quarter, ELISRA -- I know this is a private company -- but ELISRA contributed around $50 million in sales.

Could you repeat that?

This quarter, the first quarter of '06 ELISRA contributed slightly over $50 million of sales in the first quarter of '06.

Okay. And regarding your goals about their future growth and profitability?

I cannot give you any numbers, but certainly if you know the history of ELISRA, we have tried and we have already started to look for synergies. I foresee the performance of ELISRA to be improved.

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

Nir Amikam, Hapoalim.

Just a few questions. First of all, can you repeat the number of amortization for ELISRA for in the quarter?

In the cost of goods sold we have over $0.5 billion per quarter in the ongoing amortization expense.

And it will keep on going for the next few quarters?

For the next few years -- it's an ongoing number.

Okay. Another thing, I saw the customer advances that keep on climbing and I want to understand a little about the reasons, now is it sustainable or can we expect a change in the near future?

First of all the fact that we have advances I think indicates new business coming in -- one of the indications. Not all contracts come with advances, so it is not something that will necessarily be maintained but that was official (indiscernible) contracts we had recently signed.

So you can't really say if this level is sustainable?

It is not a sure thing, it depends on how contracts are going to be [billed] –- contract wins future.

It's not mostly things like a WATCHKEEPER and programs like that?

No.

Okay. And about the electro-optics, I saw that it seemed to have slowed down a little bit. Can you elaborate on that issue?

It's a quarterly fluctuation of revenues. As you know, our revenues may fluctuate from one quarter to another and that is what it is.

Okay. It's not something you can [say] for in the future?

No.

Okay, thank you.

Greg Agnew, Friedman Billings Ramsay.

Thanks for taking my call. I was wondering -- just following up on that last question, given the growth that we're seeing, should we expect that working capital will be a usage throughout the rest of the year?

I'm sorry? Greg, can you repeat the question?

I was just wondering -- it looks like working capital was a nice inflow during the quarter and I'm just wondering from a cash flow perspective if we should expect that working capital might be a use of cash throughout the rest of the year given the growth that we're seeing.

It depends on the rate in which new advances come in which we sell under these programs. But I think that, as I said before, it really depends on whether we get -- to an extent it depends on the advances that we may or may not get in new contracts, but some of which will turn into inventory and then sales, etc., going forward.

Okay. And then just on the revenue line, both land systems and the other revenue line were higher than I had expected. I was just wondering if you could talk a little bit about the strengths that you saw in each.

I think of the strength that you actually get from the electro-optics is also relevant here. From a quarterly basis it is -- revenues in one area –- business area or another may fluctuate. But I think that the trend is for all areas to grow and that is -- in the long-term that's what you'll see.

But certainly on the other revenue line that is significant, the 26 plus million that you saw this quarter is significantly higher than the mid to upper teens that you've been tracking at throughout 2005 and I was just wondering if there was a onetime item there?

That number I think is more or less sustainable. It would be (indiscernible) but they also had a small contribution there. So we think it should be around -- it fluctuates as well, but the [small application] could lead to a smaller business line.

Okay, great. Thank you very much.

[Moshe Friedman], (indiscernible).

Could you please repeat the number of amortization (indiscernible) ELISRA that will be held for the next two years? I just didn't hear the number.

As I said before, the ELISRA amortization expense is in the cost of goods sold. It's over $0.5 million per quarter.

$0.5 million per quarter.

Yes, it's about $2.2 million per year and it will grow for the next years.

Okay. Another thing -- Tadiran Communications spoke about an initial project that you are not engaged yet, it's named (indiscernible) and I was wondering if you could elaborate on that project and what is the certainty that this project will not take off?

First I would appreciate if you asked this question to Tadiran management. However, I think that we are pretty close to concluding this deal.

I see. Are there any plans about Tadiran Communications for the future in terms of maybe delisting the Company or purchasing the rest of the shares and so on?

No, no plans at the moment.

Could you please -- about your backlog of orders that increased to $3.5 billion, how much of that belongs to ELISRA?

I think that ELISRA -- ELISRA is now a private Company and as such we do not disclose those numbers. But at the end of the year we disclosed that they came in with $340 million.

Pardon?

At the end of the year we indicated that ELISRA came in with $340 million. Their backlog has gone up since then, but as a general rule we do not disclose information about our private subsidiaries.

I see. So would it be correct to say that your own backlog declined during the first quarter?

Did it what?

Would it be right to conclude -- by the way, you consolidate both your backlogs, the ELISRA backlog and your own backlog, right?

Yes, of course.

So would it be right to conclude that your own backlog declined during the quarter?

No, not at all. Not at all. It was (indiscernible) it went up.

I see. And how much of the WATCHKEEPER project is inside?

In the backlog?

Yes.

More than $500 million.

Thank you very much.

Bernard Manor, [Bankyav].

Good afternoon, guys, and congratulations on your solid numbers. I'd like to know what you think about the UAV market globally and your position there. And maybe if you can speak about the next countries that are likely to publish more UAV contracts -- maybe from Australia maybe or Asia. And if you can elaborate a bit about your business in Europe, where do you see the next growth coming besides of course the WATCHKEEPER? And maybe a financial question about if you do such strong numbers from operating income are you going to continue to finance your debt to [smaller] your debt? Thanks.

We do see a growing demand for unmanned vehicles worldwide. And as you know, Elbit was one of the first to get into that business going back 15 years. So we have now programs in Israel, we have programs together with Thales for the WATCHKEEPER, and we have relatively smaller programs in other -- 10 or 15 countries. And we do anticipate this business to grow as countries are getting familiar with the advantage of using unmanned vehicles.

As for Europe, we have kind of a (indiscernible) agreement with Thales that based on our cooperation we will promote that technology to other European countries on one hand and then to go to other countries, and you mentioned Australia and others. So yes, we do anticipate as we are successful with the WATCHKEEPER we are getting all kinds of requests from other countries to participate in this program. So yes, we see this as a growing business for Elbit.

Bernard, can you repeat your question regarding the debt?

Right. I thought that you -- you did something like -- operating you did something like maybe $75 million operating cash flow and you used it to smaller your bank debt. And I wondered if we should expect this debt to continue or maybe use it -- increasing dividends or something else.

I think that using the cash flow –- [opening] cash flow to reduce debt makes sense. I think if we -- the level of debt will remain also -- one of the things that will dictate the use of cash flow going forward. In terms of dividend I think that even though we do not have a policy we pay dividends quarterly and I think the level we paid this quarter is –- have you noticed --it was increased by $0.01 I think this quarter.

Right, thank you very much.

(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 the UK please call 0-800-169-8104. Israel please call 03-925-5945. Internationally 9723-925-5945. Mr. Ackerman?

We'd like to thank all of you for joining us today and I'm looking forward to meeting you again in our second-quarter conference call. Thank you.

Thank you. This concludes Elbit Systems Ltd.'s first-quarter 2006 results conference call. Thank you for your participation. You may go ahead and disconnect.