Elbit Systems Ltd (ESLT) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems Ltd. fourth-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 March 15th, 2011.

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. If you've not received a copy of today's release and would like to do so, please refer to Elbit Systems website, www.elbitsystems.com, or call CCG Investor Relations, 1-646-201-9246 or 9723-607-417.

I would now like to hand over the call to Mr. Kenny Green of CCG Investor Relations. Mr. Green, would you like to 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; and Mr. Yossi Gaspar, Elbit Systems Chief Financial Officer.

Yossi 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 the call over 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 hand the call over to Mr. Yossi Gaspar. Yossi, go ahead please.

Thank you, Kenny. Hello everyone and thank you for joining. Today, we have for the first time provided you with our regular GAAP information as well as certain supplement on non-GAAP financial data. In light of our increased acquisition activities during 2010, we believe that the presentation of non-GAAP financial measures will be beneficial to investors understanding and assessment of the Company's ongoing cooperations and prospects for the future.

Non-GAAP information is also used internally by management to make decisions, forecasts, future results and evaluate the Company's current performance. In arriving at the Company's non-GAAP presentation, we have made the following adjustments.

One, amortization of purchased intangible assets. Two, significant reorganization, restructuring and other related expenses. Three, impairment of investments, including impairment of auction rate securities. Four, gain from changes in holdings, including the revaluation of the previously held shares at the acquisition date when a business combination is achieved, meaning, step up. And five, the incoming tax effect of the foregoing. You can find all the detailed GAAP information as well as the non-GAAP financial data in today's press release.

We are also filing today our annual report on the Form 20-F, and this year, we will also be making our financial statement's information available for the first time on the XBRL format.

Although 2010 was a challenging year for us in many respects, the final quarter of 2010 represents a return to revenue and backlog growth. I will now highlight and discuss some of the key figures and trends.

Our fourth-quarter 2010 revenues were $799 million, growing 4% year over year. For 2010 as a whole, we reported revenues of $2.67 billion, a 5.7% year-over-year decrease. In terms of revenue breakdown across our areas of operation in the quarter, airborne systems was 30%; land vehicle systems was 13%; C4ISR was 38%; electro-optics, 14%; and the rest was 5%.

On a geographic basis in the fourth quarter, we were relatively evenly spread, which we believe reduces the risk to our business. The United States remained our largest region at 32% of revenues; Europe was 20%; Israel 24%; and the rest of the world was 24%.

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 the airborne area of operations as well as growing sales to the United States and Israel and a decrease to Europe.

For the fourth quarter, our gross margin was 29% compared with 29.7% as reported in the fourth quarter last year. The cost of goods in the fourth quarter included a write-off of inventory of approximately $13 million as a result of the acquisitions in that quarter. For the year as a whole, our gross margin was 29.9%, almost at the same level as the 30% reported last year.

I would note that on a non-GAAP basis, which excludes amortization of purchased intangible assets and restructuring and reorganization expenses related to our acquisitions, our gross margin for the year has improved to 31.3% in 2010 versus 30.8% last year.

Operating income for the fourth quarter was $56.7 million, representing a 7.1% margin. This is compared with $58.3 million or 8.2% margin in the fourth quarter of last year. For the full year, our operating income was $207.4 million, a margin of 7.8%, compared with $262.4 million or a margin of 9.3% last year.

On a non-GAAP basis, which exclude amortization of purchased intangible assets totaling at $47.7 million, reorganization and restructuring expenses of $16.4 million, as well as an impairment of investments totaling $1.3 million which were offset by a gain from changes in holdings of $4.8 million, operating income was $268 million representing a 10% margin, compared with non-GAAP operating income of $308 million or a 10.9% margin last year.

In terms of operating expense breakdown during the fourth quarter, our net R&D expenses for the quarter were 8.6% of our revenues, compared to 8.7% last year. For the full year, our net R&D expenses were 8.8% of revenues, compared to 7.7% of our revenues in 2009. The increase is primarily due to an increase in R&D purchased on an absolute basis combined with lower level of revenues.

Marketing and selling expenses were 8.2% of revenues in the quarter compared with 8.3% in the fourth quarter of last year. For the full year, our M&S expenses were 8.6% of revenues compared to 8.9% of revenues in 2009.

Our G&A expenses in the fourth quarter were 5.1% of revenues compared with 4.5% of revenues in the fourth quarter last year. G&A expenses for the full year were 4.9% of revenues in 2010, compared with 4.2% of revenues in 2009. Our G&A expenses were higher, primarily due to added G&A expenses from our recent acquisitions.

Financial expenses in the fourth quarter of 2010 were $11.6 million compared with $7.4 million in the fourth quarter of last year. The high level of financial expenses in the quarter included interest payments, following the bond issue we executed in Israel in the second quarter of 2010.

In addition, financial expenses in the fourth quarter of 2009 were relatively low due to the currency hedging related gains. For 2010, our financial expenses for the full year were $21.3 million compared with $15.6 million in 2009.

The affiliates, which we do not consolidate, contributed $6.1 million to the net income in the quarter. This compared to $4.9 million in the fourth quarter of last year. For the full year, these affiliates contributed $19.3 million in 2010, as the same level of last year.

Consolidated net income for the fourth quarter was $43.7 million or a net margin of 5.5%. This is compared with a net income of $53.7 million or a net margin of 7.5% in the fourth quarter of 2009.

Diluted earnings per share for the fourth quarter were $1.01 compared with $1.24 for the fourth quarter of 2009. For the full year, consolidated net income was $183.5 million, a net margin of 6.9%, compared with $214.9 million or a net margin of 7.6% in 2009. Diluted net earnings per share for 2010 were $4.25 compared with $5 in 2009.

On a non-GAAP basis, which includes all the above mentioned items as well as gain from charges in holdings and related tax benefits, our net income in 2010 was $222 million or 8.3% of revenues, representing diluted earnings per share of $5.1. This is compared with non-GAAP net income last year of $250 million or 8.8% of revenues, representing diluted earnings per share of $5.8.

Our backlog of orders at year end was over $5.45 billion, slightly higher than the backlog at the end of the prior quarter, which stood at $5.38 billion and over $400 million higher or 8% than the backlog at the end of the previous year.

Approximately 72% of the backlog is scheduled to be performed during 2011 and 2012. The majority of the balance is scheduled to be performed in 2013 and '14.

Operating cash flow for the year ended 31st of December 2010 was $184.9 million compared to $209.7 million in the previous year.

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

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

Thank you, Yossi. From a financial perspective, 2010 was a challenging year in which we saw a year-over-year revenue decline. However, I'm pleased that our backlog resumed its growth in 2010, and in the fourth quarter, we managed to deliver a good level of revenues, while still growing our backlog due to an increased level of new orders coming in.

I'm also encouraged that despite the revenue level in 2010, we were still able to maintain our gross margins at the current high levels of around 30%.

Most important for 2010, however, was the solid execution of our M&A strategy, supporting our long-term goals. It marks a year of building on our internal competencies while acquiring complimentary technologies and broadening our offering to the defense market.

We were very active in this regard in 2010, making a number of acquisition that can provide significant long-term upside with [the very good] synergies adding far more to Elbit than just adding their current revenue to ours.

Given the fact that all the acquisition happened in the past three quarters; that is Azimuth in Q2; Soltam, Saymar and ITL in Q3; and in Q4, three acquisition, including M7 in the US and Ares in Brazil, it has notably increased our operation -- operating cost, both due to the operating cost structure as well as some of the cost involved in the acquisition process.

As we begin to exploit the combined synergy between the Elbit system organization and this group of new acquisitions, we believe that just as we have done successfully so many times in the past, we will be able to use the combined resources more efficiently and will improve our operating margins. The companies we have purchased in the past year opened a number of new doors for us.

First, they add additional R&D resources in a number of new areas which can potentially be beneficial across the entire breadth of our operations. As an example, we have gained some strong expertise in IP, in areas such as micro-sensor, which we leverage across many areas of our businesses. The acquisition also expands our sales and marketing organization, adding new sale channels and the widening geographic sales footprint.

Second, it propels and expands our presence in three main areas of electronic defense, namely -- which are, one, Training and Simulation of electro-optics through BVR in 2009 and Azimuth in 2010. Second, Artillery through Soltam; and third, MRO, maintenance repair operations, through M7 in United States. We expect that these businesses will more significantly contribute to our growth in the coming years.

Finally, we have expanded into strategic regions, most notably further expansion in Brazil through our acquisition in the fourth quarter of Ares and Periscopio.

Earlier in this year, we also established our Company in Australia, and have won a major order of around $300 million with the Australian DOD for a C4I system. At the same time, we're investing externally. We're also investing internally in research and development. And on a gross basis, our current run rate is over $0.25 million per year.

These investments enable us to both develop new technologies, as well as find ways to leverage and integrate our diverse range of existing technologies and continuously bring new products and platform to the market.

Our R&D investments over past years are our greatest assets, providing for our ongoing and long-term leadership in the electronic defense industry.

Looking ahead to 2011, we aim to work hard in assimilating our new acquisition into the Elbit family and look forward to the value creation and improved margins as we begin to realize some of the synergies.

Our steady increase in backlog over the past three quarters as well as our improvement in fourth quarter revenues is a positive sign for the future. So, overall, I believe, as a Company, we remain well positioned strategically, operationally and financially. And with that, I would like to open the call for questions and answers, please.

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

Daniel Meron, RBC Capital Markets.

Hello, Yossi. A question regarding the synergies of the recent acquisitions. When do you think you'll be able to start realizing them in a more meaningful fashion on the top line?

In recent experience that we have, we see synergy being affected -- I mean, I would say, after a year or so.

Okay. And then when it comes to the bottom line, is any of these acquisitions --?

Yes, yes, down to the bottom line. It takes a year and we see the impact.

Okay. And then, can you provide us with a sense on the impact of the recent turmoil in the Middle East and how it impacts some of the investments, either in Europe or in Israel on descending?

We haven't seen any negative impact from what's happening in the Middle East, and we're still evaluating whether we will see a positive one.

Yes, my question was more towards the positive. I mean, you guys have a lot of [insurgent] solutions that I thought will be even more in demand given the recent events.

But this is exactly what I said. I mean that we expect to see positive impact, but we haven't seen it yet.

Okay, so this is something that we should see over, you think, quarters or is it something that will be reflected in orders in the next several years?

No, I cannot tell. But what I expect that it will -- we will see a positive impact on us, but I cannot tell you when this will happen.

Okay, thank you, Yossi. And then last one from me. On the competitive front, did you see any change in the competitive dynamics because of the tightening budgets as far as more competitors trying to move into areas that they've avoided so far?

On one hand, yes, we do see the big clients trying to get into our historical line of businesses. However, we found out, and they found out, that it is very difficult for big, I mean, huge companies to get into the defense electronic area, and they cannot be competitive in that. So, as of now, we have not been affected.

On the other hand, I can say that, yes, in some areas, we do see, I would say, a declining budget in defense. But when we look at on our niche, I mean, defense electronics, this line of business we still see this growing in the near future.

Okay, very good. Thank you, Yossi. Good luck.

[Zar Penativ], Oscar Gruss.

Could you elaborate on the business environment and the growth factors that you see in the Company right now?

Could you please elaborate a little bit the question?

I asked if you could -- could you elaborate on the business environment -- the recent business environment changes and the growth factors.

What I can say that in -- maybe I give -- I'll try to do it shortly. But in United States and West Europe, we do see some budget constraints to buying big platforms, but in areas of defense electronics, it's somehow stable. In other areas like Brazil, Australia, India and other countries, we see a growth in their defense spending. This is for --

I'm asking about the cycle, the marketing cycle. How long does it take to purchase a deal, something like that?

Yes, it's -- maybe if you would.

Well, maybe I'll try to answer that one. We did say probably for the last four to six quarters that we have seen longer marketing cycles, longer time that it takes customers to make decisions.

A very important part of that decision process is that the customer really sees by with his eyes and operates the equipment that he intends to buy in his environment, in his territory, by his operators. And all of that, of course, takes more and more time. This process goes on for the last probably four, six, maybe eight quarters, and we don't see that it has changed recently.

Should it affect your margin?

Not really. What we have experienced is that over -- in this new environment, we do have a higher R&D and marketing expenses, which are -- which can be seen in our financial reports, on one hand. On the other hand, once the contracts are signed and under performance, then some of the research and development part of that contract has already been done, and it's a more easy transition to production and delivery to customer. Therefore, from point of view of gross margins, it may even act on the other way.

Okay. And now, can you talk about the growth factors geographically?

Well, geographically, as Mr. Ackerman addressed it previously, in the US, it looks like that our niche of business is continuing to grow, although relatively small growth, several percentages per year. And being positioned on selective platforms that the DOD is continuing to buy and fund, it looks like that our business in that territory will be rather stable, at least the way we see it.

In Israel, we have our part in the market and we don't expect it to diminish. I think it will grow proportionally and on an absolute basis as well.

Europe is more or less acting like the US, maybe with a slight budget reduction. But our programs, like in the UK, the Watchkeeper Program, is solid, and we feel comfortable with that one. The rest of the world, the Far East and South America, we see growing defense expenditures and we feel ourselves well positioned to take significant part in that.

Do you see the budget increase in Brazil due to the Olympic game and the World Cup game over there?

There are homeland security budgets allocated in that area. We feel that we have relevant solutions for these kinds of needs, and we hope that we'll be successful in gaining business in that area.

Okay, thank you very much.

Thanks.

Joseph Wolf, Barclays Capital.

Just -- it was a continuation, I think, of a prior question. But I'm wondering if you could go into a little bit of detail given the acquisitions that you've been doing and talk a little bit about pricing for companies, the competitive environment, and growth versus greenfield, buying versus building, specifically in Australia and Brazil.

Talking about the first item you mentioned, we did see in overall a slight decline in the pricing of acquisitions in the last year in the US. We do see the various multiples of the defense companies. However, having said that, still in selected targets, we do see relatively high multiples in the US.

We were successful in our acquisition in the US, the M7 Aerospace company, which is in the MRO business. I think it brings some quality business niche for us, and we'll definitely be able to build synergy. And the multiples that we bought it for are quite good and we are happy with that deal and looking forward to get the return on that investment quite quickly.

Other things that we have bought here in Israel, Soltam and ITL and the other companies, we feel comfortable with that acquisition and definitely it opens out for us a totally new branch of business which are artillery systems -- integrated artillery systems, integrated artillery solutions, that we did not have that in the past, and we expect to grow that business quite nicely in the future. So that is -- does that answer your question?

Yes, also just the buy versus build in emerging economies or emerging opportunities that were gone through, Brazil and Australia in particular?

Our strategy is that in most of our strategic markets, we are looking to have a local industry, having industrial subsidiary in that market in order to provide service products and support to our customers.

And that's not only jobs in that territory, but also localization of production, transfer of the technology to that territory, so that our customers feel comfortable with supplies from their own country.

Along that strategy, whenever we feel that one of our customers, strategic customers, is in need of equipment or technology, that's more or less the way we go. While most of the technology and products are developed here in Israel, they're transferred to that territory and support is given to the customers. So, this is the strategy.

In some cases, just to complement on that, we buy companies, existing companies, in our area of business, which actually shortens the cycle that I was talking before. And in some cases, we establish new operations, like we did in Australia, in order to support the customer requirement.

Okay, thank you.

(Operator Instructions)

There are no further questions at this time. Before I ask Mr. Ackerman to go ahead with his closing statements, 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 1-888-269-0005; in Israel, please call 03-925-5921; and internationally, please call 9723-925-5921. A replay of the call should be available on the Company's website, www.elbitsytems.com.

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

Yes, thank you. I would 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. fourth-quarter 2010 results conference call. Thank you for your participation. You may go ahead and disconnect.