Elbit Systems Ltd (ESLT) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems first-quarter 2008 results conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded, May 20, 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 972-3607-4717.

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

Thank you and good day, everybody. On behalf of all the investors, I would like to thank Elbit 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 discussion 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 early today also refers to the content of this conference call. With that, I would like now to turn over the call to your speaker. Joseph, please.

Thank you. Hello, everyone, and thank you for joining us today. Again, we had another quarter of strong growth, improved profitability and record financial results across the board.

I will provide now a summary of the results. You can find all the detailed figures in the press release we issued today, which is also available on our website.

Our first-quarter 2008 revenues were $616.1 million, growing 52.6% from the $403.6 million as reported in the first quarter last year. Note that our results including incorporation of Tadiran Communications results starting in the second quarter of 2007. On an organic basis, our revenues grew over 35% year-over-year.

In terms of revenue breakdown across our Elop operation, the first quarter Airborne Systems was [25.2%] of our revenues. C4ISR was 26.7%, Land Systems was 25.3%, Electro-Optics 14.3% and other businesses accounted for 8.5%. In addition, all sectors grew year-over-year on an absolute basis with the C4ISR leading mainly due to the incorporation of Tadiran Communications into our results.

On a geographic basis, we saw strong growth in all regions year-over-year on an absolute basis. The United States remained our largest region, accounting for 34.9% of our revenues. Europe 22.2%, Israel 20% and the rest of the world was 22.9%.

While our gross profit grew 62.6% year-over-year in absolute terms to $168.4 million, our gross margin in the quarter was 27.3% compared to 25.7% in the first quarter last year. This improvement is due to a mix of projects we performed in the quarter and efficiency processes we implemented. Our operating profit in the quarter grew 81% year-over-year to $48.5 million, representing an improved operating margin of 7.8% in the quarter compared to 6.7% in the first quarter last year. This margin improvement is a result of the higher gross margin mentioned above, while restraining the growth in operating expenses.

Despite the strong decrease in value of the US dollar against the shekel, Israeli shekel, our expenses did not increase significantly as a percentage of revenues since last year due to effective business management, improving hedging activities of our exchange rate exposure. While the weak US dollar presents a challenge to us, we constantly are looking at ways to mitigate this exposure, and we have been active and relatively successful on that front so far.

During the quarter we sold onetime income due to an insurance payout with regard to a fire at the Elisra facilities in 2001. This income has had a net total of 5% per share to our bottom-line. The net profit increased year-over-year by 68% to $32.2 million with a net margin of 5.2% of revenues compared with the 4.7% in the first quarter last year.

Our diluted EPS for the quarter was 75% versus 45% in the first quarter last year. Our backlog of orders at the quarter-end reached a record of $4.92 billion compared to $4.62 billion as of the end of 2007. Our order bookings level reached a record of $914 million in the quarter, a testimony to the underlying strengths of our business. 68% of the backlog is for sales outside of Israel. Approximately 69% of the backlog is scheduled to be performed during 2008 and 2009. The majority of the remaining 31% is scheduled to be performed in 2010 and 2011. Operating cash flow was strong as well at $65.2 million compared to $86.8 million last year.

Finally, the Board of Directors declared the dividend of $0.20 per share for the first quarter of 2008.

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

Thank you. Again, I am proud to present another quarter of strong growth and profitability. In the first quarter, we again continued our strong topline growth while maintaining strong profitability, producing record net profits, EPS, backlog, booking and operating cash flow. Last year we successfully integrated Tadiran Communications within our operation in Israel, the United States and Germany. We also acquired Ferranti Technologies, based in the United Kingdom, and began assimilating these into our overall business.

2008 is the year in which we are focusing our efforts on really extracting the synergies from our recent measures. We are already beginning to see the fruits of these synergies across the board and expect to further leverage and expand on them in 2008. We are leveraging and utilizing our scale within projects that were previously out of our reach and selling new solutions to existing customers. We have been enable to compete for larger projects with a broader product base and an ability to offer given wide-ranging end-to-end systems and solutions. In all we are gaining access to increase business opportunities by utilizing our ability to offer more comprehensive and competitive solutions.

Elbit Systems is now the global leader in the electronics defense industry, and this is very much in line with our long-term strategic plans and has continued to be the underlying goal of our acquisition strategy.

And now with your permission I would like to briefly summarize some of the recent events in the quarter and beyond. Only a few days ago our subsidiary Tadiran Communications received a $127 million contract to supply tactical communication radio equipment from a European customer. This contract reflects our leadership as a C4I and radio solution provider.

In addition, Elop, another subsidiary of Elbit, was selected by Lockheed Martin Aeronautics to supply new generation Head Up Displays for the new F-16 aircraft. This agreement (inaudible) cooperation with Lockheed Martin. The multiyear product is a continuation of an ongoing vast operation between Elbit Systems and Lockheed Martin.

Towards the end of the first quarter, we won a tender to supply our Skylark I UAV to France's Special Forces. Just to recap, the Skylark advanced mini-UAV gives a unique manpack configuration for enhancing ground forces tactical performers in various mission scenarios. This contract marks our first (inaudible) response. France's selection of our Skylark attests to our ability to meet the sophisticated challenges of the modern battlefield. We consider this agreement with France's Special Forces as a milestone in entering the defense market and hope that this will be followed by further agreements of this type with European NATO member countries.

In early March Cyclone, another subsidiary of Elbit, won an order to supply $160 million of commercial aircraft parts to Spirit AeroSystems, which is Cyclone's largest contract ever. This win reflects the recognition and trust that we have established among major global aviation companies. We see the commercial aviation market as a significant growth engine since it interfaces with a broad spectrum of our activities. We view this win as an important step in sustaining Elbit Systems leadership in the fast-growing area of advanced avionics systems and aero-structured products applied in the commercial aviation industry.

In February, our new subsidiary, Elbit Systems of America (inaudible) was awarded $26.5 million to deliver the order for thermal laser spot imagers from the US Marine Corps system command. And finally, in January we were awarded a $40 million contract from the Netherlands Ministry of Defense for the supply of advanced battle command systems. We won the contract following international tender participated by several of the leading defense companies in the world. Winning these tenders constitutes another step in establishing our position as leader in the C4I fast-growing and developing market. Elbit Systems' DMS systems are in use today by over 20 military worldwide, and we view this contract awarded by the Netherlands MoD, a leading country in NATO, as a springboard to potential future business in this market.

In summary, our strong performance continues into 2008 achieving new record international parameters and backlog. Our organizations includes a large number of leading companies with (inaudible) in many cases key and diversified geographic regions with a cutting-edge comprehensive product portfolio for the evolving needs of the defense, Homeland Security and commercial aviation industries. Given our strong cash flow, a growing backlog providing us with good visibility and our continued and growing investment in research and development, we feel highly confident in our continued success well into the future. Add this continues to be exciting times, especially as we reap the fruits of our acquisitions and integration efforts of last year.

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

(OPERATOR INSTRUCTIONS). Tsahi Avraham, Clal Finance Batucha.

Great results. The first question is about the backlog. We can see that the backlog grew in the amount of $300 million. Was part of it is adjusted to the dollar?

Some of that, a relatively small part of that, is the backlog which we had in Israeli shekels from domestic customers, and that was adjusted according to the dollar value. The majority of that growth in the backlog is not related to that part.

Okay. You are saying relatively small, but if you -- we know that 32% of the backlog is in shekel, and since the shekel was appreciated 8.5 against the dollar during the first quarter, it means that at least I don't know, 130, $120 million was adjusted. Am I close, or is it -- ?

The calculation is slightly different because even for domestic customers in Israel, we have significant contracts which are not necessarily in shekels.

Okay. But you can give us a range or the amount of the --?

We usually do not give out those kinds of details.

Okay. Second question is about the margin. You showed very high margins during the quarter. Was there any onetime items -- have you cancelled any provisions or something like that?

We had no onetime activities or no onetime impact on our results this quarter except what we have mentioned regarding the other income regarding the fire of Elisra. If you are seeing the other income line, we had an income of about $4 million, and offsetting that with the minority share in the bottom line, we ended up with a benefit of about $0.05 per share, which is roughly about $2 million. Nothing in the gross profit and nothing in the operating profit was affected by any onetime input.

The last question is about the dollar. It looks like the dollar had no effect on you this quarter. How come we have not seen any effect even on the R&D? You said a little bit by hedging, but was it all?

As I have mentioned on several occasions, we had some very strong management attention to make sure that we can mitigate the impact of the dollar on our expenses. When we hedged, that was one aspect of that. Other aspects related to total overall budgets in the different expense areas, other aspects related to managing more effectively our programs, including the R&D and the other expenses.

Rami Rosen, ING.

Congratulations on very impressive results. My question is maybe a follow-up on operating margin. It seems that the dollar is even weaker this quarter than it was in the first quarter. So how likely that assume a sustainable operating margin or even an improvement in operating margins going forward in the year?

As I said earlier, we are working hard in order to mitigate the impact of the dollar. No doubt that the present level of the dollar versus the shekel is very challenging to us. We usually don't give out any forecast, but I think it will definitely require from us increased efficiencies in order to maintain this level of performance.

Okay. And my second question related to Elisra. Can you give us some color on the growth or the margins or the progress it makes for this activity in terms of revenues growth and improved margins?

Elisra is on the avenue of improvement as we just said. We are working hard with them as well, and we see improvement coming along. We had not yet been able to achieve all of our goals with the Company. They are not yet at the level of profitability like the rest of the group, but we do see improvements. Definitely the Company has some very attractive and advanced technologies that are required by our customers, and we see a lot of interest in their products and systems. But from that point of view, definitely it looks very promising.

Sure. And my last question is regarding the geo split. Should we expect any change in the geographical split of revenues going forward, less in the US and more in favor in Europe, for example?

Well, as you can see, we sell to Israel around 20%, US 35%, Europe 20% plus and rest of the world about 20%, and we foresee this ratio's plus or minus 3% will be remaining also in the future.

Okay. Guys, thank you very much and continue out the good work.

Yoav Borgan, Leader Capital Market.

First, I would like to by my -- I would also like to congratulate you. These are extremely impressive results, and you should be very proud. Actually this leads to my questions. I'm wondering how indicative this growth rate if I look at the organic growth, 33, 35% you mentioned year-over-year, how much -- how indicative this can be for the remainder of the year?

As you know, we do not give out forecasts. However, if you look at our strong backlog, which is very close to about $5 billion, this definitely gives us relatively good visibility into the near to mid-term future, out of which one might calculate, deduct what the future is out there for us. So we definitely feel confident that what was said in the past double-digit growth, we support that definitely at this point in time as well.

Okay. And regarding the margins, besides the fact that the margins are again extremely impressive, but they seem pretty much extraordinary from a historical perspective. I have not seen these margins -- I think the last time maybe Q3 2004 or during 2002, and this was -- the Company was very different, it was before your major acquisitions, and obviously in a totally different exchange rate environment.

So I'm really puzzled. I mean how could you explain this I mean, and how indicative could this be again towards the future, the near future, the far future?

I would refrain myself from talking about the future, but I think that the Company is doing I would say a good job in managing the business. As I said before, nothing in this quarter is a windfall or a onetime input in our results. Definitely as a bigger organization we have flexibilities that we did not have as a small organization. The synergies that Mr. Ackerman mentioned earlier, they start showing up. I hope we will be able to maintain the present success level, although I would not be able at this point in time to give you any forecast.

Okay. So basically, finally the economies of scale have really started to kick in, if I understand the historical trend correctly.

This is true. However, I would recommend to be very careful not to take the trend of Q1 '08 versus Q1 '07 as the trend for the whole year.

Okay. And I have maybe two more questions if I may. One is regarding Elisra. How are things doing? Are there any developments regarding the labor issues?

I think that as of now, the [resolution] with the union is quite positive. People are working very hard, and we see the results. It will take maybe a longer time than we originally planned, but we see positive results in getting new business, we see positive results in human relations, and I'm very optimistic that we will get to maybe not to the Elbit profit level, but we will get close to that in the coming years.

Okay. Maybe my last question regarding relates to Tadiran Communications. The significant order you reported about a few weeks ago seems very impressive. Besides the size, also the identity or the details that you gave out.

Obviously Tadiran Communications is in a very important year or years in its lifecycle. How do you view this? Do you think this is the beginning of a new era like the post -- a new era after its major client pretty much has decreased its orders?

If you recall, when we spoke about the rationale behind acquiring Tadiran Communications, what we said at that time that we see a very promising synergy between Elbit's Command & Control and Tadiran radios. And we did say at that time that by merging these two technologies, we will have both sides getting new business.

This is what happened. The technology was restudied on for many years, but by having now one division responsible for marketing both C4 and radios helped Tadiran to gain this vast amount of orders, and this was the rationale behind our decision to acquire to Tadiran and to merge Tadiran into the Land division.

Okay. Maybe just one more question regarding M&As. I understand that at least formally 2008 you do not have any -- it will not be an M&A. It will be more of a year of integrating your existing acquisitions. But looking towards 2009, what kind of areas do you see today the most attractive, you know, pricewise and businesswise?

As we said, the acquisition is an integral part of Elbit's strategy. You are absolutely right that we decided that 2008 will be devoted to digest and rationalizing the acquisitions that we made in the last years, and we do expect to make an acquisition after that. And if we find the right opportunity which will add value to our Company, I will not hesitate to do the next acquisition in '09. But we do that only if we see the right and relevant candidate for our portfolio.

I see. Okay. Thank you both very much, and again, congratulations.

Ronny Barone, UBS.

Congratulations on the good quarters. I have a question. You grew sequentially this quarter, which is rather unusual for the March quarter. If I look at your revenue mix and I see that this was mainly attributed to the Land Systems in terms of the different segments which grew pretty sharply from the fourth quarter and also in terms of geographical markets grew at the other market outside Europe, the US and Israel. If you can try to elaborate a bit on which markets are we looking at here and also in terms of the Land Systems if there was anything in particular in the quarter?

Geographic-wise I would not pay too much attention to one quarter results. You need to see that on a unit basis, and I already mentioned that the ratio that you saw in '07 I believe will stay the same also in '08. Businesswise, yes, we do see worldwide more money being spent into Land applications on behalf of other areas, and this is why we manage to capture more business by our Land division.

Okay. And the second question regarding your collection this quarter was very strong. I believe DSO was 65. Is it indicative for future quarters, or was it particularly strong this quarter?

If you look at the last several quarters, a big emphasis -- actually going back in the last two to three years, a big emphasis was put in the Company to improve the cash flow as much as possible. Part of that effort is in the collections. Of course, effectiveness in that area has strengthened the cash flow, and I think that effort will continue in the future. About the results, I would not be able to give you any forecast, but we definitely are looking of managing effectively our cash flow.

And finally from me, regarding the tax rate, it was rather low. The effective tax rate was rather low this quarter. If you can give us the reason for that and what you expect going forward, and the same goes for interest rate? It was slightly higher than what I expected I mean even if we take into account a one-off charge. Also, what do you expect going forward?

Regarding the tax rate, this is actually a composition of the income coming from the various plans in the different geographical regions. As you know in the US, we have higher tax rates. In Israel we have slightly lower ones. Europe and other places. So it is a combination of the income and the tax rate in the various geographical regions.

This quarter I would not give too much of weight to a quarterly tax rate because we have to look at longer-term like a yearly term rate. We do not see at this point in time a significant change in the tax rate for what we have experienced in previous years, except the tax rate in Israel as we all know is changing and going down from year to year slightly in the last years, and it will reach a lower-level in general in Israel.

Regarding the financial expenses you have mentioned, in the financial expenses, we have actually close to about a $2 million expense there related with the ARSs included there. All the rest is nothing specific.

[Jonathan Rosen], Deutsche Bank.

I would also like to congratulate you on a very fine set of results. I have a number of questions.

The first one relates to the minority interest. I was wondering if you could explain what you attribute the significant increase in minority interest over the past couple of quarters? For example, is it related to any specific holding?

Our major subsidiaries that contribute to this line is our subsidiary in the UK, U-TacS. We own 51%, and our partner, Thales, owns 49%, and they are in the business of unmanned aerial vehicles, actually running one of our major programs in the UK, which is the Watchkeeper Program. A very important program and quite successful.

The other subsidiary that we have there is, of course, Elisra, that we own 70%, and IAI owns 30%. As I mentioned earlier, in Elisra this quarter had the onetime income due to the fire damages. So you can see this part over there as well.

Essentially the contribution of these two was very important. We have another subsidiary which will own 51% by the name of Kinetics, which are doing in air-conditioning, land systems, pneumatic systems and so on, and their performance was very satisfactory as well. All that put together gave us the number that we see there, over $10 million, which is a combination coming from all the major subsidiaries there. We have seen a continuous improvement over the recent quarters in most of these activities, and we hope that that will continue.

Perfect, thank you. So with the success of the Watchkeeper Program, you would expect that clearly to have a positive impact going forward on that line?

Not only. The number, as I mentioned, is a combination of all these three major subsidiaries.

Okay. My second question relates to payables in inventory. I have noticed an increase in both of them over the quarter. I was wondering if you could explain and give some color as to where those increases come from?

As you have seen, we have actually grown significantly from the previous quarter last year, in the fourth quarter and also to the first quarter this year. In order to enable that growth in the revenues, which is due to contracts we have received, we have to build, of course, the necessary inventories in order to be able to deliver on time quality equipment. So that definitely explains the increase in our inventory.

Payables, definitely that is part of our subcontractors. We are working with them, and that goes together along the same lines.

My final question relates to the backlog. I was wondering if you have any feeling as to whether the significant increase in backlog sequentially from the last quarter is something that is perhaps just a one-off, or do you feel that it is something that could be a continual phenomenon?

Certainly we have many opportunities in our pipeline, but obviously we cannot give you any forecast about this year '08. The end year backlog will be higher than that, but to what extent we cannot tell. As you know, the competition is very tough in the marketplace. But being in the right area of businesses, I would expect that the number for the end of '08 will be slightly higher than this one.

Thank you very much and congratulations once again.

David Levinson, Bank Hapoalim.

Congratulations for the excellent results. I would like to wonder about the gross profit margin again. It is above 27%. Quite an extraordinary result if we look at the dollar exchange. Can we assume that it will be more than 27% in the next quarter?

As you know, we do not give out guidance. We definitely are managing the business for improvement and to mitigate the problem with the dollar/shekel. We are working hard to achieve that, but I'm sorry, we cannot give you any guidance on that at this point in time. But I assure you the Company is doing everything possible in order to secure its business.

Okay. And another question about this quarter, regularly the first quarter is quite weak. This time it was almost like the fourth quarter of '07. Can you explain a little bit about these results?

As I have said to many of you in the different meetings, the Company is working hard in order to better use its assets, its capital assets, the manpower, and part of that is to flatten and equalize as much as possible the throughput of the Company in the different quarters.

Historically the first quarter, as you have mentioned, in terms of revenue was lower, and then gradually growing through the second and third up to the high -- relatively high fourth-quarter revenue.

Over the years we have put an emphasis in trying to balance that out and have as much as possible quarters with revenues close to each other without any big changes. That is part of the efficiency measures of using better our capital and our human resources. This year we believe that we probably will be more successful in that, and that will result in more balanced revenue over the various quarters. So if I'm going and comparing previous years, I would expect that this year will have more balanced revenues over the various quarters. In that way we use better our assets, capital and human resources, and that, of course, helps us also on the bottom-line performance.

Okay. Thank you very much.

[Rowen Senator], [Sera Funds].

Great numbers. I wanted to ask Joseph if you can sort of highlight which items were actually mostly responsible for the improvement in the gross margin sequentially as well as year-over-year? You mentioned increased synergies, but if you can be a little bit more specific?

Also, on the revenue front, are you seeing any change in revenue mix that actually also enhanced your margins over time?

Yes, I think that there are various factors that have brought us to these results. Mix in the various programs that our revenues were composed of with their proper profitability has helped us in achieving these numbers.

So, number one, definitely a mix of programs. Other aspects will be controlling our expense levels in both overhead and other expenses of the Company in order to achieve better margins. That is definitely something that we have put a lot of emphasis in. And going forward our backlog definitely supports what I just mentioned earlier, but I am sorry I cannot give you any guidance on that.

Alright. No, but you are clearly stressing the point we should not necessarily take the trend as indicative. But, on the other hand, you are also saying that there was no major exceptional one item in the quarter. So can we assume at least that this level is not unusual or is representative of the current level?

This level is not unusual for the first quarter. About going forward, many things can change. As we know, the dollar/shekel does not help and continues to provide us challenges in the second quarter, even more than in the first quarter. Working hard to mitigate that with other items like efficiencies, internal efficiencies, mix of programs and so on. So there is no guarantee of any kind that we will get different results in the future, better or worse.

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

Thank you. On behalf of Mr. Gaspar, who is now on a business mission in the US and from us here in Israel, I would like to thank all of you for joining us today and for your support and interest in our Company. And I'm looking forward to hearing you in our next conference. Thank you, all.

Thank you. This concludes the Elbit Systems first-quarter 2008 results conference call. Thank you for your participation. You may go ahead and disconnect.