Elbit Systems Ltd (ESLT) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems Limited second 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 August 14, 2007.

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 GK Investor Relations at 1-866-704-6710, or 9-723-607-4717.

I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. You may go ahead.

Thank you. Good day, everybody. On behalf of all the investors, I would like to thank Elbit management for hosting this call.

Earlier today Elbit Systems issued its results for the second quarter of 2007. I trust that most of you have seen by now a copy of the press release, but if not, you may view it in 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 and beyond. 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 content of this conference call. With that, I would like now to hand over the call to Joseph. Joseph, please.

Thank you, Ehud. Hello everyone and thank you for joining us today. Before I start, I would like to remind you that one of the major events that influenced our financial statements in the second quarter of 2007 was the completion of the acquisition of the remaining outstanding shares of Tadiran Communications. Due to that fact that acquisition was concluded by the end of April 2007, the results of Tadiran in the second quarter were accounted for one-third to the equity line and two-thirds to consolidation of the financial statement.

Following the acquisition of Tadiran, we recorded $27.1 million of acquisition expense. This relates to write-off of in-progress R&D expenses recorded under operating expenses, totaling $16.6 million, as well as the related restructuring expenses totaling $10.5 million, which came under the cost of goods sold. This is consistent with our predicted range of the total acquisition expense we had announced several weeks ago that were estimated at that time to be between 25 and $30 million.

As we address the quarterly numbers and in an attempt to more clearly relate to the business results on a comparative basis, I will focus my analysis mainly on the results on a pro forma basis, which exclude the acquisition expenses. Our second quarter in 2007 revenues were $468.2 million, a 36% year-over-year increase. As described above, we began to fully consolidate the results of Tadiran as of the end of April 2007. Thus, our results also include the contribution of two-thirds of one quarter from Tadiran. Organically, excluding Tadiran, we also presented a strong growth with a 22% year-over-year increase.

We saw growth in all our business lines over the last year. Airborne systems continued to be the largest areas of operation and were at 34.4% of total revenues, followed by C4ISR systems that were at 29.2%, land systems were at 14.6%, wireless optics at 13.8%. Other businesses accounted for 7.8% of revenues. Tadiran Communications revenue contribution is included in our C4ISR revenue line and that is the reason for the strong year-over-year growth in that line of business.

On a geographic basis, we saw strong growth in the U.S. and Europe and a small decrease in the contribution of the Israeli market. The U.S. accounted for 37.2% of total revenues, followed by Europe at 26%. Our strong European growth follows the recognition of revenues from the Watchkeeper Project as well as increased presence in various European countries.

16.4% of our revenues came from Israel and 20.3% from the rest of the world. The decrease compared with last year in Israel is due to quarterly fluctuations as well as the consolidation of the results of Tadiran. However, we expect that in the future and in general Israel revenues will return to account for about 20 or over 20%.

Our gross profit was $116.5 million. Excluding the restructuring costs related to the Tadiran acquisition, our gross profit was $127 million, a 42% increase in absolute dollars year-over-year, representing a gross margin of 27.1%, which is 1.1% higher than the second quarter of last year. The higher margin was driven by the consolidation of the higher-margin Tadiran revenues as well as further organic growth.

Operating expenses, excluding the $16.6 million in in-process R&D write-off, totaled 19.7% of revenues compared to 18.7% in the second quarter of last year. The increase was due partly to a growth in R&D expenses, which as a percentage of revenues, excluding the OCS contribution, was 7.8% compared to 7% last year. Additionally, we saw an increase in sales and marketing expenses, which made up 8.4% of revenues compared to 7.9% of revenues last year. This increase in operating expenses was in large part due to the impact of Tadiran Communications and increased marketing efforts in various international markets, including equipment demonstration efforts in these markets.

We believe that there is a potential for additional efficiency measures by exploiting the synergies and the rationalization of the R&D efforts and global marketing network of both organizations. This, however, will be an extensive process and we expect to see its positive impact in the near to mid future.

The general and administration expenses in the quarter were 4 -- 5.1% of revenues compared to 5.5% in last year's second quarter. Our operating profit in the quarter was $7.6 million, however excluding the acquisition-related charges, it reached $34.7 million, at 38% higher than the $25.1 million reported in the equivalent quarter last year. Our operating margin in the quarter, excluding the acquisition-related expenses, reached 7.4%, up from the 7.3% in the second quarter last year.

Financial expenses in the quarter were $5 million versus $6.7 million in the last year equivalent quarter. Our non-consolidated subsidiaries contributed $2.4 million to our net income. Net loss for the quarter, including the acquisition-related expenses, totaled $0.7 million, however excluding the Tadiran Communications acquisition expenses, net profit for the quarter increased by 54 -- 5 -- 57%, reaching $23.7 million, or 5.1% of revenues, compared to $17.2 million, or 5%, last year. Note that in the second quarter last year, we had also an IPR expense of $2.2 million relating to an acquisition of some shares of Tadiran and the $17.2 million is net of this amount. Earnings per diluted share, excluding the above impact, were $0.56 per share versus $0.41 per share last year.

Our [backlog of orders] at the quarter end crossed the $4 billion mark for the first time in our history, reaching $4.196 billion. We added $400 million to the backlog in the last quarter, which comprised both of organic growth and the consolidation of the backlog of Tadiran. 73% of the backlog is for sale outside Israel and approximately 61% of the backlog is scheduled to be performed through the end of 2008. The majority of the balance is scheduled to be performed during 2009 and 2010.

Operating cash flow for the first six months was very strong, as well, setting a new record of $129.7 million compared to $104.4 million last year, a 24% increase year-over-year.

Finally the Board of Directors declared a dividend of $0.16 per share for the second quarter of 2007.

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

Thank you, Joseph. Again, I am proud to present strong results. We continued our strong top-line growth, delivering 36% revenue growth this quarter with the help of the Tadiran Communications and 22% growth organically. For a company with a revenue run rate of almost $2 billion a year, this is really quite an achievement. We did this while maintaining our profitability, producing healthy net profits and record operating cash flow.

We grew our business very strongly in the U.S. and Europe and we can say that we are solidifying our position as a global defense company. Over the past two years, we have sought to expand our presentation -- our penetration, sorry, in key markets primarily in the U.S. and Europe. And this in part underscores our acquisition strategy. Complementary acquisitions are a key, fundamental in our vision to be one of the world-leading defense companies. At the same time, we look to expand our product and solution offerings based on our R&D efforts.

In the second quarter, we continued to execute on this strategy, which has enabled us to grow substantially over the past few years. As (inaudible) mentioned, on April 26 we gained full ownership of Tadiran Communications. More recently, on July 26 we purchased UK-based Ferranti Technologies for GBP15 million.

I would like first to address the Ferranti acquisition. Ferranti is a supplier of engineering, manufacturing and product support solutions to the aerospace and defense markets, with a highly capable management team. Together with U-TacS, our UK-based UAV system company, and UEL, the UAV engine company, this acquisition will strengthen our presence in the UK and Europe. I believe that Ferranti will significantly enhance our business base in the UK and will enable us to provide better support to our customers in the UK and Europe.

Let me go back to Tadiran. Tadiran is an excellent company with advanced technology and products that have proven operational success with numerous defense forces worldwide. Tadiran's areas of business is in communication technology, very much complements and are synergetic with those of our group, contributing to a strong organization very much greater than the sum of its parts.

To illustrate during -- to illustrate, during the quarter the United States Marine Corps ordered $18.5 million of rugged computers from Talla-Tech, which is a subsidiary of Tadiran. And this system, at the same time, has provided the U.S. Marine Corps with other products in the past and this particular order is a classic example of how we can leverage our relationship with our customers, offering them a broader and more comprehensive product offering and ultimately growing our sales to them.

Tadiran enabled us to slowly expand our business in the area of communications and C4ISR. It has already enabled us to reach new customers through our offering of a wider breadth of products.

Besides of our acquisition activity, the second quarter was extremely active and we won many new contracts. I would like to take a few moments now to discuss only a small portion of some of the more significant wins.

In May, Elop was awarded several contracts valued at a total of approximately $50 million to supply handheld thermal imaging systems. These were for the Canadian and Israeli armed forces as well as for additional customers worldwide. Elop continues to solidify its position as a leader in the defense imaging field and has on its roster of customers many of the leading armed force globally.

In June, our 51%-owned UK company, (inaudible) U-TacS, was awarded a contract worth $110 million by Thales UK to provide an intelligence, surveillance, target acquisition and reconnaissance support capability for the UK armed forces. The contract includes the provision of our high-end tactical Hermes 450 UAV system, which is globally recognized as a brand name for UAV customers worldwide. U-TacS also provides the core UAV system for the Thales UK Watchkeeper UAV system. Once again, we are proud to be a part of a winning team together with Thales UK.

One final win I would like to mention was the receipt of an infinitive quantity contract for repair and modification of various light-targeted systems for the Marine Corps helicopter United States. The total contract value may run as high as $97 million over the five years period.

This growth and growing variety of projects with existing and new customers in different countries all meeting different needs goes to show the wide range of technologies and solutions the group offers, as well as the deep and ever-increasing synergies that have been created among the group companies. During the quarter, we were very proud to receive two awards. EFW, one of our U.S. companies received the American Helicopter Society 2007 Grover E. Bell award for achievement in helicopter technology as part of the U.S. Army and [industry] team and our close-range tactical Skylark UAV won the Frost & Sullivan Award, the best innovative product award for 2007 in the aviation and defense category. These two awards are another validation beyond what our customers say about us of our technological leadership.

In summary, this has been another strong quarter of growth and performance for the Company, achieving new highs in financial parameters and backlog. We now have a combined group of leading companies who is present in most leading geographic regions with a diverse product offering for the evolving needs of the defense industry.

Given our strong cash flow, a growing backlog providing us with strong visibility, our continued and growing investment in research and development, we feel highly confident in our continued success well into the future. And with that, I would like now to open and poll for question and answers.

(OPERATOR INSTRUCTIONS). Tsahi Avraham, Clal Finance.

Hi guys. Good afternoon. About Elisra, anything you can tell us about the effect Elisra had on the quarter, about the operating income?

Elisra continued its level of performance that we reported last quarter, more or less balanced the bottom line. They achieved new orders. They are performing close to target and we are looking forward for them to go through the improvement cycle as we described earlier.

Is there any news regarding the negotiation with the [regulatory] union?

We are now in a phase of discussions with the union, quite constructive at this point in time, but we'll see the outcome in the future several weeks.

Okay. Thank you. About the Tadiran effect in the last quarter, which portion of the one-time charges you had in the quarter were related to cash flow?

Well, part of the restructuring expenses are related to cash flow, although (technical difficulty) -- hello?

Yes.

The expenses that we recorded were IPR&D, which are not related to cash flow, and part of the restructuring expenses, they are related to cash flow, although the expenses were already performed sometime ago and now we have reassessed their valuation in view of the acquisition of Tadiran.

Okay, thank you.

Roni Biron, ING.

Hi guys. A couple of questions from me. First, can you try and quantify the organic increase in backlog and whether you see room for further ramp up in backlog in the coming quarters?

Actually, I have seen the backlog grow by about $400 million. About a quarter of that was organic and about three quarters was due to the consolidation of the Tadiran numbers.

And how do you see backlog trending up in the next quarter? Do you see a continuous increase based on your rather impressive deal flow recently?

Yes, due to the number of opportunities that we have in our pipeline, I wouldn't be surprised if the backlog as of the end of this year would be higher than that.

Okay and then the organic growth, revenue growth remained over 20% this quarter. Once again, how sustainable is this growth relating to the coming quarters based on your pipeline and backlog?

As you can see from our backlog, the number that we discussed earlier, a strong high-level backlog, we are now running for several quarters at over 20%. I am not sure for how long this high percentage can go on, but we'll be definitely looking forward to have a double-digit growth rate in the revenue.

Okay. And then finally with regards to your gross margin, EBITDA margins, do you see some more room for expansion there once Tadiran is fully consolidated and some synergies are being realized?

We are definitely working on that and hopefully we will be successful.

Okay. Thank you.

Ken [Ballard], Augusta Capital.

Yes, you recently announced an engagement with Accenture to look into improving your organization. Can you tell me a little bit about what you expect will be the end results of this engagement with Accenture?

Yes. As you probably know, Elbit is now in a position after acquiring several companies in the last few years and we thought it was about time to get the help of a well-known global consulting company like Accenture to help us to see how we can generate more from our organization. And yes, we had some time with them and hopefully we will see positive results from that exercise.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS). [Alice Reed], Prisma.

Hello, good afternoon to everybody and I would like to ask three questions, if I may. The first one is the growth in the C4ISR sector sustainable at this pace.

The numbers that we have reported quarter show significant step increase and it included some organic growth and included the recognition of Tadiran Communications revenue for two out of the three months of the quarter, which we added into this line.

Does it mean that this kind of growth can be sustained throughout 2007?

We definitely are looking for the next quarter to consolidate the full quarter into our results -- a full quarter of Tadiran into our results and then we will see hopefully some additional growth there. Going further into the future, that is definitely one of our growing engines, business engines. We are expecting it to show growth in the future [as well].

Okay. The second question is should we expect a sharp increase in the orders from Israel either in 2008, or is it already in the backlog, or you think the geographical distribution that we saw is going to proceed?

Based on the Israeli defense budget and -- we anticipate that Israel portion out of Elbit business will be in the neighborhood of 25%, so we expect this number to continue also for the future.

Okay. Thank you very much and the last question is to Joseph Gaspar, is the [drag] related to FTL, to Ferranti, is going to be the same 5% scale as the previous ones we know from Tadiran and previous acquisitions? Is the IPR&D more or less on the same -- write-off on the same scale or is it to be different?

Ferranti is a significantly smaller company than Tadiran. We do not expect these levels of write-offs, definitely not in the IPR&D line. We are now in a process of analyzing the purchase price allocation of Ferranti and that will be included in the third quarter of our results.

But it is not -- you think -- as it seems today, it does not seem as proportionally on the same scale as the write-off in Tadiran, for instance.

Right.

Thank you very much. Thank you. Goodbye.

There are no further questions this time. Mr. Ackerman, would you like to make a concluding statement?

Yes, I would like to thank all of you for joining us today and for your continued support and interest in our company and we look forward to speaking with you in the coming quarter. Thank you and goodbye.

Thank you. This concludes Elbit Systems Limited second quarter 2007 results conference call. Thank you for your participation. You may go ahead and disconnect.