Elbit Systems Ltd (ESLT) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems Limited fourth quarter and full year 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. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded, March 11, 2008.

I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to all content in 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 9723-604-4717. I would now like to hand over to the call to Mr. Ehud Helft of GK Investor Relations. Ehud?

Thank you and good day, everybody. On behalf of all investors, I would like to thank Elbit Systems' management for hosting this call.

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 and the year, followed by Joseph, who will talk about some of the significant events during the quarter and beyond. We'll then turn over the call to the question and answer session.

With this, I would like now to turn over the call to Joseph. Joseph, please.

Hello, everybody, and thank you for joining us today. Our fourth quarter 2007 revenues were $591.1m, a 26% year-over-year increase. For 2007 as a whole, we reported revenues of $1.98b, an over 30% year-over-year increase.

In terms of revenue breakdown across our areas of operation in 2007, Airborne Systems was 30% of our revenues, C4ISR was 29%, Land Systems was 19%, Electro-Optics was 14% and other businesses accounted for 8%. In addition, all sectors grew on an absolute basis, with the C4ISR leading, mainly due to the incorporation of Tadiran Communications in our results starting in the second quarter of the year.

On a geographic basis, we saw strong growth throughout the world. The United States still remains our largest region, accounting for 36% of our revenues, Europe 24%, Israel 21% and the rest of the world was 19%. On an absolute basis, our revenues grew strongly year over year in all regions except Israel, where growth was marginal.

Please note that our annual results were negatively affected by one-time charges related to the completion of the acquisition of Tadiran Communications on April 26, 2007, which was charged in the second quarter of the year. The Company recorded $27.1m in expenses in relation to the acquisition as follows -- In-Process Research and Development expenses were written off $16.6m under other operating expenses, and restructuring expenses were $10.5m recorded under cost of goods sold.

For the fourth quarter our gross profit was $156.2m, a 56% increase in absolute dollars year over year, representing a gross margin of 26.4%, which is 5% higher than that of the fourth quarter last year. For the year the gross profit was $516.4m, 38% growth compared to $373.5m last year. The gross margin was 26.1%, compared with 24.5% last year. Excluding the above-mentioned charges, gross profit in 2007 was $526.8m or 26.6% of revenues.

Our operating profit in the quarter was $38.2m, 78.5% higher than the $21.4m reported in the equivalent quarter last year. Our operating margin in the quarter grew to 6.5%, up from 4.6% in the fourth quarter of last year. Operating profit for the year was $108m, or 5.4% of revenues, 18% growth over the operating profit in 2006, which was $91.9m or 6% of revenues. Excluding the one-time charges, our operating profit in the year was $135m or 6.8% of revenues, representing a 47% growth over the last year.

During the fourth quarter of 2007, the Company had a $10m financial expense related to the write-off of investments in Auction Rate Securities, which were rated AAA or AA when acquired and which have experienced multiple failed auctions due to the lack of liquidity in the markets for these securities.

The Company gained a one-time tax benefit of approximately $10m related to prior-year adjustments, arising from executing tax settlements by the Company and some of its subsidiaries in the last quarter of 2007.

Our non-consolidated subsidiaries contributed $4.5m to our net income in the quarter and $14.6m in the full year. Our subsidiaries which we consolidate but don't own 100% had strong performance during 2007, and as a result we had $8m minority share in the profit of the subsidiaries in the fourth quarter and $13m for the full year.

Net profit for the quarter increased by over 33%, reaching $31.9m or 5.4% of revenues, compared to $24m or 5.1% in the fourth quarter last year. For the year, net profit was $76.7m or 3.9% of revenues, growing 6% over $72.2m or 4.7% of revenues, as reported last year. Excluding the one-time expenses, net income for the year was $101.1m or 5.1% of revenues.

Our earnings per share for the quarter was $0.75 versus $0.57 in the fourth quarter last year. Our EPS for the year was $1.81 versus $1.72 last year. Excluding the one-time expenses, it was $2.39.

Our backlog of orders at the quarter end crossed the $4.6b mark, compared to $3.8b at the end of the last year, a 22.1% increase. 70% of the backlog is for sales outside of Israel. Approximately 70% of the backlog is scheduled to be performed during 2008 and 2009. The majority of the remaining 30% is scheduled to be performed in 2010 and in 2011.

Operating cash flow was very strong as well, setting a new record at $261m, compared to $201m last year, a 30% increase year over year.

Finally, the Board of Directors declared a dividend of $0.18 per share for the fourth quarter of 2007.

Before I hand over the call to Joseph, I would like to mention that 2007 was the first year that the Company completed a full Sarbanes-Oxley review, with complete success. I would like to take this opportunity to thank everybody involved in this effort and in achieving this significant milestone for the Company.

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

Thank you, Joseph. Again, I'm proud to present another year of growth and strong results. 2007 was indeed another record year across all parameters. We continued our strong top line growth while retaining strong profitability, producing a record net profit and EPS, a record backlog and operating cash flow.

Additionally, we have been very successful in further globalizing our business and during the year only a fifth of our revenue came from our local home market in Israel. While we grew on an absolute basis in every region, we experienced particularly strong growth in Europe, which is now a quarter of our revenues. Elbit Systems is being seen more and more by customers not just as an Israeli supplier of defense electronics equipment but as a global leader in the electronic defense industry. And this is very much in line with our long-term strategic plan and continues to be the underlying goal of our acquisition strategy.

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 expanding our portfolio of offerings with complementary technologies, products and services. During the year, we also successfully integrated Tadiran and Ferranti into the Elbit Systems family and continued to improve the efficiency of the operations of Elisra.

The synergies of all our recent acquisitions with the rest of the Group are already bearing fruit. We have been able to leverage and utilize our scale, winning projects that were previously out of our reach and selling new solutions to existing customers. We have been able to compete for bigger projects with a broader product base and an ability to offer even fuller end-to-end system solutions.

In all, we are gaining access to increased business opportunities by utilizing our ability to offer more comprehensive and competitive solutions. However, we believe there are still further underlying synergies between the businesses and we see additional scope to rationalize costs, increase our margins and generate additional business. 2008 is the year in which we intend to do just this. In order to do so, we are reorganizing the Group units to better reflect the ability of the enlarged Group and to better address our customers' needs. This will also allow us to more efficiently use our resources and harvest more synergies from our recent acquisitions during 2008 and beyond.

Now, I would like to briefly summarize some of our main events of the quarter.

Towards the end of the year, the Korean military selected our Skylark II mini UAV system as their preferred solution in a tender involving extensive technical tests and including UAV manufacturers from all over the world. Just to give you the background on this product, the Skylark II is designed for data collection, observation and target marking missions for ranges exceeding 50 kilometers. It is silent and has an electric propulsion system, allowing for optimal performance during day, night and adverse weather conditions. In fact, last year the Skylark II received Popular Science magazine's 2006 Best of What's New Award in the Aviation and Space category.

Additionally, the Skylark II is a prime example of how we can harvest the synergies between our various businesses. To illustrate, the Skylark II is fitted with Elop's advanced Micro-CoMPASS payload sensor, as well as Tadiran Spectralink's advanced digital communication system. And these products work very well together in the one system, providing us with a world-class mini UAV.

Another UAV project which we won was in Israel with the Israeli defense forces, which bought approximately $10m worth of our Hermes 450 UAV system as upgrade to their existing UAV platforms. The IDF [renewal] order attests to our system's longstanding quality and operational abilities. It is very important for a company like ours to constantly improve and upgrade our products, ensuring that we are using the latest technologies and providing the best possible performance available in the market.

In 2007 we spent $127m on R&D, or 6.4% of our revenues, which was higher than the 6.1% spent in 2006. Part of R&D dollars are being spent on the latest Hermes UAV system, the Hermes 900, which will incorporate all the features of the Hermes 450 plus it will allow longer ranges, larger payload configuration and the ability to operate under more extreme weather conditions. I have no doubt that the Hermes 900, which will undergo flight tests in the coming months, will enjoy similar success to our Hermes 450.

Back in September, we announced a [pool] by the U.S. foreign military financing, or FMF, for $300m for their portion of the Israeli Digital Army Program, also known as DAP. This is an additional amount to that which we signed with the Israeli Ministry of Defense back in 2004 for the DAP project, for approximately $200m over 10 years. The U.S. FMF portion of the DAP is an integral part of the overall program. Approximately $130m of this amount has already been recorded in our backlog.

The DAP program is a milestone in terms of the technologies, innovations and integration [rules]. It provides Israeli Defense Forces with a computerized system down to the single soldier level, including real-time situation picture, switching to and from all battlefield and command action modes. It will enable force coordination at all levels, access to (inaudible) features, includes overall operational capabilities, including suitability and [security] and more efficient utilizing of personnel and other resources.

Over the past few years, as you all know, we have seen the trend of the battlefield moving from the skies above back to much smaller scale and [asymmetric] ground level, often in civilian areas. Thus, the small group and even the lone soldier is now significant in terms of information that then can be provided to central command. Just as importantly, the information integrated from UAVs and other sources they can provide to soldiers, which will substantially improve his effectiveness and safety, and successfully complete their mission.

The Digital Army Program is very significant to Elbit Systems, both because of its scope and its contribution to our technology base. Just as importantly, it provides us with experience that we can leverage for other armies throughout the world.

In summary, 2007 was another strong year of growth and many achievements. Our performance continues achieving new heights in financial parameters and backlog. We have a big group of leading companies whose presence is important in diversified geographic regions, with a broad leading product offering for the evolving needs of the defense industry. Given our strong cash flow, the growing backlog provided us with good visibility, our continued and growing investment in R&D, we feel highly confident in our continued success well into the future. These continue to be exciting times, especially as we reap the fruits of our acquisition and integration efforts of last year.

I look forward to meeting with many of you tomorrow at our analyst and investor lunch, which will be held at another building on [Times Square]. If you would like to join us and have not already signed up, then please contact our Investor Relations people. And with that, I would like now to open the call for questions and answers.

Thank you, sir. (OPERATOR INSTRUCTIONS). The first question is from Tsahi Avraham of Clal Finance. Please go ahead.

Hi. Congratulations on a good quarter. Both the depreciation and the CapEx were relatively high in the fourth quarter. Do you see the $33m in the depreciation as sustainable going forward?

From what we have experienced in the last year, we have experienced significant growth in our production entities. And it looks like that in order to deliver the bigger revenues we have to establish additional production lines, build additional assembly and testing equipment and to support the deliveries of the increased revenues. And that's what we see in the CapEx investments.

For the future, it looks like that we have positioned us quite well, to be able to handle the 2008 and to some extent the 2009 requirements. However, we still see that from time to time, on a case-by-case basis, we'll have to increase and improve our capital expenses accordingly.

So it will be a little bit higher than 2007?

We're working to keep it to the minimum rate to support the requirements of the revenues. I'm not sure exactly what was the number for 2008.

Okay. The second question is about the organic growth. If I calculate it correctly, your organic growth in the fourth quarter was around 11%, compared to around 18% in the third quarter. Is that only fluctuation between the quarters?

Right now, all the operations are actually integrated. And I would say it's quite difficult to differentiate between revenues of -- coming from the acquisitions, like Tadiran Communications, because the operations are quite integrated with quite significant intra-company revenues. The -- what you call the organic growth, or if you refer by offsetting the Tadiran revenues, they grew over 15% by themselves, closer to 20%.

In all of 2007 or in the fourth quarter?

In the whole year.

Okay. Okay. The last question is regarding the G&A. It went up above the $34m in the fourth quarter. Any one-time effect or was it simply the dollar?

The dollar definitely has caused increased costs. And there were several other aspects, including the incorporation of the G&A of our acquisition of the Ferranti operations and some other increased costs, which were more related to one-time effects.

Okay. Thanks.

The next question is from Jonathan Raven of Deutsche Bank. Please go ahead.

Hello there. Also congratulations on the quarterly results. I've got a few questions. The first one is, I wanted to know if you're concerned about the continuing weakness of the dollar, being below ILS3.6 at the beginning of the year.

Well, it definitely doesn't help us, because we have a strong workforce in Israel. However, as you may have -- you probably have noticed, about 20% of our revenues are generated from Israel, which are essentially most of them in local currency, which is actually a natural hedge effect. In addition to that, we have about 2,000 employees worldwide, which is approximately 20% of our workforce, that are definitely paid in foreign currency, nothing to do with the shekel. Great. In addition to that, a significant part of our material and subcontracting is costed in U.S. dollars, so that is definitely a natural hedge as well. And we are also doing some financial hedging, in order to help us with the situation.

Having said all that, we still are suffering from the strong shekel. But as you see in all the financial performances of the Company during 2007, and especially during the last quarter, we were able to compensate essentially most of that by operational efficiencies and other activities.

Okay. My second question, do you anticipate any further investment write-downs this year?

It's Joseph. Actually, as you know, M&A is an integral element in our strategy, but in '08 I don't expect a significant acquisition. This year is going to be more devoted into continuing the synergy efforts between what we have already acquired. Looking forward to '08 and on, yes, we'll look into further acquisitions.

Thank you. And with that in mind, do you have an -- can you give some color as to your expectations for the impact of those acquisitions on margins in '08?

Well, you know that we don't give guidance, but certainly we are doing all what we can to improve the synergy and this will reflect on one hand on getting more business, on the other hand by improving our efficiency.

Do you have a timeframe for expected -- when you expect to reach full efficiency?

Full efficiency, usually we are talking about three years. This is the average in the world. And in '08 we already managed to harvest some fruit based on that synergy. We'll continue to do even further improvement in '08 and '09.

Okay. Thank you very much.

Welcome.

The next question is from Yoav Borgan of Leader Capital Markets. Please go ahead.

Hi and good afternoon. Actually, good morning. My first question is on Elisra. Is there any news you can convey regarding, one, the labor issues and, two, the remaining three -- 38% held by IAI?

We don't know the situation with Elisra, and I can admit that the performance of Elisra is the lowest in Elbit Group. However, we see a very state of the art technology and this resulted in the very nice orders that we got this year. But yes, the cost structure of Elisra is very high and we have to work very hard to get Elisra into -- close to the average of the Company. But I'm very optimistic and I think that in '08 we'll see some results with the help of the management and employees. I think everybody wants to see Elisra more profitable.

As for your second question, you know that we own now 30% of Elisra -- sorry, 70% of Elisra. This allows us to manage Elisra, as being the major shareholders. However, if we find the right situation to buy the other 30%, certainly we will do so, but we need agreement from both the seller and the buyer. And you know everybody's talking about that and when we have something to announce, we'll do so.

Okay. My second question, could you provide maybe a brief overview of the UAV market, the UAV global industry, from your point of view? It seems that there's a lot of action, a lot of things going on, recent acquisitions by companies that previously did not have a significant presence. I'd like to know what are your thoughts and what's Elbit's strategy?

I'll try to give you Elbit's strategy on UAV in 30 seconds, which is not that easy. But we started developing UAVs 20 years ago, understanding that one day customers will decide to use less of manned platform and more of unmanned platform for various reasons. And since then, I think Elbit became one of the leaders, certainly in Israel but also worldwide.

And yes, these days we see more and more customers are trying to equip their Armed Forces with more unmanned vehicles on [the account] of manned vehicles. And I'm talking about air vehicles, but also ground vehicles and others. And certainly we benefit out of that, since we have already well-proven platforms and technologies in that area. And, yes, as you've said, the focus for the coming years is that we'll see more and more contracts for UAVs and less in unmanned vehicles, and Elbit is -- will play a major role in this sense.

Okay. And maybe just a last question. Regarding financial expenses, excuse me, if I exclude the ARS write-off in the fourth quarter, basically it seems that you have, let's say, a normal level of financial expenses, given of course your current debt of about $1m per quarter. Is this something that we should expect to see looking forward?

As you know, the line item which says financing expenses is influenced by many factors. Of course, one of them is the net debt and the cost of the loans. But there are some other factors which are related with the balance of the shekel/dollar liabilities versus assets at the closing of the year. So I think that it takes more than just a simple answer to your question. And definitely in this quarter, in the last quarter as well, we have done some very effective hedging and other financial transactions, in order to reduce our expenses in this line. Going forward, I think it is a little bit premature to estimate the number at this point in time and it very much depends on the shekel/dollar rate as well.

Okay. I see. Great. Thank you very much.

Thank you.

The next question is from [Elah Freed] of Friedman. Please go ahead.

Hi, good afternoon. I would like also to congratulate you on your excellent results. My first question is about the European expansion. Do you see further expansion in the European and especially in the U.K. business?

As we said about five years ago, when we had only 5% of our business in Europe, that we feel that's a very important market for us. And we did some investment in Europe and we did some cooperation with European companies, and this resulted in improving and increasing our business in Europe. But as we said, we increased to 20% of our business in Europe and our long-term objective is to sustain that portion. And the way I foresee it is that we'll sell to Israel, let's say, slightly more than 20%, to Europe the same and U.S. 35% or so, and the rest is Asia and South America.

And yes, Europe, mainly NATO countries and U.K., as you mentioned, is a very important market for us. And just to remind you, in the U.K. itself we have three subsidiaries that we acquired through the years. One is to support our Watchkeeper program. This was built up jointly with Thales U.K. The second is a union doing engines for UAVs. And the third is Ferranti that we acquired about six months back.

Okay. Thank you. The other question is further to pursue the shekel/dollar rate balance. If we assume that the shekel will remain at the present level of ILS3.5 for the next two or three quarters, do you see any further strong pressure on the operational margin?

It will definitely stress our margins on one hand. On the other hand, the activities and the action that we take in order to improve our efficiency, in order to better spread our cost elements and our financial activities to reduce that impact, I would expect that we will be able to counter most of that effect.

So you do not see any immediate material danger in the current level of the shekel?

Well, definitely, as I said, we don't like it and it does not help us. But we're taking all necessary actions to offset it as much as we can.

Okay. Thank you very much.

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

Yes, please. I would like to thank all of you very much for joining us today and I'm looking forward to seeing you all in our next conference call. Thank you.

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