Elbit Systems Ltd (ESLT) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems Limited second quarter 2009 results conference call. All participants are at present in a listen-only mode.

Following management's phone presentation, instructions will be given for the question and answer session. (Operator Instructions). As a reminder, this conference is being recorded, August 12, 2009.

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 would now like to hand over the call over to Miss Fiona Darmon of GK Investor Relations. Fiona, please go ahead.

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

Joining us on the call are Mr. Joseph Ackerman, President and CEO, and Mr. Joseph Gaspar, Chief Financial Officer. Joseph will begin by providing a discussion of the financial results of this 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 a question and answer session.

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

Thank you, Fiona. Hello everyone, and thank you for joining us today. Our second quarter of 2009 continues the long trend of progress, with strong growth, profitability and cash generation. You can find all the detailed figures for the quarter in the press release we issued today, which is also available on our website.

I will highlight and discuss some of the key figures and trends. Our second quarter 2009 revenues were $728 million, growing over 11% year-over-year. Halfway through the year, we believe that we are on track in achieving our goal of double-digit growth for 2009.

Our growth was essentially all organic. During the past four quarters, we acquired relatively small companies with no material revenues. However, we do benefit from their technologies, market access and synergies between them and our other operating entities.

In terms of revenue breakdown across our areas of operation in the quarter, Airborne Systems was 24%; Armored Vehicle Systems was 15%; C4ISR, 41%; Electro-optics was 15%; and the rest was about 5%.

The strong growth in the C4ISR area was a result of increased sales of communication equipment and unmanned air systems, mainly to Israel.

The lower than average revenue level for Armored Vehicle was due to a relatively low level of short turnaround projects in that area, mainly from the United States.

On a geographic basis, our revenue breakdown was fairly evenly split across all regions with the United States at 25% of our revenues; Europe 26%; Israel 24%; and the rest of the world was 25%.

To be clear, we do not see the quarterly fluctuations in our revenue breakdown as indicative of any long-term trends, and are mainly due to a number of short-term factors.

With regard to our gross margins for the second quarter, our margin was 29.1%. The margin was affected by the mix of projects sold in the quarter, but was also reduced slightly by the weakness of the US dollar versus the Israeli shekel during the second quarter of 2009, which increased our shekel-related labor cost in dollar terms.

However, it is important to note that in the prior quarter we saw exactly the opposite effect, in which a stronger dollar increased our gross margin. But taking a wider view and looking at our first half of 2009 results as a whole, which combines the net outcome of the first quarter and the second quarter foreign exchange impact, we believe this would be a more accurate representation of our overall financial portfolio.

In any case, the foreign exchange fluctuations in the second quarter were offset significantly, and we had an income shown in our finance expenses line as a result of our hedging activities, which I will elaborate on in a second.

Operating income for the quarter was $61.9 million, representing an 8.5% margin, which was affected by the weaker dollar, as well as increased sales, marketing and R&D expenses, but lower G&A expenses. To illustrate, this is compared with an operating income of $60 million, or a 9.2% margin in the second quarter of last week (sic).

In terms of operating expenses, our net R&D expenses for the quarter grew to 7.3% of our revenues, compared to 5.8% last year, and are a function of increased spending and focus on R&D projects in order to build on our competitive lead in all areas of operation.

Marketing and selling expenses were 9.3% of our revenues in the quarter, compared to 8.4% in the second quarter last year, and was primarily due to our focus on pursuing opportunities in new areas and markets.

Our G&A expenses dropped to 4% of revenues from 6.8% in the second quarter of last year, and reflects continued focus on lean and efficient management operation of the Company. Also, for comparison purposes, it should be noted that last year's second quarter numbers included expenses related to a legal settlement of the Company's subsidiary in the US.

During the quarter, we had a financial income of $11.4 million. This is compared with a financial expense of $12.4 million in the second quarter of last year and an expense of $19 million last quarter.

Our financial income was primarily due to our US dollar-shekel hedge, which in contrast to the first quarter of 2009, generated income as the shekel increased in value against the dollar. Note that while we saw a positive effect in the financial income, the currency movement in this quarter had a negative effect on our gross and operating income, as I explained earlier.

On a six-month basis, our financial expenses were $7.6 million compared to $17 million in the same period last year. This was in spite of a significant volatility in the foreign exchange.

Our non-consolidated subsidiaries contributed $3.4 million to the net income in the quarter.

At the beginning of the second quarter, we purchased the remaining 49% share of Kinetics to complete 100% ownership. As a result, we see a material reduction in the minority line.

The other affiliates, which we do not consolidate, performed well and according to plans. We had a $2.5 million minority share in the profit of subsidiaries in the quarter, compared to $16.2 million in the second quarter of 2008.

Starting from last quarter, we implemented the SFAS No. 160, which means that consolidated net income is reported before eliminating net income or loss attributable to non-controlling interests.

Consolidated net income in the quarter grew 17.3% reaching $62.2 million, or 8.5% of revenues, compared to $47.3 million in the second quarter of last year, or 7.2% of revenues.

Net income for the second quarter of 2009, which is attributable to the Company's shareholders, increased 91.7% to $59.7 million, or 8.2% of revenues. This is compared to $31.2 million, or 4.8% of revenues, in the second quarter of 2008. A significant change in this was the contribution due to acquisition of the 49% of Kinetics, which resulted in a reduced minority line.

Diluted net earnings per share attributable to the holders of the Company's ordinary shares for the second quarter of 2009 was $1.39, compared to $0.73 for the second quarter of 2008.

Backlog, as of June 30, 2009, totaled $5.1 billion, with 69% of the backlog scheduled to be performed during the remainder of 2009 and during 2010.

Operating cash flow during the quarter was [$88.2 million] as compared to [$63.5 million] in the second quarter of 2008. The operating cash flow for the six months ended June 2009 was $93.6 million, compared to $129.8 million for the corresponding period last year.

Finally, the Board of Directors declared a dividend of $0.36 per share for the second quarter of 2009.

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

Thank you, Joseph. As Joseph mentioned, our second quarter of 2009 was another strong quarter with revenue growth and a record net income. We are well underway to achieving another record year of profit and double-digit growth in revenue in 2009.

We completed two acquisitions in the quarter, an additional one towards the end of July. The one, which I already discussed in the last quarter's conference call, was the remaining 49% of Kinetics at the beginning of April, a company engaged in the development of systems in the field of advanced life support and environmental controls.

In mid-June, we initiated a process of investing $18 million in Mikal for 19% of the Company, with an option to purchase all of the remaining shares. The Mikal Group has operations in the field of artillery, armored fighting vehicles and optronics.

On July 20, we signed an agreement to purchase all of BVR Systems assets for $34 million. BVR is engaged in the area of development and production of training, simulation and debriefing systems for air, sea and ground forces.

All these acquisitions are part of our long-term strategy of complementary growth through M&A of companies which can add significant value to Elbit over and above the sum of its products.

As you can see, these companies contain elements which are highly complementary to ours. Our aim, through these acquisitions, is to unlock additional value and further strengthen our position as the global leader by enhancing our technological capabilities and product portfolios.

In addition to acquiring companies, we operate many successful joint ventures with other leading global defense companies. This, in combination of our expertise, together with that of a partner, enable us to jointly create and sell products more effectively than either of us could develop and sell individually.

I would like to take the opportunity to highlight some of our recent successes through our joint ventures. In May, we formed a new joint venture with General Dynamics, called US Dynamics, to provide UAVs to the US market. The solutions-backed US Dynamics will sell -- will be based on our advanced UAV, in particular, the combat-proven Hermes and Skylark systems. We are very excited about working together with General Dynamics to launch this new JV, which we believe has huge potential in the US market and provides solutions for some current and future operational gaps in the US defense needs.

In June, Alliant Techsystems, together with us, conducted a successful test of the Guided Advanced Tactical Rocket, which enable us to bring a cost-effective product to the market.

GATR is a low cost precision strike weapon that minimizes collateral damage. This product combines our expertise in guidance and control systems through high performance laser seekers with the reliability of an ATK-produced propulsion system and is a very, very apt demonstration of how we can successfully collaborate with peers in our industry.

Another JV with Rockwell Collins, which goes back many, many years, is called Vision Systems International, or VSI. It has been one of our most successful JVs, supplying both Boeing and Lockheed Martin, the US military, as well as a number of international military forces, with Helmet Mounted Cueing System for the wide range of (inaudible) fighter aircraft, including the Joint Strike Fighter, F-35.

In mid-June, this JV received several new contracts worth more than $54 million from Lockheed Martin for the delivery of F-35 Helmet Mounted Display and 30 additional aircraft systems.

We had many other successes in the quarter from which I will note you. The first one is a $76 million contract for a missile countermeasure system for commercial aircraft with military transport. And this is an example of our successful R&D strategy, which we believe will lead to more significant business in the future.

The second one is a $55 million contract for the establishment of a mission training center for the Israeli Air Force, which we see as a further enhancement of our service-related business.

And with that, I would like now to open the call for question and answer. Please?

Thank you. (Operator Instructions). The first question is from Yoav Burgan of Leader Capital Markets. Please go ahead.

Hi, and congratulations on another impressive quarter. I have two questions. One relates to the revenue breakdown by geographical regions. It seems that in Q2 there was a relative weakness in the US sales, and on the other hand -- and on the other half, excuse me, a relative strength in sales in Israel, and I believe this deviates from your historic trend. So, is this something that we should not regard as representative, or maybe there is some kind of shift? And how does this -- and does this have any effect on margin?

I would note the following. This is a quarterly report; the balanced revenues from each of the geographical areas that we sell to. It is not characteristic or representative for long-term trend. We still believe that if you look at our results in the last 12 months they definitely -- and the split of the geographical areas there, they are much more representative of our market presence.

Regarding your second part of the question, I would not distinct between margins coming from the various geographic areas. Roughly speaking, I would say that all of them fall within essentially the same range.

Okay, fair enough. And my other question relates to revenue breakdown by segments. I look at the Land Systems and there is a relatively -- because actually Land Systems decline, at least on a relative basis, quarter-over-quarter. Is this, again, something that we should expect to keep on declining? Or is the present contribution some kind of characteristic or representative?

Some of the numbers -- the numbers on the second quarter last year in Land Systems included a significant part of the -- what we call the short turnaround revenues in 2008. These revenues in the second quarter of this year were actually minimal, so this is the basic change between the two quarters.

On a long-term basis, we still see Land business as a growing business with significant budgets allocated to this sector.

Okay. And all of Kinetics sales are within Land Systems?

Right.

And all of BVR sales are Airborne or split between Airborne and C4ISR, or entirely Airborne?

We have not yet completed the acquisition of BVR, therefore, their results are not in our numbers.

But what do you expect -- under what division do you expect them to be?

Currently, most of their business relates more to the Airborne area.

Okay. Thank you very much.

You're welcome.

The next question is from Tsahi Avraham of Clal Finance. Please go ahead.

Hi, Joseph and Joseph. Just one question for Joseph. Could you give us your point of view regarding the backlog that grew only 1% over the last 12 months? Any outlook for the future?

Tsahi, you want answer from me or from Mr. Ackerman?

Mr. Ackerman gave us the positive point of view on the last call. I just wanted to hear from him.

Yes. We have tried, in the last three to four quarters, to enhance all Company parameters, including cash flow, profit, sales and backlog. And I think I'm relatively pleased that we managed to grow all those parameters while keeping the backlog stable.

Looking forward, I still believe that we can -- we will see a two digit growth, despite the stability in backlog for '09. And I wouldn't be surprised if we see even a bigger scale in '10 compared to '09. So this backlog, despite the fact that it's stable, represents a potential for sales growth in the future.

Okay, thank you.

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

Yes. I would like to thank everybody for joining us today. I'm looking forward to seeing you all in our next quarter conference call.

Thank you. This concludes the Elbit Systems Limited second quarter 2009 results conference call. Thank you for your participation. You may go ahead and disconnect.