Elbit Systems Ltd (ESLT) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems Ltd. Fourth Quarter 2008 Results Conference Call. (Operator Instructions). As a reminder, this conference is being recorded March 11, 2009.

If you have not received a copy of today's press release and would like to do so, please call Gelbart Kahana Investor Relations at 1 (866) 704-6710 or 972-3-607-4717. I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Ehud, please go ahead.

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 discussion 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 the beyond. We'll then turn over the call to the question and answer session.

Before we begin, I'd like to point out that the safe harbor statement in the Company's press release issued earlier today also refers to the contents of this conference call.

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

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

Our final quarter in 2008 is another one of good progress with stronger-than-usual profitability, as well as growth across all areas of operation and geographies. You can find all the detailed figures for the quarter and the year in the press release we issued today, which is also available on our Website. I will only highlight and discuss some of the key figures and strengths.

Our fourth quarter 2008 revenues were $697.9 million, growing 18% year over year - all organic growth. For 2008 as a whole, we reported revenues of over $2.6 billion, a 33% year-over-year increase. These figures represent mainly organic growth. During the last year, we acquired relatively small companies with no material revenues. However, we benefit from their technologies and market access and build synergies with the other operating entities.

In terms of revenue breakdown across our areas of operation in the quarter - airborne systems performed 23%, land systems 24%, C4ISR 33%, electro-optics 16%, and the rest of the operations 4%. All parts of the business grew in absolute terms year over year.

On a geographic basis, again, we saw growth in every region on an absolute basis. In the fourth quarter, the United States remains our largest region, accounting for 36% of revenues. Europe was 23%, Israel 17%, and the rest of the world was 24%.

As we explained in the press release, there were a number of one-time factors affecting our results in the quarter. While I'll give you the GAAP numbers, I will also highlight the one-time numbers and the net results, excluding these numbers, to give you a better picture of how our core business performed in the quarter.

For the fourth quarter, our gross margin was 29.1%, which is almost 3% higher than that of the fourth quarter last year. The strong improvement in gross margin was, as I discussed last quarter, part due to some high-margin, short-term derivative contracts, as well as the mix of projects. Also, successful integration of our acquisitions and generally improved processes contributed to the improvement in the margin.

Operating income for the fourth quarter increased 67.4% year over year to $62.2 million, representing an 8.9% margin. This is compared with an operating income of $38.2 million, or 6.5% margin, in the fourth quarter. Operating margin was also affected by increased research and development expenses related to engineering efforts to support marketing activities and accelerated development and adaptation of products to meet market requirements.

It is important to note that operating expenses in the fourth quarter of 2008 were slightly increased by a one-time, in-process R&D expense of $1 million due to the acquisition of Innovative Concepts, Inc. in the US. We expect this company to integrate synergistically in our C4I business in the US and provide advanced solutions and improved customer access in this area.

Other one-time factors which affected our fourth quarter and full-year 2008 results was the sale of MediGuide Inc., a noncore subsidiary of which Elbit owned 41.3% interest on a fully diluted basis. The total net income in the fourth quarter to Elbit Systems from this sale was $74.4 million.

In addition, there was a one-time impairment charge of $10.5 million in Sandel, a company in which Elbit Systems invested over $12 million in 2007. We took this charge in light of the difficult market conditions in which Sandel operates, which is the general aviation sector.

The overall contribution to the quarter's results from these one-time effects, including the above-mentioned in-process R&D charge, was an additional $63.9 million to the net profit.

Financial expenses in the fourth quarter of 2008 were $3.8 million, which included the write-off of auction-rate securities amounting to $9.6 million. The amount of auction-rate securities remaining on our balance sheet is $3 million. Our financial expenses were lower than you would expect, given our debt levels. A few factors positively contributed to our financial expenses in the quarter. One of these include lower interest rates globally. In addition, we hedge our currency exposure, and we saw hedging-related income; in particular, due to the strong devaluation of the British pound in the past few months.

Our nonconsolidated subsidiaries contributed $6.4 million to our net income in the quarter. Our subsidiaries which we consolidate but don't own 100% also had strong performance, and, as a result, we had 23.3 million minority share in the profit of subsidiaries in the fourth quarter.

Consolidated net income in the fourth quarter was $105.3 million, or a net margin of 15.1%. This is compared with a net income of $31.9 million, or a net margin of 5.4%, in the fourth quarter of 2007. Diluted earnings per share for the fourth quarter were $2.48 compared to $0.75 in the fourth quarter of 2007.

For the full year, consolidated income was $204.2 million, a net margin of 7.7%, compared with $76.7 million, or a net margin of 3.9%, in 2007. Diluted earnings per share in 2008 were $4.78 compared to $1.81 in 2007.

Note that these figures all included the one-time effects I have discussed in 2008. Also, the 2007 annual results were negatively affected by one-time charges related to the acquisition of Tadiran in the second quarter, totaling $27.1 million.

Excluding all the above-mentioned, one-time effects in 2008 - mainly the in-process R&D, the proceeds from the sale from MediGuide Inc., and the impairment charge in Sandel - then consolidated net income for the fourth quarter of 2008 increased by 32.5% over the fourth quarter of 2007, $42.3 million, a net margin of 6.1%. This translates to fourth quarter diluted earnings per share of $1.

Excluding the one-time effects in both 2008 and 2007, consolidated net earnings for the year was $141.2 million. This is a growth of 39.6% compared with net earnings of $101 million achieved in 2007. Diluted earnings per share in 2008 were $3.3 compared to $2.38 for 2007; again, excluding the one-time effects of 2007.

Our backlog of orders at the quarter end crossed the $5 billion compared to $4.6 billion as of the end of last year. 72% of the backlog is for sales outside of Israel. Approximately 75% of the backlog is scheduled to be performed during 2009 and 2010. The majority of the 25% balance is scheduled to be performed in 2011 and 2012.

Operating cash flow produced by the Company in 2008 was $209 million as compared to $263 million in 2007. The decline in the operating cash flow was mainly due to the higher working capital requirements in 2008 compared to 2007, in which we enjoyed a relatively high level of advances from customers.

Finally, the board of directors declared a dividend of $0.80 per share for the fourth quarter of 2008.

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

Thank you, Joseph. 2008 ends a year in which we successfully integrated our acquisitions from prior years and very much began reaping the fruits of these activities. We end 2008 in a very strong position as a global company and a well-known leader in defense electronics industry. I think our continued good results grew as our read of the evolution of the global defense industry in the past few years was indeed correct. And we invested in many areas which have become very relevant in today's world. We believe that Elbit Systems remains very well positioned strategically, operationally, and financially.

And now I would like to briefly highlight just a few of the many recent events in the quarter. During the quarter and beyond, we were awarded a number of significant contracts, and I would like to highlight just a few of them.

First is Embraer selecting us for its AMX jet upgrade project for the Brazilian Air Force. The entire contract is valued at approximately $187 million over five years, with an initial phase of $67 million. The project will be performed in a number of subsidiaries, including Elisra, which will supply the electronic warfare system. We take great pride in our selection for this important project, and it reflects the long-term satisfaction of our Brazilian customers. The project also testifies to the synergy within Elbit Systems' portfolio, which enables us to provide our customer with a wide variety of innovative, end-to-end solutions.

C4I, an area which we long ago identified as becoming ever-more critical to the modern army, has indeed become integral, and we continue to see growing interest in this area. In the quarter, our C4I business saw some significant orders supplying South American, Asian, and European armies with various systems, attesting to our extensive geographic presence and the technological leadership of our products. The total orders from these three customers was over $100 million.

UAVs and airborne surveillance systems are another area in which we really have become a true leader and, almost, household name. Our systems are being used by many armies and are also currently operationally and successfully active in several theaters of the global war on terror. We won a number of orders in the quarter for UAV and airborne systems. These include a $60-million order in Europe, a $25-million order for a South American country, and also an order for (inaudible) to support the Israel defense forces worth $40 million.

Two other large contracts we won in the quarter were an airborne upgrade contract with several European customers valued at $80 million and a project to supply the Turkish Air Force with intelligence systems, together with IAI, worth to us $87 million.

As you can see, we are seeing a lot of demand for our products and have been very busy.

I would like now to talk about one acquisition in the US, as well as one divestiture of MediGuide Inc. that was mentioned previously by Mr. Gaspar.

We bought this quarter Innovative Concepts for $15 million from Herley Industries. Innovative Concepts, located in Virginia, US, is a wireless communication firm specializing in design, production, and support of real-time embedded system and high-speed processing solution for defense and Homeland Security applications. And their technology will be (inaudible) in many of our C4I systems and applications.

We also announced the sale of MediGuide to St. Jude Medical. MediGuide develops sophisticated micro-navigation system using proprietary technology for real-time tracking, and this technology was originally developed for military applications. The total purchase price was $283 million in cash, including the assumption of [$17] million in net liabilities. Our stake in MediGuide was 41.3%.

In summary, 2008 was a year of strong performance, and we believe our momentum will continue also into 2009.

No call these days with investors can be complete without mentioning the global economic situation. While our performance has not been impacted by this situation, the climate is challenging for all. We therefore continue to manage all potential risk, as well as examine ways to exploit the current environment in order to upgrade our platform for growth through focus on areas such as wind power, which is now more readily available, capital investments which can be made more efficiently these days, and other areas for development. Our aim is to ensure that we remain well prepared and able to maintain and build our profitability, momentum, and technological leadership in the coming quarters and years ahead.

Looking ahead, I believe we have successfully primed our business for continued growth well into the future.

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

Thank you. (Operator Instructions). Yoav Burgan, Leader Capital Markets.

Congratulations on another very strong and impressive quarter. I have two or three questions.

The first one-- During the last conference call, the Q3 conference call, you were confident and comfortable enough to say that you predict a two-digit organic growth in 2009. Is this still the case? Are you even more comfortable and more confident now?

We don't see why we won't reach that also in '09.

Okay. And, regarding Q4, was all the growth organic, Joseph?

Yes. 100% was organic.

Okay. And my last question. Could you elaborate a bit on-- Obviously, you executed a number of relatively small acquisitions. But, looking forward in 2009, should we expect any maybe larger acquisitions?

Acquisition is an integral part of Elbit's strategy. And when we are talking about acquisitions, we see two types of companies that we will be willing to acquire - either a company which gives us additional technology that we are lacking or companies which may give us access to new markets and new customers.

So, in '08, we did a few acquisitions representing the technological part. We are looking for other acquisitions. It could be even a bigger one. But we won't do that if it won't see a company which will fit our strategy and will be accretive. But, as our strategy is concerned, yes, we are looking for these types of acquisitions.

Okay. Thank you very much.

Roni Biron, UBS.

Congratulations on the strong quarter. In the first three quarters of the year, I believe your performance was positively influenced by relatively high level of short-term orders which had an impact on the top line and gross margin. Was that still the case in Q4? Or is it safe to say that we are back to normal?

Q4 enjoyed also from this kind of orders.

I see. So, basically, it's a full year of short-term orders. Do you expect this to continue into '09 as well?

We are working hard to make that happen. However, the characteristic of short-time orders is that they come in short time. And their marketing cycle is also very short. So you know quite-- You don't know early in the process if they are coming through or not.

Okay. And regarding your 2009 outlook, do you feel comfortable saying that the backlog will continue to increase in '09?

Yes. We anticipate the backlog at the end of '09 to be higher than today.

Okay. Thank you very much.

Dan Harverd, Deutsche Bank.

Congratulations on a very good year. Just following up from the question on short-turnaround programs, could you describe what is the driver behind that kind of demand? In other words, is it product related-- that you have certain products. Or is it specific campaign related?

Essentially, it is customer-requirement related. That means that we, together with potential customers, identify that we have something that they need in their existing configuration or with some minor changes to the product that the company has. And we are ready to deliver that in a short time, according to customer requirements. So this is the characteristic that creates that kind of business.

Could this be a long-term, ongoing phenomena, or is this related to specific (inaudible) programs?

It could be longer term, but we definitely are not sure how that will or will not develop.

Okay. Fair enough. Thank you. In your management statement, you mention a shift from platform upgrades to product and systems sales. Can you give some kind of an indication of what the breakdown is nowadays in your business between the upgrade program and the product (inaudible) business and where you see this developing?

I believe what we said is that we do see growth in requirements of systems and products that are needed for upgrades of platforms or improvement of existing systems-- defense electronic systems. And we are not a platform manufacturer, except the unmanned air vehicles. So that fits quite well in our portfolio of offerings. So that is our strength, and that is what we meant.

Okay. I understand. Then, in terms of defense budgets, obviously there's been a lot of uncertainty recently; specifically, regarding the US. In terms of the target markets that you look at, could you just discuss what you're seeing in terms of the outlook for defense budgets over the next few years and how you would expect that to affect your business?

What we anticipate in our market is a slight growth of defense spending. But, if you look to those areas that Elbit is engaged with in defense electronics, we see that these sectors even growing faster, and they're currently buying big platforms. So what we see ahead of us to Elbit-relevant product-- We anticipate to see a growing demand in the marketplace.

Okay. Fair enough. Then just one final question from me. On the balance sheet, there appears to be a gap of roughly $90 million between severance pay funds on the asset side and then pension and termination liabilities on the other side of the balance sheet. Is this--? How should we relate to this? Is this some sort of black hole that you're going to need to fill at some point?

We definitely, as we all know what happened in the pension world due to the changes in the financial sectors-- Many changes have happened. And the numbers that you see are an outcome of various actuarial calculations. On the long term, if the financial situation will get worse, then we will see some of that that will fill that gap from internal resources. However, right now, the long term expectation is that maybe the interest rates may change, but the environment within the next three or four years may be improved. And, therefore, we will probably not need to close that gap.

Okay. So there's no short-term issue here.

That's exactly right.

Okay. Thank you very much, and good luck.

(Operator Instructions). There are no further questions at this time. Mr. Ackerman, President and CEO, would you like to make a concluding statement?

Yes. I would like to thank all of you for joining us today. I'm looking forward to be with you on our next quarter results. Thank you so much.

Thank you. This concludes the Elbit Systems Ltd. Fourth Quarter 2008 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.