Elbit Systems Ltd (ESLT) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems Ltd. third quarter 2007 results conference call. All participants are at present in 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 14, 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 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.

Thank you and good day to 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 third 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 website and on all major international wire services.

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 turn over the call to Mr. Joseph Gaspar, Elbit Systems' CFO. Joseph, please.

Thank you, Ehud. Hello, everybody, and thank you for joining us today. Again, we had a strong quarter and I will shortly summarize the results followed by a description of the major business events.

Our third quarter 2007 revenues were US$518.9 million, a 38% year-over-year increase. It is important to know that on July 27, 2007 we reported the acquisition of the UK Company Ferranti Technologies for GBP15 million, approximately US$31 million. The third quarter results, therefore, include the contributions of Ferranti from the start of August. Additionally, following the recent acquisition of Tadiran Communications, Elbit Systems' results fully consolidated Tadiran results from May, 2007. Thus, the third quarter results include the full consolidation of the Tadiran financial results for the first time.

In the last year's results, there were no contribution by Tadiran or Ferranti. To give you an idea of the strength of our core business, if we exclude the contribution of these two recently acquired companies, our core business grew 19% year-over-year on an organic basis.

In terms of revenue breakdown across areas of operation, following the acquisition of Tadiran Communications, C4ISR has become our biggest area of operations, making up 37% of our revenues. This is followed by the Airborne systems [at term] 26.3%; land systems at 18.1%; Electro-Optics at 11.8%; and the other businesses accounted for 6.8%.

On a geographic basis, we saw very strong growth in Europe, making up just over one-quarter of our revenues at 25.3%. Our strong European growth follows the recognition of increased revenues from the Watchkeeper program as well as increased presence in various European countries. The United States still remains our largest region, accounting for 32.7% of revenues; Israel at 28%; and the rest of the world, 19%.

Our gross profit was US$140.2 million, a 45.9% increase in absolute dollars year-over-year, representing a gross margin of 27%, which is [1.5%] higher than the third quarter last year. The higher margin was driven by the consolidation of higher margins [at] Tadiran Communications business and further internal organic improvements.

Operating expenses totaled 20.2% of revenues compared to 19% in the third quarter of last year. The increase was mainly due to growth in marketing and sales expenses at 8% of revenues compared to 7.3% last year. We also experienced a slight increase in R&D expenses, making up 6.7% of our revenues as compared to 6.5% last year, as well as an increase in G&A expenses to 5.5% of our revenues from the 5.2% last year.

The increase was primarily due to the strong devaluation of the U.S. dollar versus the Israeli shekel during this quarter, which increased our expenses in Israel relative to our revenues, which are recorded in U.S. dollars. However, as I will explain in a minute, we did take steps to hedge our currency exposure for which we benefited in our finance expenses.

The increase in operating expenses was also due to the impact of Tadiran Communications and increased marketing efforts in various international markets. We believe that there is a strong potential for additional efficiency measures. This is particularly true as we fully absorb Tadiran into Elbit Systems and exploit the synergies and rationalize the R&D efforts and the global marketing network of the newly acquired companies. This, however, will be a longer process, but we do expect to see some positive impact in the near to mid future.

Our operating profit in the quarter was US$35.4 million, at 45% higher than the US$24.4 million reported in the equivalent quarter last year. Our operating margin in the quarter grew to 6.8% from the 6.5% last year.

Finance expenses this quarter were US$735,000 versus US$4.4 million in the last year's third quarter. As I said previously, the devaluation of the U.S. dollar against the Israeli shekel in the quarter increased our cost of goods sold, increased the operating expenses, a significant portion of which are shekel-dominated relative to our dollar-denominated revenues. However, we took steps to hedge our foreign currency exposure and in particular, the U.S./shekel rate. Therefore, the reason for the significant reduction in the finance expenses was due to this hedging and provided us with finance income. Also, a significant portion of our financial assets were placed in shekels, which created income due to the evaluation of the shekel versus the dollar.

Our non-consolidated subsidiaries contributed (technical difficulty) [US$42 million] to our net income. Our major subsidiaries with minority shareholders like Elisra, U-TacS in the UK, and Kinetics were all profitable this quarter.

Net profit for the quarter increased by 41%, reaching US$26.4 million or [5.1%] of revenues compared to US$18.7 million or 5% last year. Our EPS for the quarter was $0.65 versus $0.45 in the third quarter last year.

Our backlog of orders at quarter end reached the US$4.5 billion mark compared to US$3.8 billion at the end of last year, a 20% increase. 71% of the backlog is for sales outside Israel and half of the backlog is scheduled to be performed through the end of 2008. The majority of the remaining 50% is scheduled to be performed during 2009 and 2010.

Operating cash flow for the nine months was very strong as well, setting a new record at US$214.2 million, a 43% increase year-over-year.

Finally, I would like to inform you that the Board of Directors declared a dividend of 17% -- $0.17 per share for the third quarter of 2007.

Having said all that, I would like to take the opportunity to apologize for Mr. Ackerman not being here to attend the call. And I will do my best to provide you with the business information on his behalf.

In particular, we are proud of our continued growth. This quarter we again maintained strong growth rate, delivering 38% revenue growth with the help of the acquisition, as I said before, of Tadiran Communications and Ferranti. Organically, I mentioned it, we grew 19%. Going forward, we consider Tadiran Communications and Ferranti an organic part of our Company. For a company with a revenue rate beyond US$2 billion, this is really quite an achievement, and I again extend my congratulations to the hard-working staff of the Corporation.

We achieved this growth by continuing to increase our profitability and again, showing record operating cash flow. As you know, over the past few years we have sought to expand our penetration in key markets, primarily the U.S. and Europe, while extending our product and service portfolio, and this in part underscores our acquisition strategy. In the last week, we announced a plan to fully merge and absorb Tadiran Communications into Elbit Systems, after which Tadiran will cease to exist as an independent entity. Moreover, right after, we are creating a new subsidiary which will contain the merged entities of our Land and C4 division as well as Tadiran Communications to be called Elbit Systems and C4I Tadiran Ltd -- Limited. This merger plan is still subject to various approvals and we expect to complete the process at the beginning of 2008.

The synergic activities of Tadiran with those of the rest of the group are already bearing fruit. However, we believe we can still better realize the underlying synergies between the businesses to rationalize cost by completing this merger process. In addition, we believe we will be able to gain access to increase business opportunities by our ability to offer more comprehensive and competitive solutions to existing and new customers.

Another acquisition we completed during the third quarter was that of Ferranti, a UK supplier of engineering, manufacturing, and product support solutions to the aerospace and defense markets. We see Ferranti as a company with highly capable management teams and a welcome addition to our Elbit Systems group. Together with U-TacS, our UK-based UAV Systems Company, and UEL, the UAV engines company, this acquisition will strengthen our presence in Europe -- in the UK and Europe -- and will provide us with significant base to reach larger and more significant customers. In fact, already in the third quarter we have seen strong growth in our revenues from Europe.

I'd like now to briefly talk about some of the recent wins before I open the call for questions and answers.

Our most significant win this quarter was that of Vision Systems International, our joint venture with Rockwell Collins, and represents a significant value of our global relationships with defense leaders. The Boeing Company awarded VSI a contract for the delivery of more than 300 additional Joint Helmet Mounted Cueing Systems and the value of the contract totaled over US$60 million. VSI has a total of [19] Air Force's as customers for the Helmet Mounted Systems, including the U.S. This demonstrates the value of our products that is added by providing pilots globally with unprecedented situational awareness.

Another important recent win was the supply to the Israeli Defense Forces with US$30 million of UAV in products and upgrades. This further establishes us as the leader UAV supplier to the Israeli Defense Forces. The order includes the supply of new and improved UAV systems as well as the upgrade of existing QAV systems designed to enhance and expand the IDF existing UAV platforms.

Our Helmets 450 UAV product is an original development of ours and the idea has been operating the UAV based on this platform for several years with significant success. This is part of the reason that it was recently chosen to lead the British Arm Forces procedures, Watchkeeper program and other UAV programs in various countries.

Finally, in September, we were awarded the prestigious IDF prize for 2007 for two defense systems developments which made a significant contribution to enhancing Israeli security. Being awarded the Israeli Defense prize is a great honor to both Elbit Systems as a company and to the teams that participated in these projects. It is not an indication of only the advanced technological capabilities, the creativity of our teams, but also the extensive cooperation between our teams and the Israeli Defense Forces in defining the products which have a very efficient edge.

In summary, this has been another strong quarter of growth with many achievements. Our performance continues achieving new heights in financial perimeters and backlog. We have a group of leading companies with presence in important geographic regions with diverse and leading products offerings and evolving needs in the defense industries.

Given the strong cash flow, a growing backlog, strong visibility in the future, strong R&D investments, we feel highly confident in our continued success into the future.

With that, I would like now to open the call for questions and answers.

(OPERATOR INSTRUCTIONS). Yoav Burgan, Leader Capital Markets.

A few questions from me, I'll try to make it short. First, could you provide some kind of an update on the labor -- the labor/union issue at Elisra?

Okay. During the beginning of the year, as you all know, we had discussions with the union representing the employees at Elisra. Recently we came to some understandings which were reflected in the fact that the employees returned to full work and they are back at their table with -- very efficiently, completing the different tasks. We have not yet concluded all the discussions with them. We are in process of doing that. We expect that to go through towards the end of the year, hopefully to come to some agreement with the unions and then to be able to proceed with an improved plan for the future.

Would you predict a new labor agreement until the end of the year?

That's what we are working hard to achieve. In these case, as you all know, nothing is granted.

Okay. And my second question is on the M&A front. Could you share some of your thoughts with us? It seems that recent deals in the U.S. are being executed at pretty high levels of multiples. What are your thoughts regarding that? And also regarding M&A opportunities in Europe today?

As we have said, M&A is part of our strategy of growing the business. We are continuously looking for opportunities that will complement our business and give us a better platform to access more markets and customers. The U.S. is definitely one of the areas that we are looking. We are looking in Europe as well. The high multiples -- I think you are right. We always consider it on a case-by-case basis. And we always take into consideration the synergies that might come up from any acquisition like that.

And regarding Europe?

Europe is the same. We are looking at Europe, well, as you know. We recently acquired Ferranti. That's just a very good example of an acquisition that will provide us a very good management team with very good access to additional customers for our products and systems.

Okay. And another question -- could you provide some color, any kind of color, on the breakdown of your backlog? I mean, have you had or according to the areas of operations?

We usually do not give out that breakdown. But I can assure you that the backlog covers all of the areas of the operations and all of them did grow -- some more, some less -- but all of them did grow.

Okay. But is there any significant -- I mean, it's not significantly different than the past quarter revenue breakdown.

Not significantly different.

Okay. That's fair enough. And my last question, could you try to quantify for us the effects of the evaluation of the shekel on your cost space -- I mean on your cost of revenues and the operating costs?

I think it varies from quarter to quarter. Very much depends on the kind of contracts that we have. As you probably know, some of the contracts that we have are in shekels for themselves. So, I don't have a number to give you here. But as you have seen, we were able to find solutions to this problem; at least to part of it.

Okay, great. Joseph, thank you very much.

Ronny Barone, UBS.

Question regarding profitability and given the higher margins at Tadiran, it seems your organic profitability declined this quarter on a sequential basis. Was it mainly currency related or were there other factors involved? And on constant currency basis, how would you say that profitability performed this quarter?

I don't think I have a number on constant currency basis. I'll bet you are seeing last quarter, the second quarter, we had a gross profit of 27.1%. This quarter we had a profit (technical difficulty) 27%, which is very close. We did suffer from the devaluation of the shekel to some extent. I think that we are in that range right now.

Are you comfortable with the current gross margin and operating margin levels? Or what do you expect going forward into the next coming quarters?

We're trying to improve. We are working hard to do that. I think we have seen some improvement if we compare it to previous year or two years ago. I think we have seen improvement. It is a long process and we're working very hard to do that.

And assuming that your current exchange rates prevail, what should we expect regarding the impact of the currency on the financial income? Should we expect another quarter with very low financial expenses? Or should it be different next quarter?

I think I have a hard time in predicting the future. I'm very good at predicting the past. But, no, I think if the current situation stays, then in general I would expect a similar outcome.

Okay. Thank you very much and good luck.

Joseph Wolf, Lehman Brothers.

Just a follow-up on the margin side. I'm wondering if you can help us understand the life cycle and mix contribution to improving margins. By that I mean things like the UAV is now in full production. You're doing second generation (inaudible) in Israel. As you do that, are those higher margin types of businesses? Or do we have to think about it as starting a new business and a (technical difficulty) kind of margin? And can you balance that with the internal efforts that you've been doing for some time on just improving overall operations and margin capabilities?

Regarding the margins of the UAV, of course, as you know, we do not give out any breakdown of margins of contracts or business areas. However, I would say that all of the businesses on an average basis are around the same margins. Each of them has good programs and some of them are less than that. All of them on average, the same rate.

What was the second question?

Just if you could balance that improvement -- so, even as you move towards the next generation, it doesn't become a more profitable business line for the Company?

Usually when we look at profitability programs that are repetitive in production sometimes could be more profitable. New developments sometimes have more risk in them. But a replacement of generations of products could be more profitable or less profitable; it depends on the different contracts and environments.

Okay. And so then the improvement in margin you're saying comes mainly from procedural and operational improvement, not from mix?

Mainly.

Ronny Barone, UBS.

Just another question regarding your backlog. It seemed to have grown pretty substantially over the past few years. I mean, generally speaking, how much room do you see for additional growth going forward from this level? Or should we expect some kind of a backlog stabilizing [pain in sub-stage]?

As I said before, I have a hard time predicting the future. But we do see continued interest in our products and systems. We do see successes in our wins of more programs -- bigger programs. We hope that will continue in the future.

(OPERATOR INSTRUCTIONS). [Bernard Manore], Yahav Bank.

Congratulations on the good numbers for the quarter. I thought maybe you can tell us something new about the contract of [Telian Keshir] regarding the project for the Austrian Army? Which I think maybe delays, about maybe a year or so? And we know that there have been some political changes there, but can you tell us something new?

And is there any indication from [Simmons about XPress Train's] project in China? That's it. Thank you.

On the second one, there is nothing new to report. On the first one, there are positive developments.

Right. Okay. Can you give us some maybe revenues from that project -- the Austrian Army? Maybe EUR40 million or EUR50 million?

No, no revenues yet from this project.

Right, okay.

Mr. [Manore], has your question been answered?

Right. Thank you.

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

Okay. I would like to thank all of you for joining us today. I would like to again apologize on behalf of Mr. Ackerman. And for your continued support, I would like to thank again for the interest in our Company. And we look forward speaking with you on next coming quarters. Thank you and good bye.

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