Elbit Systems Ltd (ESLT) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems Ltd. second quarter 2010 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 reminder, this conference is being recorded August 17, 2010. 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 CCG Investor Relations at 1-866-704-6710 or 972-3607-4717. I would now like to have the call over to Mr. Kenny Green of CCG Investor Relations. Kenny, please go ahead.

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 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 refer to the content of this conference call.

With that, I would like to turn the call over to Yossi. Yossi, please go ahead.

Thank you, Kenny. Hello, everyone, and thank you for joining us today. You can find all the detailed figures for the quarters 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 second quarter of 2010 revenues were $603.3 million, a decline of 17% year-over-year. The decline in revenue in the second 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. We note that, as of the last quarter, our backlog again started to grow and continued this quarter as well.

The decline in the revenues was primarily in the area of the C4I, where we experienced lower sales in unmanned airborne systems and radio communication equipment. We continued to see a longer decision making process and lengthening of the sales cycle.

In terms of revenue breakdown across our areas of operation in the quarter, airborne systems was 30%, land vehicles was 17%, C4ISR was 33%, electro-optics 14% and the rest was 6%.

On a geographic basis, the United States remained our largest region, accounting for 36% of revenues, Israel was 22%, Europe 19% and the rest of the world 23%. The main difference compared with last year is an increase in airborne systems and a decrease in the C4I, and on a geographic basis we saw an increase in the United States versus a decrease in Europe. For the second quarter of 2010 our gross margin was 30.4% compared with 29.1% in the second quarter of last year. The change in the gross margin compared with that of the last year was mainly due to the product mix sold in the quarter and continued cost improvements. Despite the lower levels of revenue, the Company gross margin improved by 1.3%.

Operating income for the second quarter was $49.1 million, representing an 8.1% margin. This is compared with $61.9 million, or an 8.5% margin in the second quarter of last year.

In terms of operating expense breakdown during the quarter, our net R&D expenses for the quarter were 9.4% of our revenues compared to 7.3% in the second quarter of last year. I'm happy to note that this quarter we were able to receive higher level of external participation in our research and development, which enabled us a higher level of overall R&D expenses.

Marketing and sales expenses were 8.3% of our revenues in the quarter compared to 9.3% in the second quarter of last year. Our G&A expenses in the quarter were 5.3% of revenues compared to 4% of revenues in the second quarter of last year. The higher rate of the G&A expenses was mainly as a result of lower revenues and additional G&A expenses related to the acquisitions of BVR and Azimuth businesses.

The Company recorded a net gain of $4.8 million related to the reevaluation of the previously held Azimuth Technologies Ltd. shares at the acquisition date, due to its accounting treatment as a business combination achieved in stages.

Financial expenses for the quarter were $1 million, which included hedging-related income. This is compared with financial income of $11.4 million in the second quarter of last year. The higher level of financial income in the second quarter of last year was due to hedging activities in that quarter, which resulted in a higher income level due to the sharp change in the US dollar versus the Israeli shekel in that quarter.

The net income attributable to noncontrolling interest was $2.3 million this quarter compared to $2.5 million in the second quarter of last year.

Consolidated net income for the second quarter was $44.8 million, or a net margin of 7.4%. This is a decline from the net income of $59.7 million or a net margin of 8.2% in the second quarter of 2009. The main reason for the decline is the lower revenue level we had this quarter. Diluted earnings per share for the second quarter of 2010 were $1.04 compared to $1.39 in the second quarter of 2009.

Our backlog book of orders at the end of the second quarter of 2010 was $5.36 billion compared to $5.25 billion as of March 31, 2010, which marks two consecutive quarters of growing backlog. Approximately 61% of the backlog is scheduled to be performed during 2010 and 2011. The majority of the balance is scheduled to be performed after 2012 and 2013.

Operating cash flow produced by the Company in the first six months of this year was $101.6 million compared to $93.6 million in the same period of 2009.

Finally, the Board of Directors declared a dividend of $0.36 per share for the second quarter of 2010.

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

Thank you, Yossi. While the second quarter of 2010 was a quarter with a lower level of revenues, we are encouraged by our renewed growth in backlog over the past two quarters.

Let me emphasize the fact that the medium and large-platform US sector is an area which we have recently entered through our development of the Hermes 900, which was recently selected by the Israeli Air Force, and we are in the process of cementing our expertise, reputation and competitive ability in this sector. This might take some time, but we are confident of our ability to succeed in this area. We see strong interest in this platform and we remain excited with regard to its prospects and how [these] (inaudible) can significantly enhance our positioning in this industry.

Our competitive capabilities are supported by our investment in research and development. Over the past two years we have spent close to $1 billion on R&D and marketing, a significant amount for any Company. These investments, while behind us now, are actually an asset which provide the foundation for our long-term leadership in the electronic defense marketplace. We have invested strongly in those areas which have become very relevant in today's market. We correctly foresaw the move to intelligence solutions as well as [digitization] of the battlefield, and we have built and continue to build highly competitive assets and compelling product in these areas.

And now I would like to mention also that we have completed a successful bond issuance in the Israeli market amounting to approximately $284 million. These funds will support our working capital needs, including our continued investment in research and development as well as our M&A strategy, which is a key part of our long-term strategy of complementary growth by adding companies to the Elbit Systems family.

We continue to look for companies which can add significant value through the harvesting of synergies over and above the sum of these parts. Our aim through these acquisitions is to unlock additional value and further strengthen our position in the marketplace by adding technological capabilities to our portfolio and gaining access to new markets. We have, time and again over the past years, proven that we can successfully integrate new companies into our family.

And in summary, Elbit Systems remains well positioned strategically, operationally and financially. While we are going through a phase of lower revenue growth, long-term prospects for the Company remain promising and I am encouraged by the renewed growth of our backlog, which is a good sign for the future.

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

(Operator instructions) Daniel Meron, RBC Capital Markets.

A couple of questions on my end. First of all, Yossi, I believe that you mentioned in a press interview three weeks ago that you expect flattish growth in 2010 and continued growth in backlog. Now that you've published the second quarter, it does seem like second-half ramp is going to be pretty steep. What drives your confidence that you will still achieve flattish revenue growth in 2010?

We know how many leads we are currently promoting. We know the interest that customers are -- currently show in our products, and this is why I foresee that the second half of this year will be definitely better than the first half, so this is why I see this flattish year happening.

So you guys are still standing by your expectation of 2010 to mimic the revenue in 2009?

Yes, yes, plus or minus.

Can you define the realms of that? Are we talking plus or minus 3%, or plus or minus 5%? What are the parameters when you say flattish?

I think we are talking about the future thing to be flattish, plus or minus. This is what I can say now.

Okay, that's fair. And then, can you talk a little bit more about the regional dynamics, either through the backlog or how you see the next several quarters shaping up from the regional perspective, Americas, rest of the world, Europe and Israel?

For starters, we estimate we have seen the US proposed budget for 2011, a growth of 5% to 6% in general and slightly higher than that in the areas that are relevant to all of the core businesses. In Europe, we experience quite flat budgets in the defense, while there are countries that are slightly reducing and some of them that are slightly increasing the budgets. In the relevant territories in the Far East and South America, relevant for Elbit, we do see customers increasing defense budgets. Here in Israel, of course, things are rather flat with slow increase. So this is more or less the trend.

In general, I would like to mention that the defense electronics segment of the defense expenditure is usually increasing at a higher rate than the overall defense expenditure worldwide.

And then last one from me -- within the composition of the backlog that increased, what's driving the growth in backlog? And also, is it fair to assume that either the regional or divisional composition of backlog is similar to, say, the last 12 trailing months' performance and mix?

In general, with minor changes, I would say the general trend is more or less as we have experienced in the past.

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 03-925-5901; and internationally, please call 972-3925-5901. A replay of this call will also be available at the Company's website, www.elbitsystems.com.

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

Yes, thank you. I'd like 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. second quarter 2010 results conference call. Thank you for your participation. You may go ahead and disconnect.