Elbit Systems Ltd (ESLT) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems Ltd. first-quarter 2010 results conference call. All participants are 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 May 13, 2010.

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

Thank you, operator, and good day, everyone. 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. Yossi Gaspar, Elbit Systems' Chief Financial Officer.

Yossi will begin by providing a discussion of the financial results of the quarter, followed by Joseph who will talk about some of the highlights and significant events during the quarter and beyond. We will then turn over the call for 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 earlier today also refers to the contents of this conference call. With that, I would like to hand the call over to Yossi. Yossi, go ahead please.

Thank you, Kenny. Hello, everyone, and thank you for joining us today. 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 now highlight and discuss some of the key figures and trends. Our first quarter of 2010 revenues were $618 million, a decline of 6% year-over-year. The absence of revenue growth in the first quarter of 2010 can be attributed to the slowdown in the growth of our backlog which occurred a year ago, which has now followed through in our current revenues.

The two main areas of operation which were impacted are the C4I and the land vehicles. In the C4I area we had a number of UAV projects which were delayed, and hence the revenues from these projects have not come through. In the land vehicle area, the reduction of the short turnaround projects this year compared to last year were the main reason for the decline.

One of the main reasons for the past decline in backlog and the current decline in revenues is the change in the market behavior, which we elaborated on in the previous quarter, mainly the lengthening of the selling cycle. Customers now require seeing and evaluating 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.

Overall, we have adjusted to this trend quickly and 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.

In terms of revenue breakdown across our areas of operation in the quarter, airborne systems was 29%; land vehicle systems was 19%; C4ISR 33%; electro-optics 13%; and the rest 6%.

On a geographic basis, the United States remained our largest region, accounting for 31% of our revenues. Europe was 25%; Israel was 23%; and the rest of the world was 21%.

We do not see the quarterly fluctuations in our revenue breakdown as indicative of any long-term trends, and there was no significant difference to that of the prior year. However, on a year-over-year basis in the area of operations there was a decrease in the sales of the land vehicle systems and the sales of the C4I, as I just explained.

On a geographic basis revenues from Israel increased over last year, while revenues from the US decreased somewhat mainly due to the decrease in the land vehicle systems sales.

For the first quarter of 2010 our gross margin was 29.9% compared with 31.7% in the first quarter of last year. As I mentioned, the first quarter of 2009 included revenues of short turnaround contracts. This, coupled with a strong US dollar versus the Israeli shekel, contributed to the higher gross margin level. The gross margin for the first quarter of 2010 was in line with our average for recent periods.

Operating income in the first quarter was $49.2 million representing an 8% margin. This compared with $76.6 million or an 11.7% margin in the first quarter of last year, which benefited from a higher gross margin and lower operating expenses.

In terms of operating expense breakdown during the quarter, our net R&D expenses for the quarter were 8.5% of revenues compared to 7% in the first quarter of last year. While there are some quarterly fluctuations, there is no material change in our R&D budget.

Marketing and sales expenses was 8.8% of revenues in the quarter compared with 8.7% in the first quarter of last year.

Our G&A expenses in the quarter were 4.5% of revenues compared with 4.4% of revenues in the first quarter of last year and almost flat on an absolute basis. This reflects a continued focus on lean and efficient management of the Company's operations.

Financial expenses for the quarter were $3.1 million compared with an expense of $19 million in the first quarter of last year. The high level of the financial expenses in the first quarter of last year was due to the Company's US dollar/Israeli shekel hedging activities.

The Company recorded an income of $12.8 million in the first quarter of 2010 due to final payment from the sale of Mediguide. This is compared with other income of $0.1 million in the first quarter of 2009.

The minority share was $2.8 million this quarter compared with $6.8 million the first quarter of last year. The main reason for the decline is the fact that the first quarter last year we owned 51% of Kinetics, hence we deducted 49% of the profit attributable to minority holders; while now we owned 100% of the company.

Consolidated net income for the first quarter was $49.8 million or a net margin of 8%. This is 15.1% gross over the net income of $43.3 million or a net margin of 6.6% in the first quarter of 2009.

Diluted earnings per share for the first quarter of 2010 were $1.15 compared with $1.02 for the first quarter of 2009. Note again that the above net income figures for the first quarter include the one-time income from Mediguide. Excluding this one-time income, the net income for the first quarter of 2010 was $40.1 million or $0.93 per diluted share.

Our backlog of orders at the end of the first quarter of 2010 was $5.25 billion compared with $5 billion at the end of last year. Mr. Ackerman will elaborate in a moment about some key recent wins that contributed to this renewed growth in our backlog.

Approximately 68% 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 the first quarter of 2010 was $64 million compared with $5.4 million in the first quarter of 2009.

Finally, the Board of Directors declared a dividend of $0.36 per share for the first quarter of 2010. That ends my summary and I shall now turn the call over to Mr. Ackerman.

Thank you, Yossi. While the first quarter of 2010 was slower than usual, we are encouraged by our renewed growth in backlog as well as some important recent orders. The largest order of the first quarter was a $298 million contract for a C4I system for the Australian Defense forces.

The contract is for the supply, integration, installation, and support of a Battle Group and Below Command, Control, and Communications system for the Australian Army. The capability will increase the commanders' battle space awareness, automate combat messaging, and assist in the execution of operations.

We were awarded this contract directly from the Defence Department in Australia following a worldwide competitive open tender. We are extremely proud to be selected for this major program, one of the largest and most prestigious BMS programs in the world.

The fact that we were selected over a group of other large defense contractors is a testament to our position as one of the leading companies in a major competitor in this area. This selection of our system by Australian Army, considered among the world's most advanced and modern fighting forces, also reflects the quality and maturity of our land and C4I systems, resulting from the fact they are currently in operational use by more than 20 armed forces worldwide.

We also recently established a subsidiary in Australia that we will support this and other programs.

Another major award achieved in the quarter was by our subsidiary Elisra. It was for airborne and ground electronic warfare, EW, system to be delivered over the next three years for a customer in Asia. The aggregate value of the contract was approximately $147 million. The system will be delivered over the next three years, as I said.

This is another award which attests to our technological leadership and strengthens our position as a recognized world leader in the electronic warfare market.

More recently, the Israel Defense Ministry awarded us with a $50 million contract to purchase the new Hermes 900 UAV to expand the Israeli Defense Forces' existing fleet, which includes our Hermes 450 systems.

The follow-on order attests to the IDF's high level of satisfaction with the performance of our UAS. This further cements our position as a world leader in the UAS field.

Together with the Brazil Air Force and our subsidiary in Brazil, Aeroelectronica, we also recently inaugurated a new UAS evaluation center in Santa Maria in Brazil.

In summary, Elbit Systems remains well positioned strategically, operationally, and financially. We have a very broad product range. Our operation and customer base are becoming even more global. And we are well known as one of the leaders in defense electronic, a critical niche of the defense industry.

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

(Operator Instructions) Daniel Meron, RBC Capital Markets.

Hello, Yossi and Yossi. Can you provide us with a little bit more color on the dynamics that you see in the marketplace right now? Is the increased order rates that we have seen the last several months something that we can call trend, and we should expect better conversion going forward?

Also, what drove those decision-making in the first place in the last few months? Thank you.

If for example we'll take really the European and the US defense spending, we have not experienced any cuts in the related business for Elbit. However, we did see some slowdown in the process till an order is ready to be delivered.

So both Europe and the US actually for Elbit, from Elbit's point of view, we didn't see any program cancelled, but they take more time. And I won't be surprised if he backlog of 2010 will be higher than today.

Okay. Was there any specific drivers that are pushing armies in general to make their decisions now versus say six months ago?

I don't see any major, major changes. It takes time. They want to select the best for them, and I think this is to our benefit.

Okay, great. When we look at the trend to move to fixed based projects versus cost plus, how should we think about the impact on your business? How are you positioned versus your competitors in that space?

We don't have any -- we didn't have any cost-plus type of program. So for us it is not a change. We always use only fixed price. Maybe 1% or 2% were under cost-plus programs.

So is it fair to say that in a sense you will be better positioned than your peers that will have to cope with the difference in (multiple speakers) budgeting?

I think we are better positioned to this kind of construct. We see those again -- for our business, I think it is a benefit. I think this is one of our competitive advantages in the marketplace.

Okay. Very good. I will yield the floor for other people to ask their questions. Thank you. Good luck going forward.

(Operator Instructions) [Werner Manor], Harel Insurance.

Yes, thank you. Hi, Mr. Gaspar and Mr. Ackerman. Can you tell us something news you have about your M&A policy? If you can talk with us about areas that you see more accelerating.

Maybe geographical, something that can interest you even in the long term for boosting your positioning. Maybe in markets that you see that budgets there are going to grow in a faster pace than other markets. Thank you.

M&A is and has been a long-term element in our strategy. We have done in the past close to 30 acquisitions, and we will continue to do so.

We have a special Vice President dealing with M&As, and we will be looking for M&As who add technology that we are lacking or an acquisition that improve our access to the market.

This has been done and we will continue to do also in the future. Actually these days we are evaluating several opportunities. But as you know, we make an announcement when all is concluded.

Okay. Thank you and 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 03-925-5901. And internationally, please call 972-3-925-5901. 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 a concluding statement?

Yes, thank you. I would like to thank all of our employees for their hard work. And to everyone on this call I would like to thank you for joining us today. Have a good day and goodbye, and looking forward to hearing from you in our next conference call.

Thank you.

Thank you. This concludes the Elbit Systems Ltd. first-quarter 2010 results conference call. Thank you for your participation. You may go ahead and disconnect.