Elbit Systems Ltd (ESLT) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems Ltd. second-quarter 2011 results conference call. (Operator Instructions). As a reminder, this conference is being recorded August 16, 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 call. If you have not received a copy of today's release and would like to do so, please call CCG Investor Relations at 1-646-201-2946.

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

Thank you. On behalf of (technical difficulty) I would like to thank Elbit Systems for (technical difficulty) 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 being 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. We will then turn over the call to the question and answer session.

And now I would like to turn over the call to Mr. Gaspar. Yossi, please.

Thank you. Hello, everyone, and thank you for joining us today. Like last quarter we will provide you with both our regular GAAP financial data, as well as certain supplemental non-GAAP information. In light of our increased acquisition activities during 2010, we believe that the presentation of non-GAAP financial measures is particularly beneficial to investors understanding an assessment of the Company's ongoing cooperation and prospects for the future. You can find all the detailed GAAP financial data, as well as the non-GAAP information in today's press release.

[Backlog of orders] in the second quarter marked another improvement in the backlog growing to $5.6 billion, the fifth consecutive quarter of backlog growth. As you can see, this has been feeding through to our results, leading to revenue growth.

I would like to highlight and discuss some of the key figures and trends. Our second-quarter 2011 revenue was $692 million, a 15% increase over the $603 million which we reported in the second quarter of last year.

In terms of revenue breakdown across our areas of operation in the quarter, Airborne Systems was 30%, Land Systems was 14%, C4ISR was 40%, Electro-Optics was 11%, and the rest of the businesses were 5%.

On a geographic basis, the United States was 32% of our revenues, Israel was 27%, Europe was 19%, and the rest of the world was 22%. We do not see the quarterly fluctuations in our revenue breakdown as indicative of any long-term trends. I would like to highlight our healthy geographical spread that allows us to enjoy positive trends in different markets around the world. We did see an improvement in our C4ISR revenues, primarily due to the resumption of revenues from the Watchkeeper project.

On a year-over-year basis, there has been also a trend of reduced sales in Europe and increasing sales in Israel. For the second quarter, our gross margin was 39% as compared to 30.4% reported in the second quarter of last year. The lower gross margin in the quarter was mainly due to a mix of programs sold during the quarter and the lower gross margin contributions from the acquisitions made in the past year. We expect that as we harvest the synergies from the recent acquisitions, the margin in these acquisitions should gradually increase.

The operating income was $52.6 million or 7.6% of revenues compared with $49.1 million or 8.1% of revenues in the second quarter of 2010. Non-GAAP operating income for the second quarter was $67 million, representing a 9.7% margin. This is compared with $66 million or a 9.3% margin in the second quarter of last year. The non-GAAP figure here is particularly important as it shows the healthy trend of improving profitability in our underlying business, excluding mainly the impact of intangible assets related to acquisition activities and gains from changes in [full].

In terms of operating expenses down during the second quarter, our net R&D expenses for the quarter were 8% of our revenue compared with 9.4% last year. The lower R&D margin was due to increased participation of governmental and other parties in our R&D funding in the quarter compared with last year.

Marketing and selling expenses were 8.6% of revenues at the same level as in the second quarter of last year. Our G&A expenses in the second quarter were 5.1% of revenues compared to 5.3% of revenue in the second quarter of last year. Despite our recent acquisitions, we were successful in controlling costs and reducing our G&A margin.

Financial expenses for the second quarter of 2011 were $9.4 million compared with $1 million in the second quarter of last year. The higher level of the financial expenses in the quarter was mainly due to higher currency hedgings, related costs primarily to the weakening of the US dollar compared to the Israeli shekel, and it also included additional costs due to our increased level of debt.

Consolidated net income attributable to Elbit Systems shareholders for the second quarter was $38.9 million or a net margin of 5.6%. This is compared to the net income of $44.8 million or a net margin of 7.4% in the second quarter of 2010. The EBIT earnings-per-share for the second quarter were $0.90 compared with $1.04 for the second quarter of 2010. Our non-GAAP net income, which excludes mainly amortization of intangible assets and the gain from changes in holdings, was $50.4 million compared with $48.7 million in the second quarter of 2010. Non-GAAP EPS for the quarter was $1.16 compared with $1.13 for the second quarter of last year.

Operating cash flow for the quarter was a negative of $23 million compared with $102 million in the second quarter of 2010. The reduction in the operating cash flow is mainly a result of reduced net profit, increased inventories and increased trade receivables.

Our backlog of orders at year-end was $5.65 billion, an increase over the backlog at the end of the prior quarter, which stood at $5.6 billion. As I said earlier, this marked the fifth consecutive quarter increase in backlog.

Approximately 62% of the backlog is scheduled to be performed during the rest of this year and 2012. The majority of the balance is scheduled to be performed in 2013 and 2014.

Finally, the Board of Directors declared a dividend of $0.36 per share for the second quarter of 2011.

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

Thank you. As was mentioned, we are pleased with the continued trend of growth in our results. Our revenues grew over last year, and we also grew our backlog due to an increased level of new orders coming in. This really is a good sign for the coming quarters as we continue to convert this level of record backlog into revenues. The recent acquisitions we have made, while enabling us to grow and expand our business, as well as provide us with significant long-term upside, has the effect of slightly lowering our margins.

As we harbor the synergies over the coming months and we hope to absorb these companies into Elbit, we see many opportunities to rationalize and share costs, as well as enhance information and research across the business. While this takes time, we believe that we will unleash the synergies and bring the model out to the Elbit Systems average as we have done numerous times in the past.

I am also pleased with our year-over-year improvement in net income on a non-GAAP basis, which is amortization of the health and overall improvement in our businesses.

In the past few months, we have won a variety of orders in many different regions. While [some] now face a tougher economic and budget environment, we see significant growth potential throughout the world in many regions, especially Asia Pacific and Latin America.

In Asia we recently won an order to supply the Electro-Optics compact multipurpose advanced satellite system for maritime patrol aircraft. We also won an order to supply another Asian army with advanced training systems for its armor and infantry posts. In South America we had an order for our aerial [client other] unmanned aircraft systems.

Our European market is also performing better. We are pleased that the Watchkeeper project is now back on track and again contributing to our revenues. During the quarter we were chosen to supply a directed infrared countermeasure system for various aerial platforms in the Italian Air Force. In France we won an order to supply personal search and rescue locator beacons. We were also awarded a contract to upgrade the Romanian Air Forces' C-130 Transport Aircraft.

A new area in which we have recently entered is that of establishment of training and simulation centers. We recently signed an agreement for the establishment of a Helicopter Pilot Training Center for Macedonia's Defense and Security Forces. The project, valued at EUR43 million, will be operated under the Private Financing Initiative concept in which Elbit Systems will provide a comprehensive solution, including the setting of a training center, acquisition of aircraft supply, a full [reach] of simulators and operations of the center for a period of eight years. While these type of projects require significant upfront investment, they provide a long-term stream of revenue.

In our local market here in Israel, we received a $40 million follow-on order for the Digital Army Program. The total value is much more than that. It is of $300 million, and those additional orders are due to be received soon.

As you can see, our performance remains a boost in our many geographical end markets. We also look forward to reaping the rewards and extracting the synergies from our recent acquisitions. I believe that in 2011 we will continue to see the fruits of our efforts throughout the year, and I expect we will continue our year-over-year growth.

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

(Operator Instructions). [Tevia Revner], Barclays Capital.

Just a quick question about backlog. They have increased stable compared to last quarter. Can you tell us what current level of backlog means in terms of opportunities for 2012?

Well, from what we see, we do see some improvement compared year over year. When I look at the backlog in the previous year at this point in time and how we can project that for 2011 and compare that to what we have now for 2012, I think we can look with cautious optimism for further growth in the future.

Daniel Meron, RBC Capital Markets.

First of all, a quick follow-up on backlog. I was wondering if the M7 acquisitions or in general the leasing acquisitions further help the backlog, and if so, can you quantify?

M7 acquisition was in late 2010, and whatever backlog they had, which was not really significant, it did add onto our 2010 numbers. Nothing in the 2011 second quarter was affected from a one-time addition. Of course, M7 continues to win business as we have also reported, and that new business entered into the backlog of the overall Corporation.

Okay. Thanks. Now within your growth in 2011 this year, do you still expect growth year over year so ahead of the industry, with the industry? And also in 2012, if you can -- I mean I know you don't quantify, but do you expect yourself -- you were focusing on C4ISR and airborne, etc., do you expect to grow with the industry or faster?

Well, regarding this year, as we have seen, the first consecutive quarter a growth of backlog. By the end of the day, our businesses that when we get an order we can spin it to revenues, and we expect that the second half of the year should be better than the first half of the year in view of the backup that we have.

Overall, compared to the rest of the industries, I would say that some of the advantages that we have is the spread in the various geographical areas worldwide, which, as Mr. Ackerman mentioned earlier, has helped us to compensate any decline in some areas by growth in other areas, especially for Asia Pacific and Latin America as growing areas from that point of view.

Okay. And as far as between the different segments really, the backlog, is it spread out between them, or is there a lot more backlog in, say, C4?

There is no material change from the various areas of operations from what we were accustomed to see over the recent four or five quarters.

Last question for me before I leave the floor, yield the floor, the main growth opportunity as far as regions, I know not to look at the specific quarter, but in general you mentioned a couple of times APAC and Latin America where we were talking about, are there any specific countries you could point to within that, within those regions?

I don't think that we have given a lot of details, but on various occasions we did say that we have quite good positions in South America and in Brazil, which we just several months ago we did release information regarding several contracts and corporations that we have in that country. In Australia we did win a new significant contract back in 2010 in the C4 Command & Control area, which is a totally new market for us, and, of course, the aftermarkets in that region.

Ziv Tal, Oscar Gruss.

Can you give me some color regarding the cash flow from this current quarter?

Cash flow in this quarter was a little bit problematic as you can see from our press release. The reason for that was mainly the increase in the inventories, which were prepared to help in the revenues in the second half of the year. And that, coupled with increasing in payments from customers that are longer-term than usual, has impacted our cash flow. We expect this to be improving over the next several quarters.

So, in the next quarter or the next two quarters, we are going to go back to the same cash flow that we have seen in the past?

Well, I'm not sure about the exact same cash flow, but we definitely will improve.

See if there is any shifting in the model, in the business model that we are going to expect to see?

Well (multiple speakers)

(multiple speakers) -- cash flow?

To some extent. As you know, probably some of our contacts are very long-term contracts. On the air it was mentioned, some of the training centers that we have put up, long-term steady cash flow coming in. But, over a longer period of time, these kind of contracts require an initial investment from point of view of cash from our part to set up the infrastructure and so on. We have several of those types of businesses. We are looking forward for a very successful stream of revenues and cash for several years in the future.

And can we talk about the publication today in the website Israel Defense regarding the file, they want to go back into the unmanned aircraft systems? Did you --?

You need to address that to our [file-up] this year.

Yes. Do you see any competition from those types?

I think that outside of the US there is no room for more companies in that area as it is very, very strong, and heavily established in Israel the majority of these is ours, I would say with more than 8%, and you have heard about our successes in more than 15 countries, including now UK, France, Brazil, Chile and many others. So you need to ask them what is the rationale behind that.

(Operator Instructions). [Bernard Maor], [High Island Share].

Congrats on the results of the quarter. My question is, if you can tell us about the OpEx, which remained rather constrained this quarter, can we expect this level of percentage from revenues to last in the next few quarters, or do you see any fluctuations here?

And the other question is about the recent acquisitions of ITL or Azimuth and Pearls of Wisdom. How do you see the integration in the R&D of these companies? Do you see -- when do you expect to see synergies from these acquisitions or a transformation of these technologies and these new technologies into revenues?

Regarding your first question regarding operating expenses, I think a more representative number would be an average of the last three to four quarters. We definitely have constrained our operating expenses. We are working very hard in lowering mainly the G&A expenses related with the recent acquisitions we did last year, and the marketing still very important to develop the future business. But, as a percentage of our revenues, I think the more representative number would be an average of the last several quarters.

Regarding Azimuth and ITL, Azimuth is a little bit earlier acquisition beginning at the beginning of 2010. I can say that it is fully integrated and consolidated in our businesses, including especially our Electro-Optics division, working very well and already generating a lot of synergy with the rest of the business.

ITL is a rather new acquisition. By the end of 2010, I think we have some more steps to grow in order to completely integrate that. But we did see quite a lot of synergy built around that integration with -- especially with our Electro-Optics division.

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 the call will also be available on the Company's website, www.elbitsystems.com.

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

Yes, thank you. 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 good-bye.

Thank you. This concludes the Elbit Systems Ltd. second-quarter 2011 results conference call. Thank you for your participation. You may go ahead and disconnect.