Elbit Systems Ltd (ESLT) 2007 Q1 法說會逐字稿

Welcome to the Elbit Systems, Ltd. third-quarter 2007 results conference call. All participants are at 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 May 15, 2007.

I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to all contents 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 972-3607-4717.

I would now like to hand over the call to Mr. Ehud Helft from GK Investor Relations. Ehud?

Thank you and good day to everybody. On behalf of all the investors, I would like to thank Elbit management for hosting this call today. Earlier today, Elbit Systems issued its results for the first quarter of 2007. I trust most of you have seen by now a copy of the press release. But if not, you may view it on the Investor Relations section of the Company's Website and on all major international wire services.

Joining us on the call today are Mr. Joseph Ackerman, Elbit Systems' President and CEO; and Mr. Joseph Gaspar, Elbit Systems' Chief Financial Officer. Joseph will begin by providing a summary of the financial results of the quarter, followed by Joseph, who will talk about some of the significant events during the quarter. We will then turn over the call to the question-and-answer session.

Before we begin, I would like to point out that the Safe Harbor statement in the Company's press release issued earlier today also refers to the contents of this conference call. With that, I would like now to hand over the call to Joseph. Joseph, please.

Thank you, Ehud. Good morning and good afternoon to all of you, and thank you for joining us today. Our first-quarter 2007 revenues were $403.6 million, a 20.7% year-over-year increase. Note that both our first-quarter revenues of 2007 and 2006 now fully consolidate our resource revenues, and therefore, this growth represents the organic growth of the Group.

Our first quarter top line does not include revenues of Tadiran Communications. This will change one month into the second quarter, when we begin to fully consolidate Tadiran's revenues.

Looking at our revenue distribution by business line, Airborne Systems continued to be our largest areas of operation and were 37.6% of revenues; Land Systems, 20.2%; C4ISR Systems, 21.5%; Electro-Optics, 13%; and the other businesses accounted for about 7.7%.

All geographical regions have demonstrated strong growth, led by the U.S., which accounted for 36.1% of total revenues, followed by Israel, 23.8%; Europe, 20.8%, growing substantially over the last year; and the rest of the world, 19.3%.

Our gross profit was $103.5 million, an 18% increase in absolute dollars year-over-year. However, our gross margin for the quarter, 25.7%, was slightly lower than the last year's 26.2%. The lower gross margin this quarter is mainly due to the impact of the strengthening of the Shekel versus the U.S. dollar, which increased the effective labor cost in Israel.

Our operating expenses were kept in check, and the total operating expenses in the first quarter reached 19% of revenues compared to 19.9% in the first quarter last year. Savings were mainly in the G&A area.

Our operating profit in the quarter was $26.8 million compared to $20.8 million in the equivalent quarter last year. Our operating margin in the quarter was 6.6% compared to 6.2% in the first quarter of last year. We had a substantial decline in financial expenses this quarter to $2.9 million versus $4.2 million in the first quarter last year, following a strong cash flow generated by the Company and various hedging activities we have done.

Our non-consolidated subsidiaries have done well and contributed nicely to our profit this quarter, generating a net income of $3.4 million. The main contributors were Tadiran, VSI, SCD, and Opgal, all of which had good first quarters. The results of all of that was a net profit of $19.1 million, or 4.7% of revenues for the first quarter, 32% higher than the first quarter last year. Our EPS was [45%] (sic -- see press release).

The backlog of orders this quarter reached $3.796 billion, a net increase of $10 million from the end of last year. It is important to note that we added $483 million to our backlog this quarter. However, we removed $70 million from the backlog due to the settlement of the Bulgarian helicopter project.

71% of the backlog is for sales outside of Israel. Approximately 70% of the backlog is scheduled to be performed during the next seven quarters. The majority of the 30% balance is scheduled to be performed during 2009 and 2010.

Operating cash flow in the quarter was also very strong, setting a new record of $87.1 million compared to the $75.4 million last year, strong by itself.

Finally, the Board of Directors declared a dividend of 16% share -- per share for the first quarter -- $0.16 per share for the first quarter of 2007.

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

Thank you, Joseph. Again, we showed strong results for our first quarter. We continued our strong top-line growth, showing, as Mr. Gaspar said, a 20% [running] growth rate, which were accompanied with a revenue run rate approaching $2 billion a year is quite an achievement. We did this while producing healthy net profit and cash flow.

Over the past few years, we have fought to expand our penetration in key markets, primarily the U.S. and Europe, while constantly increasing our product and solution offerings with strong performance and healthy backlog generation. We continued to execute this strategy, which has enabled us to grow substantially over the past few years.

At Elisra, there is still more work to do until it reaches the profitability level we would like to see. It is important to note that we are still in the midst of the restructuring process and we only see the true fruits of our labor at the end of the process. We are convinced that these steps are essential, reasonable, and are in the best interest of Elisra and its employees.

Though we have already initiated this process, the efficiency measures are a major component in the success of the plan. We believe and hope that the employees will understand this and work together with us to turn Elisra around and put it back on a path to strong growth and performance, serving both investors and employees of the Company.

We have (inaudible) as an important and complementary asset to the Elbit Systems Group. We see significant synergy by combining our offering in all of our business areas. In fact, we have already seen improvement in our recent ability to bring quality orders and to grow this backlog, thanks to being part of the larger Elbit group.

On April 26 this year, we completed a cash tender offer for the balance of the publicly held Tadiran Communications shares. We paid a total of $382 million for the remaining shares. This acquisition marks the realization of another significant part of our long-term strategy, and we have already begun to work on fully exploiting the synergies that now when the whole (inaudible) Tadiran can more readily be implemented.

Tadiran's areas of business very much complement and are synergistic with those of the Group, contributing to a stronger organization, very much greater than sum of parts. Both these acquisitions, Elisra and Tadiran, enable us to further leverage our depth and versatility and offer our customers even more comprehensive turnkey solutions based on the Group's new collective strengths.

Now, I would like to discuss some of the projects which we won during the first quarter. In January, we signed a contract to supply unmanned turrets and electro-optic systems for the Belgian Armored Infantry Vehicle Programme. This was through our cooperation with the Swiss Company MOWAG, part of the General Dynamics' European Land Combat Systems Group. We see that our cooperation with MOWAG reflect the level of the position we have achieved with our customers, end users and business partners worldwide. MOWAG was selected by the Belgian government to be the prime contractor for the supply of the Piranha III vehicle for the program.

The current (inaudible) consists of more than 100 vehicles, with the further potential of up to an additional approximately 100 vehicles. Our portion includes the delivery of 30 mm unmanned turrets, and various electro-optic and electronic subsystems for this vehicle.

In February, our U.S. subsidiary, Kollsman, Inc., won (inaudible) order for the supply of Laser Target Designators. This, following the (inaudible) win, again slowly [enhances] our U.S. business and provides [distribution] for our product and technology in the United States.

Another project we achieved toward the end of the quarter was a contract for the delivery and commissioning of an integrated coastal surveillance system in Lithuania. This system is built on concepts of providing a highly-focused, proficient data fusion and processing capability to provide a valuable decision-making and enforcement tool for border guard force everywhere.

We won a very important contract through the establishment of a training center for the King Air B200 Beechcraft for the Israeli Air Force. The training center will operate through a private financing initiative, PFI program, with Elbit providing a turnkey solution, including the establishment of the training center, its operation and its supply of simulators, training services and maintenance for a 10-year period.

Finally, we were also awarded through our subsidiary, Cyclone, contract in the quarter by Lockheed Martin Aeronautics for structural components for the F-16 aircraft ordered by the Greek Air Force.

This broad and varied variety of projects with existing and new customers in different countries, all meeting different needs, goes to show the wide range of technologies and solution the group offers, as well as the deep and ever-improving synergies that we have created among these new companies.

The first-quarter 2007 continued a very long run in which we achieved increased revenue year-over-year. With a 21% of (inaudible), strong cash flow and backlog that continues to provide us with strong visibility and ensure our future growth, supported by our continued investment in research and development and marketing, we feel highly confident in our continued and strong growth into the future.

However, we always strive to improve our efficiency, and we see room for improvement, particularly in our margins following our integration of Elisra and Tadiran into the Elbit Systems family. I believe that we are taking the right steps and hope to see improvement in the coming quarters.

We also plan to continue executing our successful strategic plan that has truly served in positioning Elbit Systems as a global player in the growing defense electronics business. This strategy includes the development of leading-edge technology that give us an advantage over our competition in major programs, concentrating on developing the new growth [engine] such as land systems, unmanned vehicles of all types, ISR system, homeland security systems and airborne systems, both military and commercial.

All this, together with our M&A activity, will ensure our long-term position as one of the leaders in the global defense electronics market.

And with that, I would like now to open the call for questions and answers. Operator, please.

(OPERATOR INSTRUCTIONS) Yair Reiner of CIBC.

Good afternoon. First question is on the Tadiran consolidation. Can you give us just a sense of what are some the steps you are going to take to rationalize operations, and what are some of the synergies we will be able to see over the next, I guess, few months and then maybe a year down the line?

As we all know, Tadiran is expert and engaged in radio technology. Elbit was deeply involved in command control and networking systems. These two areas are complementing each other. Now we are going to put all this together with all the engineers into one group, leveraging each other's capabilities and models. And we are going to start this consolidation in a few weeks.

Have you already identified specific places where there is potential for cost-cutting or is the opportunity here really more about growing the business?

There is no issue of cost-cutting; both companies are very effective. The (inaudible) synergy is more, as you say it, on the top line -- I mean more business, leveraging each other's market presence and so on.

Good. So essentially -- I know that Elbit does not like to give guidance, but when we look at the two companies, at least for the first couple of quarters, we should think about, at least on the expense side, putting the two companies together, and perhaps over time synergies on the top line leading to faster than otherwise growth?

(inaudible) I won't give you numbers, but we will see some savings in research and development, because we saw some duplication in R&D. And definitely when we are now one company, we will see some savings there. But we see only leverage getting more pronounced and so on. So you will see the results in the coming quarters.

Just a brief question on Elisra, also in terms of an update. It seems as though the profits of consolidating the companies and trimming down costs has taken longer than you'd expected internally maybe, which was a little more than a year and a half ago. Any kind of insights into what the outlook looks like, how confident are you that you're going to be able to drive out some of the costs you were hoping to drive out a year and a half ago when you made the transition?

Yes, it took us slightly longer than we originally planned, this is true. But currently, we have a very detailed plan in place that we introduced to the employees. And as now, we are in the middle of dialogue with the employees to make them [partners] to this process. Once we reach an understanding, it will take us a few months. And I foresee that 2008, we will be able to reflect the result of this business plan.

Very good. Thank you and continued good luck.

Thank you.

Amir Avivi with Poalim Shaar.

Hi and (inaudible) for the good financial report. I have two questions. The first one is about Elisra -- can you give us some data about the company and how it affects your financial report?

And the second one, you achieved a very nice gross margin. And if we take away the currency issues in Israel, the trends of the Shekel, in the gross margin, and Elisra probably didn't achieve so much, then how did you achieve this gross margin? Thank you.

Regarding Elisra, your first question, as Mr. Ackerman said, we are working according to a multiyear plan to bring the Company in line with the business efficiency of the whole Group. This takes some time. The results of the last quarter, year-end quarter, which were quite unsatisfactory, I think we all think that all that is behind us.

Going forward, it is hard work to bring the Company back to the right business [conduit]. And what we have seen in the first quarter is some initial steps in that direction. We all hope that it will go along the time, and along the line, it will get better and better. Regarding your second question --

Can you give us some details about this quarter -- financial highlights of Elisra (multiple speakers)?

This quarter, their performance was more or less in line with their plan, with approved budgets and so on. Last quarter, as an extraordinary step, we did provide the highlights of the Company performance in view of the fact that they had a very significant adverse effect on our business results. This quarter, that is of course not the case, so we continue business as usual for the whole Group we provide numbers.

Regarding the [GP] you have mentioned, yes, we were affected as well from the (inaudible) of the shekel versus the dollar, like every other Company here in Israel mainly that is doing export. And, as you know, a big part of our revenues come from overseas.

We were successful to some extent to counter that with various activities, some of them operational and some of them financial, so that we were not hurt very much at the bottom line. And with GP, we kept it more or less in line with our previous performance.

However, the continuation of the strengthening of the Israeli Shekel in the second quarter does affect us again, and we are doing all kinds of efforts in order to counter that as well. If you can help us in turning around that, I would definitely welcome that help.

Can you give numbers about the role -- influence of the strengthening of the Shekel on your gross margin a bit?

I would prefer at this point in time not to give you any fixed numbers. But you can look at our revenue spread -- about 25% of our revenue is, roughly speaking, for the Israeli market, most of them in Israeli shekels. And that will be a natural hedge to our business.

We have a significant workforce in the U.S. and worldwide that their cost is in foreign currency, which obviously is not affected by the shekel. Of course, a big part of our labor is here in Israel, which is affected by the shekel -- the dollar value. But we have taken some steps to counter this effect. So in the bottom line, you will see it in our numbers of course, in the GP.

Okay. Thank you so much.

[Ella Freed] of [Brisba].

May I congratulate you again for your impressive results? I have one question for Joseph, please, and one more strategic question for you. Is there any visibility beyond the next seven quarters concerning the profitable growth? Because the backlog looks very nice, but it is limited in visibility. What about 2009 for you and for the industry?

2009 is two years from now. What I can tell you is that the focus for the defense spending in the world shows that this growth will continue in defense spending. So a big part of this global business, I don't see why we won't get at least the same piece out of this budget.

But many of your projects are long-term projects, and therefore you already have some still for the quarters beyond the end of 2008.

If you ask us what is our expectation for 2009, we continue our growth in revenues in '07, 08 and '09. Clearly, I can't give you an exact number --

But you do not expect a weakening of the pace of growth of the defense industry?

Not (inaudible).

Okay. And another question is a more technical question. In-process research and development write-off, how much was it in this quarter?

In-process, we had zero.

You had zero this quarter?

Yes.

Oh, okay. And is it because there was no evaluation or because there are no write-offs right now?

There were no write-offs. Actually, this quarter was a quarter without any acquisitions and so we had nothing this quarter. By the way, the first quarter last year was similar, without any one-time write-offs. So it's apples with apples in the comparison period.

We definitely -- looking at the second quarter, that would change. We acquired Tadiran, as you know, and that will -- our numbers will reflect that.

Okay, thank you.

(OPERATOR INSTRUCTIONS) There are no further questions at this time. Mr. Ackerman, would you like to make your concluding statement?

Yes. I would like to thank all of you for joining us today and for continued support and interest in our Company. And I'm looking forward to seeing you all again in our next quarter's conference call. Thank you.

We have a follow-up question from Ella Freed of Brisba. Would you like to make your question?

Yes, if I may, another brief question. The Airborne Systems, are they being replaced by Land Systems and C4ISR Systems as the main (inaudible) for growth or it's just a seasonal thing? Is the shift being [conferred] to Land Systems and C4ISR Systems as the main drivers of growth for the Company?

From what we see now, and the quarter shows that as well, we see actually all the businesses growing. There might be some fluctuations from quarter to quarter between the different businesses, but all of them are in the growth mode.

And regarding the specifics about Land Systems versus the Airborne Systems, yes, we drive them to compete with each other for the growth rate. But not -- no, I don't think there is anything along those lines.

Okay. Thank you very much, again.

Amir Avivi of Poalim Shaar.

I figured in Europe, you achieved your former growth -- you talked about 20% from the total sales. My question is are you going to stay on this level in the next year or you are going to change your goal or your target about Europe?

As you recall, I think it was two years ago when we set up this goal to achieve this 20% in Europe. I'm very happy to tell you that we got to that point even earlier than planned. But our goal is to stay at that level of around 20%.

Okay, thank you.

Mr. Ackerman, is there anything you would like to add to your concluding statements?

Just looking forward to hear from you all next quarter. Thank you and goodbye.

Thank you. This concludes Elbit Systems, Ltd. first-quarter 2007 results conference call. Thank you for your participation. You may go ahead and disconnect.