Elbit Systems Ltd (ESLT) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems Limited third quarter 2008 results conference call. All participants are present in a listen-only mode. Following management's presentation, instructions will be given for the question and answer session. (Operator Instructions). As a reminder, this conference is being recorded, November 25, 2008.

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 Gelbart Kahana Investor Relations at 1-866-704-6710 or 972-3607-4717.

I'd like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Ehud, would you like to begin?

Thank you and good day, everybody. On behalf of all the 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 discussion on 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.

With that, I would like to turn over the call to Joseph. Joseph, please?

Thank you, Ehud. Hello, everyone, and thank you for joining us today.

Again, we had another quarter of strong growth and improved profitability. You can find all the detailed figures in the press release we issued today, which is also available on our website.

We reported third quarter revenues of $671.2 million, growing more than 29% over the third quarter of last year, all of it organic growth.

In terms of revenue breakdown across our areas of operation in the third quarter, Airborne Systems was 24.1% of revenues, C4ISR was 44.3%, Land Systems was 18.3%, Electro-Optics was 9.5%, and other businesses accounted for 3.8%. All sectors grew year-over-year on an absolute basis, with the C4ISR leading.

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 33% of our revenues. Europe was 23.5%, Israel 19.6%, and the rest of the world was 23.9%.

Our gross profit grew very strongly, 41.5% over the last year to $198.3 million, with a gross margin in the quarter of 29.5% compared to 27% in the third quarter of last year.

The strong improvement was partly due to previously mentioned high margin, short-term delivery contracts, as well as the mix of projects performed in the quarter, and generally improved processes within the Company.

During the third quarter, two events occurred that in an aggregate had minimal total net effect on our net profits. There was a one-time income of $6 million related to a legal settlement involving a US subsidiary of the Company, which benefited the G&A costs. Balancing this, there was also a financial expense related to the write-off of Auction Rate Securities totaling $5.7 million.

Our operating profit in the quarter more than doubled over the last year to $78.3 million, representing an improved operating margin of 11.6% in the quarter compared to 6.8% in the third quarter last year. This margin improvement is a result of the higher gross margin, while controlling the growth in operating expenses, and also the additional benefit provided by the settlement we mentioned above.

While we so far have not seen any significant impact on our business from the new and challenging macroeconomic environment, we put a particular emphasis on controlling our expenses in such uncertain times.

Financial expenses were $16 million compared to less than $1 million in the third quarter last year. The large increase was due to the above-mentioned $5.7 million ARS write-off, as well as the weakening of the US dollar against the Israeli shekel over the reported period.

Net profit increased year-over-year by 35% to $35.6 million with a net margin of 5.3% of revenues compared to 5.1% in the third quarter last year. Our diluted earnings per share for the quarter was 83% versus 62% in the third quarter last year.

Our visibility remains strong. The backlog of orders at quarter end was $4.87 billion compared with $5.05 billion as of June 30, 2008. While our backlog was slightly below that of the last year, we believe our backlog remains strong. For example, the Brazilian win of over $180 million occurred just a short time after the end of the third quarter. 71% of the backlog relates to orders outside of Israel, representing the global diversity of our business.

Our visibility also remains strong, with 57% of the Company's backlog scheduled to be performed during the remainder of 2008 and during 2009.

Operating cash flow for the quarter was a negative of $17 million, which resulted in $113 million positive operating cash flow for the nine months ended September 30 this year.

Finally, the Board of Directors declared a dividend of $0.22 per share for the third quarter of 2008.

That ends my summary, and I shall now turn the call over to Mr. Ackerman.

Thank you, Joseph. I am pleased to report another quarter of solid progress at Elbit Systems, with growth across all areas of operation and in all geographies.

Company-wide, we continued to improve with sustained growth on both the top and bottom lines, driven both by strong organic growth as well as the contribution through our acquisitions.

In addition, in only the first three quarters of 2008, we have already surpassed the whole of last year's net income, achieving just shy of $100 million in net profit.

We are examining the potential implication of the global economy -- economic on our Company. While we have not seen any impact on us, we are taking measures to rationalize all expenses. This is to ensure that we are able to maintain our profitability, momentum and technological leadership in the coming months ahead. We believe that Elbit Systems remains very well-positioned strategically, operationally and financially.

I would now like to spend a few moments discussing some of the developments with regard to our acquisition activity in the quarter.

At the start of this quarter, we received all approvals required for the completion of the full merger of Tadiran Communications. Tadiran transferred all of its assets and liabilities to Elbit Systems, merged with and into Elbit Systems, and no longer exists as a legal entity. This full merger is part of our plan to actualize synergies through reorganization and we are already seeing the fruits of our efforts.

More recently, our US subsidiary, Elbit Systems of America, purchased Innovative Concepts from Herley Industries for $15 million. Innovative Concepts is a wireless communication technology firm specializing in real-time embedded systems and high-speed processing solutions for defense and homeland security applications.

Innovative Concepts will become part of our C4I solution business, and the acquisition is part of our long term strategy to provide advance C4I system solution to the US Department of Defense, and Department of Homeland Security.

And finally, only a few weeks ago, we purchased a minority interest in the Israeli company called Azimuth. The company has superior technologies for target acquisition, navigation and orientation solutions tailored for defense applications.

Their technology has significant value to Elbit Systems, as there are many, many application of this technology across our entire product portfolio, both through internal growth, as well as our acquisition of highly [telegistic] businesses. In our field, Elbit Systems is becoming ever more a global leader in the electronic defense industry.

And now I would like to briefly highlight just a few of the many recent events in the quarter and beyond. As always, our UAVs have had particular success. We were awarded in third quarter to supply the Australian army with small Skylark UAV system for $7 million. In addition, we signed a $25 million of contract to supply UAV to a country in the Americas.

Our subsidiary, Cyclone, achieved a $31 million from Boeing to supply it with components for the F-15, including external fuel tanks, pylons and horizontal stabilizers.

Following the end of the quarter, we achieved a $100 million worth in orders for military communication system to be used by three customers in Europe, South America and Asia, all to be delivered by the end of 2009.

And finally, a few weeks ago, after the end of the quarter, we received a large order by Embraer, the Brazilian aircraft company, for avionic for the upgrade of the Brazilian AMX jets. The initial development and prototype phase of this contract is approximately $67 million. The entire contract, including the production phase, is approximately $187 million, and is scheduled to be completed through 2014.

We take great pride in our selection for this important project. We believe our selection reflects the satisfaction of our Brazilian customer from our past performance.

Under the project, Elbit Systems and our fully-owned subsidiary in Brazil, AEL, will supply the central mission computer of the AMX, as well as display system, the ammunition management system, and additional electronic systems.

Our subsidiary, [Elislar], will supply the electronic warfare system as a major subcontractor to AEL. Our ability to incorporate all those systems, in this upgrade project, testifies to the synergy within Elbit Systems' portfolio, which enable us to provide our customers with a wide variety of innovative end-to-end solutions. In summary, our strong performance continues also into 2008.

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

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. (Operator Instructions). The first question is from Tsahi Avraham from Clal Finance. Please go ahead.

We know that you like to give conservative guidance, but since your backlog has declined in this quarter after very long time, could you be more specific regarding the backlog issue?

Yes, I can tell you, in few words, that this is a question of timing. We don't see a trend of backlog being decreased, and certainly we have a higher backlog in the fourth quarter.

Okay. Second question is, could you elaborate on the affiliate companies and their minority interest? You had a -- the Watchkeeper project this year, so I guess it's not representative for the future, for 2009.

Joseph?

In our line, regarding the minority interest, you can see the results are essentially relating to the minority companies that we have the majority, 51% and above. As you know, [UTech] our subsidiary in Britain, Kinetics, our subsidiary here in the US and Elislar.

I think most of the companies in that line have done well this quarter again, and slightly less than what we have seen last quarter. We are looking forward for them to continue to supply good business and bottom line profits in the future as well, although there might be changes, slight changes in the future.

Okay, thank you and good luck.

Thank you.

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

Hi, and good afternoon, or good morning. Just have two, three maybe, short questions. Regarding your finance -- operating expenses, if I look at the GNA, given if I take -- I put back the one time item of $6 million regarding the legal settlement, still it seems to be at a bit of a low level. Could you address that, please?

As I mentioned earlier, we are quite keen in tracking our expenses, our operating expenses, the GNA part being a very important part that we are looking time again to see if we can save anything on that line. And this process is an ongoing for quite a long time, and I believe that we are seeing now the results of the measures taken over several quarters, to reduce this expense as much as possible of course.

Okay, so this is something that we can assume as representative looking forward?

As you know, we don't give guidance, but we will continue to monitor this expense as we did in the past.

Okay, and just another question regarding the R&D expenses, a bit higher than recent quarters. Again, is there anything special that happened, or --?

Joseph?

Nothing special. I would say that quarterly fluctuations in our expenses are something that we see. I would not give too much of importance for those small fluctuations. In overall, our R&D activity is ongoing according to the long term plan, the strategic plan and the yearly budget, and we definitely achieving our goals of technology and product development. So --

Okay, thank you very much.

The next question is from Roni Biron of UBS. Please go ahead.

Hi, guys. Regarding the backlog, how does it break down geographically, and what should we assume in terms of the currency impact from the appreciation of the US dollar against the euro and shekel?

Joseph?

Well, I believe that we do not release the geographic breakdown of the backlog, but in general I would say it is not very different from what it used to be for some time now. So no significant changes from what we have seen in recent periods in the breakdown.

Regarding the currency, as we were able to manage with small fluctuations and changes the downside of the currency exchange US dollar versus the shekel, I believe that we'll manage the upside as well. That means that we do not expect significant or any drastic impact on our expense level due to these changes.

And could you indicate what was the organic growth this quarter?

All the growth was organic, so it's about close to 30%.

Close to 30%?

Or 29% something.

Okay, thank you.

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

Hi, good afternoon. I've got two sets of questions, that's -- take them separately. The first relates to the organic growth. I was wondering whether you believe that -- whether this level of organic growth is sustainable. If not, what level do you foresee? And either way, how do you intend to maintain the solid organic growth?

Due to the strong backlog that we have, and also the opportunities that we are now pursuing that in the pipeline, to be awarded in the coming quarters, and due to the fact that, as you all know, we have what we call, soft backlog; I mean, order that we got but are not funded so they're not recorded in our backlog. So due to all of those, we are very optimistic that we'll continue to see an organic growth also through 2009, which will be two-digit organic growth.

Okay, thank you. And the second questions relate to the long term debt on the balance sheet. I notice that there was a repayment in this quarter alone of about $159 million of long term debt, and a receipt of about $85 million in this quarter. I was wondering, is that to do with the refinancing of the maturities that you had for 2009 to push them later?

This is related to the arrangement that we had when we bought Tadiran Communications. For those who know the history, Tadiran Communications had some cash when we bought them, and once we have completed our merger, and got all the approvals from the right -- from the authorities, we decided that in view of the recent short term requirements for cash, it is best for our business to reduce the long term debt and, of course, reduce the future expenses related to that.

Okay, thank you.

(Operator Instructions). Please stand by for more questions. The next question is from Yoav Burgan from Leader Capital Markets. Please go ahead.

Just one more question. Joseph, you mentioned before that you do not expect any material effects of foreign exchange fluctuations. Until now, or at least until the second quarter, you managed very nicely, the depreciation of the US dollar. And mainly in Q3, we see an appreciation, a very significant appreciation of the dollar. Isn't this -- to have a positive, maybe even significant debt effect on you?

I believe in general it has a positive effect. The extent to which that effect is significant we'll see it later on. In general, it is positive. I do not expect to have a material impact on the results, in the fourth quarter.

Okay, great, thank you very much.

Thank you.

The next question is from Bernard [Menor] of [Parallel] Insurance. Please go ahead.

Yes, hi. Hello, guys, Mr. Ackerman and Gaspar, and congratulations for the strong numbers for the quarter. I'd like to know, where do you think is the weaker link in your geographical markets? Where do you expect the -- maybe the backlog to be softer, or the orders to be postponed in respect of the market situation and economic slowdown?

And if you can refer to the opportunities in the UAG markets and the electro-optics, how do you see the growth rates there for the coming quarters? Thank you.

Quite a long question; I'll try to do my best. The current backlog and what we have in our pipeline, and the soft backlog that we have, is a result of long term strategic planning. And the plan was, and we say that more than once, our plan is to have 20% and plus in Israel, of our revenues, 30% plus in the US, 20% in Europe, and the rest which is around 20% in Asia and South America.

This split is going to continue also in the future. We believe this is the right strategic split that will support our growth in the coming five, even to 10 years. So this is not going to change, and as we talk to our customers, even these days, as we talk to our customers, both in Europe, in US, in Israel, we don't see as of today any desire to change their plan with Elbit Systems and talk about our type of technology, our type of solutions.

So this is why I'm quite optimistic that this split will continue. And certainly, as you mentioned, the needs for more UAVs in the market place, more C4I in the market place. We see growing demand for electro-optics. This is why our anticipation is that our growth plan will continue, and I must say that even during this economic crisis, sometimes we see some opportunities for company like Elbit.

So to -- maybe to summarize what I have said, is that as of this moment, we don't see any impact on our businesses, or those customers and we do our business as usual.

Right, thank you, and good luck.

Thanks.

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

Yes, I would like to thank everybody, everybody for joining us today in our conference call, and I'm looking forward to being with you in our next conference call next quarter. Thank you.

Thank you. This concludes the Elbit Systems and their third quarter 2008 results conference call. Thank you for your participation, you may go ahead and disconnect.