Elbit Systems Ltd (ESLT) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' First Quarter 2017 Results Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded.

You should have all received by now the company's press release. If you've not received it, please contact the Elbit Investor Relations team at GK Investor and Public Relations at 1 (646) 688-3559, or view it in the News section of the company's website, www.elbitsystems.com.

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

Thank you, operator. Good day to 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. Butzi Machlis, Elbit's President and CEO; and Mr. Yossi Gaspar, Elbit's Chief Financial Officer. Yossi will begin by providing a discussion of their financial results of the first quarter of 2017, followed by Butzi, who will talk about some of the significant events during the quarter and beyond. We will then turn 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 now like to turn over the call to Yossi. Yossi, please.

Thank you, Ehud.

Hello, everyone, and thank you for joining us today. As we do every quarter, we will provide you with both our regular GAAP financial data as well as certain supplemental non-GAAP information. You can find all the detailed information and the reconciliation in today's press release.

Overall, we are pleased with our performance in the first quarter, in particular with the growth in revenues and the continued positive trend in backlog.

I will now discuss some of the key figures and trends.

Our first quarter 2017 revenues were $749.2 million, an increase of approximately 4% compared with $721.2 million reported in the first quarter of 2016.

In terms of revenue breakdown across our areas of operation in the quarter, airborne systems was 39%; C4ISR was 37%; land systems was 11%; electro-optics, 10%; and the rest was 3%.

Compared to the first quarter last year, land system revenue were lower mainly due to higher-than-usual level of Asia Pacific sales of land systems last year due to the completion of the tank Fire Control System program to this area. C4ISR revenues were higher this quarter mainly as a result of radio and communication systems sold to European and Israeli customers.

In terms of geographic breakdown for the quarter, North America was 26% of our revenues, Europe was 22%, Asia Pacific was 22%, Israel was 22%, Latin America 5% and the rest of the world was 3%.

Compared with the first quarter last year, we saw increased contribution from Europe primarily as well as Israel, and lower contribution from Asia Pacific and Latin America.

For the first quarter, the non-GAAP gross margin was 30.3% versus 30.5% in the first quarter of 2016. Our GAAP gross margin was 29.5% versus 29.4% last year.

The first quarter non-GAAP operating income was $65.5 million or 8.7% of revenues compared with $66.9 million or 9.3% of revenues last year.

GAAP operating income was $58.2 million or 7.8% of revenues versus $63.3 million or 8.8% of revenues last year.

I note that in the first quarter of last year, we had a onetime $7 million in accounting income from increase in value of a subsidiary due to gain from revaluation of an investment in our commercial spin-off.

In terms of our expenses for the quarter, total operating expenses were 21.7% of revenues compared with 20.7% of revenues in the first quarter of last year. The breakdown was, in research and development, 7.8% of revenues, the same essentially as last year; marketing and selling expenses, 8.8% of revenues versus 8.5% last year; and G&A expenses at 5.2% of revenues versus 5.4% last year.

We view both our R&D and marketing and selling expenses together as an investment in our future, and we have increased their total amount to about 16% of revenues in order to capitalize on the increased opportunities we are currently pursuing in many of all markets.

Financial expenses for the first quarter of 2017 were $8.6 million compared with financial expenses of $1.7 million in the first quarter of last year. Last year, we had lower-than-typical financial expenses due to gain from various currencies exchanges rate differences. I also note that in the first quarter of last year, we recorded a $3.9 million capital gain in the other income line related to the sale of real estate, while in the current quarter, other income was essentially 0.

For the first quarter, non-GAAP net income was $51.7 million or a net margin of 6.9% versus $51.2 million or a net margin of 7.1% last year.

Non-GAAP diluted earnings per share were $1.21 compared with $1.20 last year.

On a GAAP basis, first quarter net income was $45.9 (sic) [$45.6] million or a net margin of 6.1% versus $52.3 million or net margin 7.3% last year.

GAAP diluted earnings per share were $1.07 compared with $1.22 last year, which included earnings per share of $0.26 related to the gain from revaluation of investment and the sale of real estate.

Our backlog of orders as of March 31, 2017, was $7.07 billion, $292 million higher than the backlog at the end of first quarter of last year. Approximately 64% of the current backlog is scheduled to be performed during 2017 and 2018. This figure is at a similar proportion of the backlog scheduled to be performed in the upcoming 2 years compared to that at the same time last year.

Operating cash flow for the quarter was negative $51 million compared with a positive cash flow of $24 million in the same quarter of last year.

The Board of Directors declared a dividend of $0.44 per share for the first quarter of 2017.

That ends my summary and shall now turn over the call to Mr. Machlis. Butzi, please go ahead.

Thank you, Yossi.

Our first quarter results represents a good start to 2017, with continued growth in backlog as well as in revenue. Our backlog growth hit $7 billion mark for the first time, turning to around 4% ahead of where it was at this time last year.

Backlog has grown continuously for the past few years, which feeds into our solid and steady ongoing growth in revenue over the long term. In today's geopolitical environment, we are seeing a trend of increasing defense spending in many of our target markets, particularly in the electronic defense field. We have, therefore, this quarter stepped up the level of our investment in marketing and R&D in order to capitalize on the increasing opportunities.

I would like to highlight some of our recent successes.

In Brazil, we were awarded a 2-year $40 million contract from Brazilian Marine Corps for the supply of advanced C4I, electronic warfare, radio and communication systems. The system will be deployed in fixed and deployed command centers and in armored personnel carriers and dismounted configurations. We believe they will significantly enhance the marine force operational effectiveness with our C4I systems that are based on decades of operational use and combat proven by many of our customers worldwide.

Also within the C4I area, we received an order for satellite-on-the-move systems from the Israeli Ministry of Defense. The system allows high data rate broadband capabilities to be available to land vehicles on the move anywhere, anytime based on utilizing various communications satellites.

In March, we received a $100 million, 5-year contract from the Israeli MOD for advanced radio systems, a portion of which will be subject to use for military funding. We also expect to receive an additional order for maintenance services for a period of 15 years. We will provide the Israel Defense Forces with handheld, vehicle-mounted and airborne third-generation Software Defined Radios, enabling advanced network services at high security levels.

In March, we received an $80 million 4-year follow-on order from an Asia Pacific country for comprehensive electro-optics available solution for use in intelligence surveillance, target acquisition and reconnaissance missions. This follow-on contract attests to this customer's satisfaction with the quality of the previous solutions we have provided them, which are well suited for the global intelligence needs. We see an ongoing growing global demand for ISTAR solutions.

In April, we were awarded an ID/IQ contract for approximately $50 million by the U.S. Navy to provide the Helmet Display and Tracker System with Continuously Computed Impact Point algorithm for the MH-60S helicopter . The work will be performed in Fort Worth, Texas, and is expected to be completed in 2021. An initial order of approximately $14.2 million was received. This award order for the line-of-sight helmet tracking system and the integration of targeting symbology in the Armed Helicopter Weapon System for the MH-60 fleet.

Overall, as you can see, we continue to win businesses, which adds to our backlog. [And based on such backlog growth], we expect our solid performance to continue through 2017. As we have shown throughout our history, our continued successes is a function of our continuing to invest in the right areas in the defense and security arenas, targeting the right customers and meeting their needs.

Looking ahead, in many of our target markets, defense spending is on the rise and an increased portion is geared towards electric defense field. Our business is well positioned to capitalize on the trend. We remain well diversified with a broad spectrum of technologies and products with sales into many countries and regions.

And with that, I will be happy to take your questions.

(Operator Instructions) The first question is from Yoav Burgan of Poalim Sahar.

I just have one question on your new Soltam ATMOS artillery system for the IDF. I would just like to fully understand, how do you consider the current status of this project? And at what point will you start including it within your firm backlog?

We see a big -- we see a large demand for advanced artillery solutions all over the world, and such a need exists also here in Israel's IDF. We have advanced, third-generation autonomous artillery solutions by the name of ATMOS, and we understand that there is an interest by the IDF to acquire this system. We are in negotiation with -- and as you know, the ID -- the Ministry of Defense has taken the decision to acquire such a system from us after evaluating the additional possibilities in the market. And we are right now discussing with them and negotiating with them a contract. We don't yet have a contract. When we'll have a contract, of course we'll report it. And then when we start to sell, you will see it in the numbers. We all understand that it's a strategic move for the IDF. Of course, it's a strategic move for Elbit as well, and we see a large -- and we see a big potential for Elbit in this domain in Israel as well as in other countries. And I must say that we have a lot of success recently selling such product all over the world.

The next question is from Ella Fried of Bank Leumi.

I have questions on the backlog. I have 2 questions. The first one is, did you make any additional acquisitions even of smaller scale in the first quarter? And that second is, could you go into more detail on the operational cash flow?

Hi Ella. This is Yossi. Regarding acquisitions, we had during the quarter some very small acquisitions made, 1 here in Israel and more technology oriented, and 1 overseas in Latin America. Very small but, according to our strategy, as we always explain, that complement our offerings technologically or better additional access to markets. While they're not material to be reported and they are small, but we definitely believe that they have a very good potential to grow our business in the future. Regarding the cash flow, the cash flow this quarter was negative, as we reported. Our quarterly cash flow in our business is not very representative of overall yearly numbers. As we have shown for many years, we generate the cash that is approximately at the profit level or higher. We did it very nicely last year, and the year before that was even higher than -- higher cash. The lower cash this quarter was a result of increased payments to our suppliers and some reduced payments from our customers, including some growth in the inventory, which, of course, is prepared to be delivered in the following quarters. We expect cash flow to turn definitely positive towards the following quarters.

The next question Lena Rogovina of Chardan Capital Markets.

I have a couple of questions on the results and a follow-up question on ATMOS quantum. So my first question is, was there a significant increase in revenue from other regions. Is there something specific? And does it mean your important region emerging for Elbit's business? And the second question is on dividends. There is an increase in quarterly dividend. Should we expect same payments in the coming quarters later this year? And then I'll get back to the follow-up question after.

Regarding the other regions, we categorize in the other regions territories that are not included in the prime regions that we define specifically, and one major one is, of course, Africa, various countries in Africa. So we have seen -- due to our increased marketing efforts in this continent, we start seeing the revenues coming in. That is for other regions. The dividends, we don't have a defined and declared policy by our Board of Directors. However, if we look back at the history of the company, we do pay out every quarter dividends at the rate of about 30% -- approximately 30% of our net income, and this is the case right now as well, as you probably have noticed in the first -- in the last quarter last year. In 2016 first quarter, we raised the dividend significantly to $0.44 -- 10% actually. We increased that to $0.44 per share. We did pay out -- we are going to pay out $0.44 this quarter as well. And looking forward, I would not make any prophecies, but looking based on history, that's probably what [we're] going to happen in the future as well.

Okay. And to clarify one -- ATMOS, so if -- that means, the defense decision to select Elbit as a supplier is final? And what's the risk for them to review their decision? And could you please confirm that the size of the contract is $1.5 billion as it was stated in the local press?

As I mentioned earlier, a decision was made to acquire such systems from us after evaluating the different possibilities in the market. There is -- we are right now negotiating the program with them, the contract with them, and it's too early to tell what will be the size of the contract. It probably won't be a 1-year contract. It will be a multiyear contract. And of course, when such -- when this dialogue will be concluded, we'll report it to the market, of course. It's a big program. It will be -- I hope it will be -- I believe it will be a big program for us, but we don't have it yet. We have -- it's still under negotiation, and I hope it will happen soon.

The next question is from Mr. Michael Klahr of Citibank.

First, you made a remark in your comments about the high sales and marketing efforts to take advantage of opportunities. Could you give us a bit of color around this, around new products, new geographies, making changes in existing geographies? And related, could tell us about that item going forward? Is it onetime in nature? That's the first question.

We see many opportunities for us mainly in North America as well as in Europe and in Asia Pacific. That's the reason for us to take the decision to invest more in R&D and marketing. I believe that this level of investment is -- will be also -- is -- will be required for the future. I don't expect a higher investment in the future. And I believe these investments will help us to capitalize on the opportunities that we are seeing ahead of us. We see many opportunities actually all of -- for most of the portfolio all over the world. We see opportunities in C4I systems. And we see opportunities for fiber. We see opportunities in the home and security domain. And we also see many opportunities for protection suites for aircraft DIRCM and EW solutions. So we see more opportunities for the company. That's the reason for increase for the level of investment in R&D and marketing. But I believe that's a sufficient investment. I don't see us investing more than that in the future.

Okay. And I just want to talk about the size of that acquisition from 18 months ago. And there were some earn-outs related to that. Has any of those been paid? Or do you expect them to be paid?

For right now, the forecast for the performance of the business and the actual performance of the business is according to the plan that we have anticipated. We're optimistic on that at this point in time, and we'll see how it develops over this year and early next year. And then of course, based on that, we'll decide on the earn-out amount.

The next question is from David Winters of Wintergreen Advisers.

Really, 2 questions. First of all, could you just touch on how you protect your intellectual property? Because it's the core of the business. And then secondly, with this massive cyber attack that's happened globally, I mean, if you could just touch generally on the opportunity for your cyber protection business.

Okay. Regarding the IP, I'll try to answer that. We have definitely an internal process in the whole company over all the subsidiaries that we follow, which relates to recording the IP as generated, which relates to patents that we applied for and also relates to making sure that our IP is used properly by our companies and is not used -- actually is not infringed by third parties. From time to time, we do provide licenses to manufacturers of parts of our systems. Under those license agreements, things are very well defined. We actually follow processes that are very known in the U.S. and European companies. So that is the way we do it. Actually, it is run, the whole IP process, and controlled -- is run by our company Secretary and by our Executive Vice President for R&D. These are the 2 responsible figures that manage the whole thing, and in their organizations, we have specific people that take care of these aspects of managing the IP.

With regard to cyber security, we have 2 line of business. The first line is with integrated protection suites which we provide for big organizations and for governments based on a solution we are providing here for the Israeli Ministry of Defense in Israel. That's one line of business that we have. We can take sensitive IT network and protect it A to Z. The second line of business is mainly in the commercial markets. There we provide products, different products to the market. We have very advanced training systems, and some of them were sold in the U.S. in Maryland as well all over Europe, in Japan, in Korea. We had also SCADA protection solutions to protect the SCADA networks such as utility and gas and oil networks. And we also have solutions product to protect the IT -- private IT networks for banks, for insurance companies and for businesses. So one line of business deals with enhanced integrated suites, and the other line of business deals with products. Both of them are very successful. The business is growing. We see many opportunities. And one of the reasons for the increased marketing is because we invest more in marketing efforts in this area.

(Operator Instructions) There's a follow-up question from Ella Fried.

Just a few days ago, a [parliamentarian] committee approved the first part of a [relief] package for defense exports. I wonder, does it have any tangible influence on your business?

Which committee?

A Knesset committee approved the first part of relief package for defense exports.

Oh, for export?

For defense export.

Yes. No, I don't see any effect on the company. On the contrary, we -- of course, we comply with those regulations. And I believe that the relief we get will simplify the process and will help us in our marketing and export efforts. So I see -- I believe that this -- the decision, which made 2 days ago, is on the right direction and it will help us to simplify all the processes prior to the exporting.

There are no further questions at this time. Before I ask Mr. Machlis to go ahead with his closing statements, I would like to remind participants that a replay of this call will be available 2 hours after the conference ends. In the U.S., please call 1 (888) 326-9310. In Israel, please call 039-25-5904. And internationally, please call 9723- 925-5904. A replay of the call will also be available at the company's website, www.elbitsystems.com.

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

I would like to thank all our employees for their continued hard work. To everyone on the 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 2017 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.