Elbit Systems Ltd (ESLT) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems Ltd. first-quarter 2012 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 a reminder, this conference is being recorded May 15, 2012. 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, and good day, everybody. 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'll 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 content of this conference call. And with that, I would now like to turn the call to Yossi. Yossi, Please?

Thank you, Ehud. Hello, everyone, and thank you for joining us today. We will provide you with both our regular GAAP financial data as well as certain supplemental non-GAAP information. You can find all the details in today's press release.

Our results of the first quarter mark an improvement over the last year's results with growth in both our top and bottom lines. I will now highlight and discuss some of the key figures and trends.

Our first quarter's 2012 revenues were $691 million, 11% higher than the $620 million which we reported in the first quarter of last year. In terms of revenue breakdown across our areas of operation in the quarter, Airborne Systems was 41%, Land Systems was 13%, C4ISR was 32%, Electro-Optics 10% and the rest was 4%. These are similar percentages to those of last year.

On a geographic basis, the United States remained our largest region at 31% of our revenues. Israel was 20%, Europe was 17% and the rest of the world was 32%. 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 rest of the world, particularly Asia-Pacific and Latin America, where defense budgets are growing. And there was a decrease in sales in Israel as some of the larger projects, such as the Digital Army Project, are in a transition phase.

For the first quarter, our gross margin was 28.3%, below the 29.9% we reported in the first quarter of last year. The change is a result of the higher competitive environment we operate in. Operating income for the first quarter was $41.7 million, representing a 6% margin. This is a year-over-year growth of 2% in the dollar amount of the operating income compared to the $40.9 million or 6.6% margin as reported in the first quarter of last year. The non-GAAP operating income was $53.9 million or 7.8% compared to $54.9 million or 8.9% in the first quarter of 2011.

In terms of operating expense breakdown, during the first quarter, our net R&D expense for the quarter was 8.5% of our revenues compared to 8.7% last year. Marketing and selling expenses were 8.9% of revenues in the quarter, similar to the first quarter of last year. Our G&A expenses in the first quarter were reduced to 4.9% of revenues compared to 5.7% of revenues in the first quarter of last year. Financial expenses for the first quarter of 2012 were $7.8 million compared with $10.7 million in the first quarter of last year, which included at that time relatively high expenses related to currency hedging activities.

The affiliates, which we do not consolidate, contributed $4 million to the net income in the quarter, of which $1.6 million is related to capital gains as a result of sale holdings in affiliated company compared to $3.7 million in the first quarter of last year. Consolidated net income attributable to the Elbit Systems shareholders increased by 17.7% to $32.9 million, or a net margin of 4.8%. This is compared with a net income of $27.9 million or net margin of 4.5% in the first quarter of 2011.

Diluted earnings per share for the first quarter were $0.77 compared with $0.65 for the first quarter of last year. Our non-GAAP net income was $40.8 million, or 5.9%, compared with $38.6 million, or 6.2% in first quarter of 2011. Non-GAAP EPS for the quarter was $0.96 compared with $0.90 for the first quarter of last year.

Our operating cash flow for the quarter was $51.8 million compared to $40.1 million in the first quarter of 2011. Our backlog of orders as of March 31, 2012 was over $5.45 billion, a slight decrease from the backlog at the end of the prior quarter, which stood at $5.53 billion.

Approximately 71% of the backlog is scheduled to be performed during the rest of 2012 and 2013. The majority of the balance is scheduled to be performed in 2014 and 2015.

Finally, the Board of Directors declared a dividend of $0.30 per share for the first quarter of this year.

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

Thank you, Yossi. After a challenging end to last year, I am happy to report a solid quarter for the beginning of 2012. Our results demonstrated improved revenues with higher cost of goods but lower operating expenses and improved net income over last year. While our backlog has dropped marginally, largely because of the relatively higher level of revenue this quarter, the general trend of a long-term increase in the backlog as well as revenues still holds true.

I'm pleased with our year-over-year revenue growth, which put us on track for a solid year at Elbit Systems. As you have seen in our results today, much of this revenue growth came from outside our traditional market of Israel, Europe and the United States. In particular, we saw an increasing portion of revenues from markets such as Latin America and Asia Pacific, geographic areas with many emerging and vibrant economies with growing defense needs. Over the past few months, we have announced a number of projects in these regions. Let me give you some examples.

We won a $15 million project with an Asian government for our Wise Intelligence Technology systems. One more is a $25 million contract in Brazil for a self protection suite, a directional infrared countermeasure system and a pilot orientation header display for the new KC-390 military transport aircraft. These wins followed our earlier selection as the provider of the mission computer for the new jet. And more, it's a $50 million project elsewhere in Latin America also to supply our Hermes 900 unmanned aircraft system for perimeter security missions.

Many of these countries in these regions have diverse and growing defense markets driven by growing defense budgets. Brazil, specifically, remains a market with significant potential for our Company, and I'm very happy with how our Brazilian subsidiaries have progressed over the past few years. I would like to stress that I continue to believe that in year 2012, we will begin to see the impact of our ongoing efforts over recent years and our revenue growth in the first quarter goes part of the way in confirming this.

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

(Operator instructions) Yoav Burgan, Poalim Sahar.

Thank you. I have two to three questions. First is on your gross margin -- and I'm referring to your non-GAAP gross margin -- it seems that the recovery, when I compare to your very low Q4 gross margins, was pretty steep, was pretty sharp. Now, if I look at your current 29%-29.1% non-GAAP gross margin, is this something that you feel confident or comfortable looking forward? Or was this maybe partially positively impacted by any kind of short-term orders or factors within the first quarter?

The first quarter of last year gross margin was impacted by a mix of programs sold in that quarter, and also by a one-time hit because of write-offs that we had with -- related to one of our programs that were terminated. And we explained that during the first quarter. The 25%-26% gross margin of the first quarter of last year was not and is not indicative of our gross margin rate, in general.

The present gross margin that we see for this quarter is more in line with the level of gross margin of our business. We do not give forecasts or guidance, as you know, but I would say that the numbers of this quarter are more in line with our business.

Okay, and my second question is on your backlog. It seems that the backlog has pretty much stabilized on the $5.5 billion level. Should we still anticipate some kind of growth looking forward throughout the year? Or, given your current business environment, we should still expect some kind of stagnation?

It's Yossi. We are all aware of the trend in the defense budgets. However, I'm very pleased with the leads or the prospect that we have in our channels. And I think there is a good potential that, at the end of the year the level will be higher than the end of 2011. However, I want to stress that, yes, we are more, maybe, selective in pursuing businesses due to our need for profit. And we don't take all, and you'll see the results in the bottom line.

Okay, good. And my last question -- it seems recently, there seems to be some headlines regarding the disruption of your labor relations within Elisra. Should we expect any kind of material impact on your Q2 results?

No, no, I don't think so. I think that, yes, we did have this strike. But some other people still continue to work and I don't anticipate any major impact on that strike.

Okay, great, thank you very much.

Joseph Wolf, Barclays Capital.

Thanks, a couple of questions. The first is on you mentioned that the gross margin was impacted by the competitive environment. And I'm wondering if you could go a little bit deeper into that. What's the competition like right now in the markets that you're growing fastest, such as Brazil and the Asia-Pacific? Has the competition reached those places yet, or is it the same -- or is it a little bit more competitive in the United States and Europe?

You know that always we see competition. The competitive advantage is due to the technology that we are bringing to the marketplace and how early we identify those other markets. And if you take Brazil as an example, we are there for more than 15 years. We have acquired three companies there. And now, when the government decided to significantly increase the defense spending, definitely Elbit is well-positioned there. And we see the result, and I think we are getting a very significant program over there.

So yes, there is competition. But they are relatively late. It's more difficult for them to get into that market there. But we also -- always, we need to be very careful and to retain our advantage there.

Is that affecting pricing, though?

It may affect pricing, it may. But in parallel to their needs to buy in more affordable prices, what Elbit is doing is always coming with a next-generation technology which justify higher cost, and also looking inside the Company to see how we can reduce the cost to comply with those new numbers. But in places where you have this kind of an advantage, the need to lower cost is lower.

Understood. And then you mentioned that -- I guess in your closing statement, and I think it was in the press release, that your ongoing efforts should meet 2012, where you'll see the positive impact of ongoing efforts. Could you just go into that a little bit? Do you mean in terms of revenues, geographic positioning, internal cost plans that are going to mean margins are going to rise even in a tough environment for spending? Could you be just a little bit more on that comment?

I'll give you a few examples. One is, we have decided not to get into the platform business, but to stay with defense electronics, being intelligence, being unmanned vehicles, being software, being Electro-Optics and so forth. And the fact is that now we see more needs in those areas, despite the reduction that we see in the defense spending. So we are leveraging that.

Secondly, all the M&As that we did in the last 10 years, which made us as a local industry in those areas. And now, when governments are willing to spend money more in their own businesses, and we are perceived to be a domestic business, we are, again, taking advantage of that. And talk about efficiency -- this year, we'll end up with, I would say, 500 people less than the end of previous one. So these are significant cost saving in that. So all this together, I think, will bring us to a better year, due to what we have been doing in the last few years.

Okay, great, thank you.

Daniel Meron, RBC.

So congrats on the rebound here, in the margins from the fourth quarter dip. So when it comes to the statement you made about the business trends in Latin America, Asia Pacific, etc., how is that reflected in either bookings or backlog? Is it materially different than the quarterly performance we've seen last several reports?

I think what we've said already is that, in the pipeline, we have this number of qualified leads that we are currently pursuing, and in those areas more than in the past. And this will compensate all, I would say, negative trends that we may see in Europe. And, yes, we see more business in those areas. And, fortunately, or smartly for us, we have prepared ourselves to that. And so we do have already presence in Australia, in Brazil, in Korea, India and other places where the budget is actually growing. And so I foresee some good results in those places.

Okay, that's encouraging, Yossi. And as we look into your position versus your competitors', you guys were, I'd say, ahead of the curve looking into these markets, emerging markets. Where do you see Elbit's performance versus your competitors' or the industry? What is the benchmark that we should be looking at, meaning where does the Elbit see its growth versus the industry? And what's the benchmark that you think is the relevant one for you guys, be it the industry as a whole or the defense electronics one?

I think that, in the defense electronics business sectors, in those areas that we have mentioned, I think that we'll do better than the peers.

Even within the defense electronics segment?

Yes.

Okay.

Maybe -- I would like to be more accurate and talk about those areas that we have mentioned.

Okay. So just as a follow-up to that, can you try and provide us with a little bit more insight to which segments of your business -- aside from the geographies, you guys are active in many segments. So which ones of those do you see as more promising ones, at least based on the feedback that you're getting from your customers these days?

I think that we see, I would say, an equal, let's say -- let's go over what Elbit is going to be doing. So we do Electro-Optics, we get intelligence, we do command and control, we do radio, we do unmanned vehicles, we do avionics. This is the needs in all of the market places. So I cannot see any difference between all those, and they are sometimes combined together. So the growth rate, I think, will be somehow equal.

Okay. How would you characterize -- and that's my last question. How would you characterize your integrated versus discrete components sales, meaning do you see yourselves more in turnkey or offerings that provide a broader suite of your solutions, rather than discrete segments of your solutions and projects? Is that a fair statement?

Yes, that's a very, very good point, I must say. What we see now is that the customer wants to see us as a one-stop shop. And we are fortunate to have a variety of technologies under one roof. So when we get these kind of requests from customers, we have all the technology needed to be integrated into one comprehensive solution, which is an advantage over other companies who definitely have less variety of -- or lower variety of technologies. So yes.

But in parallel, sometimes we sell boxes or units, but the majority is a system profile which we can offer.

Okay, that's very good. Thank you. Good luck.

Ella Fried, Bank Leumi.

Good afternoon and congratulations on the financial results. I also have two questions. Would you elaborate some more on the longer-term backlog? It seems that the backlog beyond the next seven quarters has declined quite sharply. And how does it relate to the current business cycle -- in the industry, I mean?

I wouldn't take that as anything for comparison. I think these things change, and what we did see in the last year here, two years, we have seen also programs with long-term programs to be performed over several years. So this specific point in time, I would not take any conclusions out of it.

Okay, thank you. And another question -- the dollar in Israel seems to be stabilizing above a NIS3.8 level. We'll be seeing in the next few quarters some positive impact from this move?

Our policy is to hedge our shekel/dollar exposure for longer-term, usually nine, 12 and even 15 months ahead. So in that way, we are standardizing our financial performance. So any fluctuations in the dollar or stabilization in the short term do not -- does not really affect us. So, right now, we are actually hedged well for most of this year and, to some extent, even some part of next year.

So will you be losing from the hedge?

Not necessarily. I think that we have done the proper hedging at the proper time, and we'll not be gaining and not losing anything material.

Okay, 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 two hours after the conference ends. In the US, please call 1-888-326-9310. In Israel, please call 03-925-5900. And internationally, please call 972-3-925-5900. A replay of the call will also be available on the Company's website at www.ElbitSystems.com. Mr. Ackerman, would you like to make your concluding statement?

Yes, thank you. I would like to take this opportunity to thank all of our employees worldwide for their hard work throughout the quarter, 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. first quarter 2012 results conference call. We thank you for your participation. You may go ahead and disconnect.