Elbit Systems Ltd (ESLT) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems Ltd. third-quarter 2010 results conference call. (Operator Instructions). As a reminder, this conference is being recorded November 16, 2010. I would now like to turn over the call to Mr. Kenny Green of CCG Investor Relations. Mr. Green, please go ahead.

Thank you, operator, and good day to 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; 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 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 now turn 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 third-quarter 2010 revenues were $649.9 million, a decline of 11% year-over-year. The decline in the third quarter of 2010 can be attributed to the slowdown in the growth our backlog, which occurred last year, which has followed through into our current revenue levels.

I should note though that in 2010 our backlog has grown again, and on a sequential basis we grew our revenues compared with the previous quarters of this year.

The decline was mainly in armored vehicles and Electro-Optics, while Airborne Systems grew strongly. In addition, on a geographical basis there was a decline of revenues coming from Europe. We see tighter end markets, which is leading to 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 Systems was 15%; C4ISR was 41%; Electro-Optics, 11%; and the rest was 3%. On a geographic basis the United States accounted for 29% of our revenues, Israel was 28%, Europe was 18%, and the rest of the world was 25%.

For the third quarter of 2010 our gross margin was 30.5% compared with 29.7% in the third quarter last year. The improvement in gross margin compared with that of the past year was mainly due to product mix sold in the quarter, but also due to careful control of costs. We are pleased that despite the lower level of revenues in the quarter we were able to maintain and even improve our gross margins in this quarter.

Operating income in the third quarter was $52.4 million, representing an 8.1% margin. This is compared with $65.7 million or a 9% margin in the third quarter of last year.

In terms of operating expense breakdown during the quarter, our net R&D expenses for the quarter were 8.6% of revenues compared with 7.6% in the third quarter of last year, and was slightly higher on an absolute basis.

Marketing and sales expenses were 9.1% of revenues in the quarter compared with 9.2% in the third quarter of last year. On an absolute basis marketing expenses were lower compared with those of the corresponding quarter last year.

Our G&A expenses in the quarter were 4.7% of revenues compared with 3.9% of revenues in the third quarter of last year. On an absolute basis G&A expenses were $1.7 million higher compared with those of last year. The high rate of G&A expenses was mainly a result of lower revenues and additional G&A expenses related to our acquisitions of BVR and Azimuth.

Financial expenses for the quarter were $5.5 million. This is compared with a financial expense of $0.6 million in the third quarter of last year, which was unusually low in that quarter due to currency hedging related gains.

The net income attributable to the non-controlling interest was $3.9 million this quarter compared to $6.2 million in the third quarter of last year.

Consolidated net income for the third quarter was $46.4 million or a net margin of 7.1%. This is a 22% decline from the net income of $59.6 million or a net margin of 8% in the third quarter of 2009. The main reason for this decline is the lower revenue level in this quarter.

Diluted earnings per share for the third quarter of 2010 where $1.05 compared to $1.35 for the third quarter of 2009.

Our backlog of orders at the end of the third quarter of 2010 was $5.38 billion, slightly higher than the $5.35 billion reported as of June 30, 2010. Backlog has improved from the $5.04 billion as of the end of last year. This quarter marks three consecutive quarters of backlog growth.

Approximately 52% of the backlog is scheduled to be performed during the last quarter of 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 nine months of 2010 was $73.6 million compared with $127 million -- the same $127 million in the same period in 2009.

The main reason for the lower level of operating cash flow was the reduced level of revenues and advances on new contracts, combined with the timing of advances and payments. We expect that over a longer period operating cash flow will catch up with the profit figures.

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

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

Thank you, Yossi. 2010 has been a challenging year in a decade of growth for Elbit Systems. The tightening that we all saw in the defense market led to the lack of growth in backlog last year, which influenced the sales in 2010.

Nevertheless, over the past few months we focused on adjusting our business to the current circumstances. I'm encouraged that we are able to maintain our gross margins despite weaker revenues, as well as an improvement in backlog compared with the end of last year.

While last year was a quieter year for M&A, this year we have been more active, making a number of acquisitions that can provide long-term upside with synergies adding far more than just the addition of their current revenue to ours.

We bought three Israel-based companies, Soltam, Saymar and ITL from Mikal. Soltam opens up a new market for us of artillery systems. Today mortar and artillery are increasingly sold as part of an integrated solution combined with command-and-control and target acquisitions.

The combination of Soltam and Elbit unleashes significant business opportunities for bringing different technologies together to create new platforms and fully integrated end-to-end solutions to our customers.

Saymar provides upgrades and modernization of light and medium armored vehicles. We see many areas in which Saymar complements our existing armored vehicle system business.

This followed the two acquisitions made last quarter data, that of Azimuth, a company with strong ability in navigation and targeting system, as well as BVR, providing us with additional competencies in training and simulation.

We believe all these acquisitions provide access to new markets and allow us to be more attractive to our customers. It also provide us with opportunities for harvesting significant technological and product synergies across the entire Company.

While the recent acquisitions were made in Israel, we also continue to look globally for acquisition opportunities. We are focused on finding and acquiring new capabilities in our core markets which will strengthen our competitive positioning in those areas.

At the same time, we are also investing internally in R&D. Our current run rate is over $0.25 billion per year, a significant amount for any company. These investments allow us to both develop new technologies, as well as find ways to leverage and integrate our diverse range of existing technologies and bring new product and solutions to the market.

In summary, while 2010 has proven to be slower than our initial expectations, I strongly believe that Elbit Systems remains well-positioned strategically, operationally and financially. The long-term prospects for the Company and our industry remain promising. We have time and again demonstrated that we know how to create significant value for our customers and ultimately our shareholders.

With that, I would like to open the call for questions and answers. Please.

(Operator Instructions). Gilad Alper, Meitav.

Thanks for taking my call. Can you guys comment on the development of operational margin going into 2011? We have seen a decrease over the last year, I think, mainly because of an increase in R&D expenses. Should we continue and see the same trend also in 2011 or should the margins basically stabilize it where it is now?

Secondly, if you can tell us what kind of tax rate we model in 2011. Thanks.

Looking into 2011, I think we are going to benefit from the improvements in the operations that we have done during 2009 and 2010. I expect roughly speaking we would expect similar lines in terms of margins. Although, if we will encounter any acquisitions then we will have to see what the margins of those acquisitions are and combine them with our business, and definitely they will result in a cumulative situation.

Regarding the tax rate, yes, we consistently have been able to improve our tax rate over the years. The tax rate of this quarter, as any other things, are not very representative on a long-term basis. However, if you look at our tax rate for the last four or five quarters and you take an average on that, I think it is representative going forward.

Okay, thanks.

Joseph Wolf, Barclays Capital.

Hi, good afternoon everyone. My name is [Tevia Revner]. A quick question on behalf of Joseph Wolf. Since October Elbit has announced contract wins in multiple geographies. Can you address the competitive landscape globally as competitors also try and increase exposure (inaudible) of their own markets?

As of competitiveness of Elbit, what we have demonstrated that we are very good at areas of defense electronics. When we see, despite the fact that budget being flattened, is countries are looking for more and more defense electronic type of products, and this is what Elbit has been doing along the years.

But more so customers are looking for a one-stop shop. I mean if they want a solution, they want all of the solution, all of the technology to come from one home. Elbit, after all the acquisition and R&D we made in the last decade, we are this kind of a company that can offer the variety of solutions to our customers, and we benefit from that.

Thank you.

Doug Rosenberg, RBC Capital Markets.

Hi, thanks. My first question is on the different segments. I sort of feel jumping around a lot like C4ISR is up and airborne is up this quarter. Where do you see -- how do you see that landing looking ahead?

Well, I would say that a quarterly result of any of these parameters in the various segments, as of operation I would say, is not very representative. We should look in a general longer-term basis on the trend of each of them.

However having said that, we do see a nice growth in the airborne business in our Company, although internationally or worldwide the airborne market, I wouldn't say it is growing very strongly. But we were successful in penetrating in various new areas, one of them what I would give an example, training and simulation, with the acquisition of BVR last year. And the development of new technologies and products, that is an area that helped us grow the business. And we see some others -- similar ones in the airborne business.

In addition to that, C4ISR worldwide growing; command-and-control systems, communication systems, unmanned platforms and so on definitely growing the demand of that. I would say in Electro-optics a niche of night fighting, night vision equipment and so on is also something that we are looking growth areas.

I see. Thanks. My next question is on -- you mentioned a bunch of the M&A from recent -- when do you expect them to be accretive?

I would say that the ones that we have acquired in 2008 and before are definitely accretive already. The ones that we did in 2009 I think we have a fast breakeven point. And actually in 2010 we didn't do a lot of acquisitions.

Okay. But the ones that you did do in 2010, you expect them by early 2011 or --?

Yes, yes. I think very good acquisitions and we see the results of that in 2011 already.

Okay, thanks. Just the DSOs. I didn't see -- can you tell me what they were?

I really don't have the number here with me. But if you -- but I will be able to send it to you.

Okay, thank you very much.

[Ella Freid], [Laramie Bank].

Good afternoon. Would you say that from what you see of the industry is most of the revenue decline behind us, or should we expect a further decline in 2011?

I can talk only what have been shown for our industries, and most companies in the first marketplace showed a decline in 2010. But as of 2011 for our Company, Elbit Systems, I expect to see higher sales in 2011 than in 2010.

Thank you.

(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 in 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 9723-925-5901. A replay of the call will also be available on the Company's website, www.ElbitSystems.com.

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

Yes. I would like to take this opportunity to thank all of our employees for their devotion to our Company, which provide the basis for our continued success in the future. And to everyone on this call, thank you for joining us today and for your continued support and interest in our Company. Have a good day and goodbye.

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