Elbit Systems Ltd (ESLT) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems Ltd Fourth Quarter 2009 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 10th, 2010.

I would like to remind everyone that the Safe Harbor language contained in today's 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 CCG Investor Relations at 18-66-704-6710 or 972-3-607-4717.

I would now like to hand the call over to Mr. Ehud Helft of CCG Investor Relations. Mr. Helft, please go ahead.

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, 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 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 statements in the Company's press release issued earlier today also refers to the content of this conference call.

And with that, I would like now to turn over the call to Joseph. Joseph, please.

Thank you, Ehud. Hello, everyone, and thank you for joining us today. The final quarter in 2009 continues our long trend of profitability and cash generation. 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. We had filed today our report, the 20-F, and it is available on the EDGAR.

I will now highlight and discuss some of the key figures and trends. Before I get into the comparative analysis between 2009 and 2008 results, I would like to note that our results in 2008 included two major one-time effects. These are the gain of $74.4 million from the sale of Mediguide Inc. and a one-time impairment charge of $10.5 million in our holdings in Sandel, Inc.

To enable a more effective understanding of our 2009 results compared with those of the previous year, I will excuse these one-time effects in the following analysis. Our first quarter 2009 revenues were $715 million, growing 2.4% year-over-year. For 2009 as a whole, we reported revenues of over $2.8 billion, a 7.4% year-over-year increase. Our gross was mostly 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 29%, land vehicle systems was 19%, C4ISR was 33%, electro-optics was 14%, and the rest was 5%. On a geographic basis in the fourth quarter, the United States remained our largest region, accounting for 29% of our revenues. Europe was 25%, Israel was 22%, and the rest of the world was 24%. Quite evenly spread, which reduces the risk in our business.

We do not see the quarterly fluctuations in our revenue breakdown as indicative of any long-term trends. However, on a year-over-year basis there has been a trend of increasing sales in airborne, electro-optics, and C4ISR operations, as well as growing sales to Europe and Israel.

For the fourth quarter, our gross margin was 29.7%, an improvement from the 28.9% reported in the fourth quarter of last year. For the year as a whole, gross profit margin was 30% compared to 29.1% in 2008. The overall improvement in the margins compared with last year was due to stronger US dollar versus the Israeli shekel, which positively impacted our cost of labor. Also, we continued the focus of our internal efficiency improvements and focused on building synergies between the operating units.

The sale process has also lengthened slightly. Customers now require seeing and evaluating essentially a more finished product adapted to their specific requirements before they are willing to commit for procurement. At the same time, while delivery dates stay firm, this requires a shorter production and delivery time. Thus, sales happen a little later in the process, which has the effect of lowering our revenue recognition, but potentially improve margins.

And added side effect is that we are also incurring higher marketing and R&D expenses prior to receiving firm orders, which caused increased operating expenses. However, after receiving the order, we may enjoy lower development risk. This trend has effects on additional financial barometers such as advances from customers, inventory and of course, the backlog. Overall, because we have adjusted to this trend quickly, we believe that we have strengthened our competitive position by being able to bring to the market more final and field-proven products as required by our customers.

Operating income in the fourth quarter was $58 million, representing an 8.2% margin and was affected primarily by increased marketing and sale expenses on both an absolute and percentage basis. This is compared to $62 million or 8.9% margin in the fourth quarter of last year. For the full year, our operating income was $262 million, representing a 9.3% margin compared with an operating income of $249 million or a 9.4% margin last year.

In terms of operating expense breakdown during the fourth quarter, our net R&D expenses for the quarter were 8.7% of our revenues compared to 9.2% last year. For the full year, our R&D expenses were $217 million, representing 7.7% of revenues compared to $185 million, representing 7% of our revenues in 2008.

Marketing and sales expenses were 8.3% of revenues in the quarter compared to 6% in the fourth quarter of last year. For the full year, our marketing and sales expenses were $251 million, representing 8.9% of revenues, compared to $198 million, representing 7.5% of revenues in 2008. This was mainly due to our increased efforts in pursuing opportunities in new areas and markets such as additional parts of Europe, Australia, as well as enhanced activities in some of our existing markets such as in the US and Brazil.

Our G&A expenses in the fourth quarter were 4.5% of revenues compared to 4.6% of revenues in the fourth quarter of last year and almost flat on an absolute basis. This reflects a continuous focus on lean and efficient management of the Company's operations. Financial expenses for the fourth quarter of 2009 were $7.4 million compared to $3.8 million in the fourth quarter last year. For the full year of 2009, our financial expenses were $15.6 million compared to $36.8 million in 2008.

The periods which we do not consolidate contributed $4.9 million to the net income in the quarter. This compared to $6.4 million in the fourth quarter of last year. For the full year, these affiliates contributed $19.3 million compared with $14.4 million last year. This is a significant growth due to improvements in profitability and growth of revenues in these companies.

Consolidated net income for the fourth quarter was $54 million or a net margin of 7.5%. This is compared to net income of $41 million or a net margin of 6.1% in the fourth quarter of 2008. Diluted earnings per share for the fourth quarter were $1.24 compared to $0.98 for the fourth quarter of 2008. For the full year, consolidated net income was $215 million, a net margin of 7.6% compared to $141 million or a net margin of 5.4% in 2008.

Diluted earnings per share for 2009 were $5.00 compared to $3.28 in 2008. Note again that these figures all exclude the one-time effects I have discussed regarding 2008, the gains from the sale of Mediguide of $74.4 million, and the impairment charge in Sandel of $10.5 million.

Our backlog of orders at year end was over $5 billion, slightly higher than the backlog at the end of 2008. Approximately 72% of the backlog is scheduled to be performed during 2010 and 2011. The majority of the balance is scheduled to be performed in 2012 and 2013. Operating cash flow produced by the Company in 2009 was $210 million at a similar level to 2008. Finally, the Board of Directors declared a dividend of $0.36 per share for the fourth quarter 2009.

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

Thank you. 2009 caps another successful year for Elbit Systems. While 2008 was a year in which we digested and integrated a number of major acquisitions, 2009 ends a year of building on our internal competencies while acquiring complementary technologies and broadening our offering to the defense market. Despite a tough year for the world economy and slower global growth in defense spending, we maintained our backlog of orders and grew our revenue level while generating strong profitability and cash flow. We are proud of all these achievements.

We end 2009 in a strong position. We have a very broad product range. Our operations and customer base are becoming even more global and we are well known as one of the leaders in defense electronics, a critical niche of the defense industry. Looking ahead to 2010, like all defense companies, we are affected by global defense spending patterns. We have the advantage that our revenues are geographically diversified and divided relatively easily between Israel, United States, Europe, and other countries in the rest of the world.

We also see a trend that defense spending is shifting to lower cost, lower manpower, and higher technique areas such as unmanned vehicles and C4ISR areas in which we are good at. For example, our world view is validated in that the US Department of Defense is increasing funds to areas such as US unmanned vehicle and C4I intelligence programs at the expense of the more expensive project platform project. We believe that this focus on higher tech in the electronic defense areas will continue to benefit us over the long term.

Over the past few years, our research and development effort and investments were based on our analysis of the direction of the global defense industry. Our lead has so far proven us correct and we invested in those areas which have become very relevant in today's market. In particular, we correctly foresaw the move to unmanned vehicles and systems as well as the digitization of the battlefield and have built significant competitive assets in these areas. In fact, our results show a trend of including sales in airborne and C4I system compared with those in the past few years.

I believe that we have the world leading C4ISR system. As I mentioned last quarter, in October, the inter defense forces piloted its first fully operational pilot run of the Digital Army Program or DAP system, which was supplied by Elbit Systems. The pilot proved that DAP substantially enhanced the ongoing operations of the army and was an all-around resounding success. The target is that DAP will be deployed throughout the idea by 2011 and this remains on track. We believe that our success in this area has potential to generate more business worldwide in the coming years.

In mid-December, we announced that our largest and most modern UAS, the Hermes 900, completed successful flights. The new Hermes 900 offers additional key capabilities over our market-leading UAS, the Hermes 450, such as longer endurance, flight altitude of more than 30,000 feet, a larger payload capacity, as well as flight capability in adverse weather conditions.

The Hermes 900 builds on existing applications and the infrastructure of the Hermes 450 and allow us to quickly transfer this new UAS directly into serial production, which is on track. We have already seen very strong interest in this latest UAS by many customers and we hope to begin sales soon.

Before moving to the Q&A session, I would like to take this opportunity and share with all of you the fact that we are launching a new website with a dedicated and enhanced section of IR and PR in which you can find more information about our products, conferences who participate and many more exciting data and pictures. I urge all of you to visit our new site at www.elbitsystem.com and to share with us any feedback that you may have.

In summary, 2009 was a year of solid performance despite the challenging macroeconomic environment. Thanks to our investment in securing our continued growth, we look forward optimistically. We believe that Elbit Systems is well positioned strategically, operationally, and financially.

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

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions).

The first question is from Daniel Meron of RBC Capital Markets. Please go ahead.

Hi. Hello, Joseph and [Josi]. I have a couple of questions. The first one is trying to get a little bit more color on the drivers for the slower sale cycle that occurred, I guess, in the last two, three quarters for you guys to try and dive a little bit deeper into that. And then, what could basically open this log jam in the sales cycle? Are there any specific catalysts or if you can provide us with more color around it. Thank you.

Well, in general, Daniel, as I explained earlier, basically, the sales cycle of most of our products didn't change and when we talk about sales cycle, it starts with the marketing effort and it ends with the end of the delivery of the products to the customer. What has changed is the point at which our customer has the firm decision to commit to the procurement.

And what has changed is that the first part, the marketing demonstration, convincing the customer, demonstrating the equipment that it fits his requirement, that process has lengthened and it involves the demonstration of capabilities in the environment of the customer and their specific operational requirements, usually using equipment which is very close to the end configuration that will be delivered.

On the other hand, the delivery dates do not move and they are firm and the delivery has to be completed on time for the customer acquisition cycle. So, that means that our delivery schedule is shorter and the bottom line of that is that we have to invest in R&D in adapting the equipment on our own account before the customer decides to acquire the product. However, once the decision is made, the delivery cycle is short and in many cases, it does cause an improvement in our gross profit because of the shorter delivery cycle.

Now in general, this is a trend that we have detected some time ago, probably 12 to 18 months ago and we did prepare our engineering capability for quick reaction and have developed the basic modules for the products that need -- that the market needs. Therefore, I can say that, in many cases, we were very quick in our reaction to our customer requirement and fitted whatever he needed for the demonstration and for the procurement.

Okay. Thank you, Josi. And when it comes to the catalyst that can break out the cycle, I mean -- and how many of your customers are in that cycle? Do you think that this impacts about 50% of the customer base? Are we 70% there? And the timeframe until those decisions -- the decision making starts to pick up again?

This trend we identified happening in most of our markets without difference, starting from the US, going through Europe, here in Israel, of course, and the rest of the world. Most of them want to see the finished products before they commit or at least very close to the finished products for demonstration. So, it's not a one territory or one customer here and there. It is a general trend. We better adapt to it and perform accordingly if we want to be successful and that's exactly what we did.

Okay. And then, my final question is on -- if you can give us more details about the pipeline and the size and just if you can give us a little bit more insight into the kind of projects that you guys are working on that may come to the market in the next 12 to 18 months.

Well, we actually do not give details on specific projects. But I would say the following. The number of opportunities that our company has, the volume, the dollar value of these opportunities is significant and essentially, we cannot say that there is a change, a major change in that. Our products and technologies are required by customers. The volume of the opportunities and the value of them have not changed. Maybe some cases even gone up, like in some of the C4I opportunities, airborne, electro-optics, and some others.

Okay. Very good. Thank you. Good luck.

Thank you.

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

Hi, guys. I want to ask Mr. Ackerman, looking forward into 2010 knowing you have so many leads, do you have -- do you see any major change in the backlog level during the year?

Since, as you said, we have very strong leads of opportunities and as was said previously, we truly believe that we do have solutions to market requirements. I don't see why we won't be able to continue to improve our backlog also in the coming years. So -- and based on what we are currently doing and our analogies on the marketplace, yes, I don't see why we won't be successful in growing our backlog as we did in the past 10 years.

Is there a major contract in 2010 that winning or losing it may change next year's results or the impact --?

No, we never had one contract that can -- has this kind of an effect on us. As you know, Elbit is the neighborhood of $3 billion size of the company, so there is no one project who has or can have this kind of an effect on us.

Is it reasonable to assume that the major contracts you expect to win during 2010 are US contracts?

No, no. US is very important, a very important business sector that we are pursuing. But in addition, we have all kind of land businesses -- electro-optics, avionics, C4I, intelligence, early warning, all kind of. This is a very important one, but one out of many.

Okay. Thank you. Good luck.

(Operator Instructions).

There are no further questions at this time. Before I ask Mr. Ackerman to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available two hours after the conference ends. In the US, please call 1-888-326-9310. In Israel, please call 03-925-5925. And internationally, please call 972-3-925-5925. A replay of the call will also be available at the Company's website at www.elbitsystems.com.

Mr. Ackerman, would you like to make your concluding statement?

Yes. Thank you, please. I would like to take this opportunity to thank all of our employees for their hard work throughout 2009 and that has brought us to the success we enjoy today. And to everyone on this call, thank you for joining us today and for your continued support --

Mr. Ackerman, I'm sorry, there's another person in the question queue. Would you like to take it or would you like to conclude the call?

Our customer is before everybody else.

Okay. So, you'd like to take the question?

Yes, please.

Okay. The next question is from Gilad Ben Ari of Bank Igud. Please go ahead.

Hello, Mr. Ackerman. I just wanted to ask about the land system. You said that there is -- on a year-on-year basis, there is really a large decline. What is the explanation for this decline? What's happening there in this sector?

If you take the four or five years trend, you see CAGR of more than 10% growth. Yes, we had a big jump in '08 but in general, we are -- we foresee the land business to continue to be growing in the coming years.

Okay. Thank you.

You're welcome.

Mr. Ackerman, would you like to conclude?

Yes, I would like to thank everyone on this call and to thank all of you for joining us today and for your continued support and interest in our Company. Have a good day and good-bye.

Thank you. This concludes the Elbit Systems Ltd Fourth Quarter 2009 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.