Elbit Systems Ltd (ESLT) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' Second 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 have not received it, please contact Elbit's 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. Ehud Helft of GK 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. Butzi Machlis, Elbit's President and CEO; and Mr. Yossi Gaspar, Elbit Systems Chief Financial Officer. Yossi will begin by providing a discussion of the financial results for the second quarter of 2017, followed by Butzi, 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 now like to hand 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 GAAP financial data as well as the non-GAAP 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 profitability and the continued positive trend in backlog. I will now highlight and discuss some of our key trends and figures.

Our second quarter 2017 revenues were $818.3 million compared to $804.5 million reported in the second quarter of 2016. In terms of revenue breakdown across our areas of operation in the quarter, airborne systems was 37%, C4ISR was 34%, land systems was 15%, electro-optics was 11% and the rest was 3%.

Compared with the second quarter of last year, land systems and electro-optics were higher, while C4ISR and airborne was -- were slightly lower.

In terms of geographic breakdown for the quarter, we were fairly evenly diversified in the quarter, with North America at 26% of revenues, Europe at 25%, Asia Pacific at 20%, Israel at 20%, Latin America at 7% and the rest of the world at 2%. Compared with the second quarter last year, we saw increased contribution from Europe, primarily due to sales of artillery and communication equipment and lower contribution from Asia Pacific.

For the second quarter, the non-GAAP gross margin was 30.4% versus 30.3% in the second quarter of 2016. Our GAAP gross margin was 29.6% versus 29.4% last year. The second quarter non-GAAP operating income was $82.7 million or 10.1% of revenues compared with $80.5 million or 10% of revenues last year. GAAP operating income increased by 7.6% to $75.3 million or 9.2% of revenues versus $70 million or 8.7% of revenues last year.

In terms of our expenses for the quarter, total operating were 20.4% of revenues compared with 20.7% of revenues in the second quarter of last year. The breakdown was: net R&D expenses at 8.2% of revenues versus 8.4% last year; marketing and selling expenses at 8.1% of revenues versus 7.5% last year; G&A expenses at 4.1% of revenues versus 4.8% last year.

The relatively lower G&A expenses in the quarter were a result of the reevaluation of certain liabilities related to the purchase of businesses and activities and assets in prior years.

We view both our R&D and marketing expenses together as an investment in our future, and over the past few quarters, we have increased the cumulative total to over 16% of sales. We have done this to capitalize on increased sales opportunities we are currently pursuing in many of our end markets, where the environment is currently favorable to electronic defense spending.

Financial expenses for the second quarter of 2017 were $6.8 million compared with financial expenses of $5.5 million in the second quarter of last year. For the second quarter, non-GAAP net income was $68.8 million or a net margin of 8.4% versus $62.9 million or a net margin of 7.8% last year. Non-GAAP diluted earnings per share were $1.61 compared with $1.47 last year, an increase of 9.5%. On a GAAP basis, second quarter net income was $62.6 million or a net margin of 7.6% versus $54.1 million or a net margin of 6.7% last year. GAAP diluted earnings per share were $1.46 compared with $1.27 last year, an increase of 15%. Our backlog of orders as of June 30, 2017, was $7.33 billion, $511 million higher than the backlog at the end of the second quarter of 2016. This is an increase of 7.5%. Approximately 57% of the current backlog is scheduled to be performed during 2017 and 2018.

Operating cash flow for the quarter was a positive of $54 million compared with a negative cash flow of $38.6 million in the same quarter last year.

The Board of Directors declared a dividend of $0.44 per share for the second quarter of 2017. That ends my summary and shall now turn it over to Mr. Machlis. Butzi, please?

Thank you, Yossi. We are pleased with this quarter's results. Our backlog growth was especially strong, growing over 7% from last year. The longer-term component of the backlog was particularly strong this quarter, supporting steady ongoing growth in revenue over the long term.

Another important aspect for our result this quarter is the true global diversity and spread in our revenues. Europe and United States each provided approximately 25% of revenues in the quarter, and Asia Pacific and Israel provided slightly less than that. Thus, our exposure to any one particular region is limited, and right now, we are benefiting from worldwide growth in defense spending. Our recent growth in sales, marketing and R&D spending has allowed us to capitalize on the increased opportunity, and as we can see from the growth in our backlog, we are already seeing the fruit of these investments. While we have had a lot of activities in the past few months, I would like to highlight some of our recent successes.

In May, we won a 3-year, $25 million contract for the supply of J-Music Direct Infrared Countermeasures self-protection system to an international organization. And later in June, we were awarded a 1-year contract of more than $20 million by an African-based customer to equip a VIP Gulfstream G650 aircraft with our J-Music system. Also, in May, we won a 3-year, $390 million contract to supply a unique intelligence solution, including an array of ground electronic intelligence capabilities, to a European country. The contract includes various intelligence capabilities, as well as communications and command and control solutions. Also in Europe in July, we received a 2-year, $35 million contract for thousands of our advanced Electro-Optic systems for individual infantry soldiers. In June, we were awarded a contract by Lockheed Martin Aeronautics to develop a cockpit display replacement for the F-35 aircraft. This further expands our work on the F-35, which already includes power amplifiers, structure and sustainment work, as well as the Helmet Mounted Display system, through our joint venture with Rockwell Collins. These efforts reinforce our position as the leading provider of advanced cockpit and intelligent pilot interface solutions that help improve pilots' situation awareness and mission effectiveness. And finally, a few weeks ago, we announced that our Integrated Fixed Tower, or IFT, border security system, passed U.S. Customs and Border Protection systems acceptance testing. As the system integrator, we'll provide the sensor towers with radar, day and night cameras, and command and control software, which correlates sensor information to provide a single operation picture. This particular IFT system, located on the Douglas, Arizona sector, marks our second successful deployment of the system, with the first occurring in Nogales, Arizona sector. Overall, as you can see, we continue to win ongoing businesses and achieve successes at Elbit Systems. Based on our backlog growth, we expect our positive performance to continue through 2017 and beyond. As we have shown, our continued successes come about because we continue to invest in the right areas in the electronic defense arena -- area, targeting the right customers and meeting their needs.

Looking ahead, in many of our target, geographical defense spending is now on the rise, and an increased portion is given towards the electronic defense field. Our business is well-positioned to capitalize on the trend. We remain very well-diversified from both geographical point of view as well as through our broad spectrum of technologies and products.

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

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

I just have one specific question. I noticed recently that you won a patent infringement case in Texas. I see that the -- you were awarded damages of about $20 million. The case was against EchoStar. I was just wondering -- I guess, the question is for you, Yossi. When should we expect that you recognize this in your P&L? Will it be already in Q3 or Q4?

You mentioned that correctly. This event has taken place. However, we expect the final decision on that. Although the jury has decided, there may be some appeal, there may be some other activities related with that. Once we will consider that as a final decision, then we'll definitely have a release on that and let everybody know the details of it. And actual recognition in our P&L will be upon the occurrence of this.

The next question is from Ella Fried of Bank Leumi.

Very impressive backlog, and I have 2 questions. First, could you update us, please, on the progress of privatization of TAAs, where is it standing. And the second question is, could you please provide some figures in contrast of those opportunities you mentioned, like the one -- like the helmets, at least in terms of dozens of millions, hundreds of millions? In which range should we expect if these opportunities mature, all of them?

With regards to the first question, as you all know, acquisition is part of our strategy. We have a strong balance sheet, which can support several acquisitions. And we'll look for the right acquisition for the company, in Israel as well as abroad. IMI can be a relevant candidate for an acquisition. However, it would need to be done in the right conditions, which fits our view about this company. And so it's still relevant. However, we'll look for other opportunities in parallel in our main target areas. And the process is managed by the government, and they, I'm sure, that they can answer about the speed of the process and about the continuation of the process.

But do you have a deadline in the -- I mean, if you find anything interesting before they are ready?

As I said, we can support several acquisitions in parallel and we are looking for additional opportunities as well.

Okay. And the second question is about putting some figures on those opportunities? They sound very promising.

As you know, Ella, we do not give guidance and we report on contracts as we get them signed and firmed. Over the recent periods, we did mention that the number of opportunities that we are tackling and the dollar value of these opportunities has increased over time, and we definitely see the result of that in the backlog. I would be able to say that we definitely see this trend to continue. But I am sorry, I cannot give you numbers.

(Operator Instructions) There are no further questions at this time. Before I ask Mr. Machlis to go ahead with his closing statement, 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) 782-4291. In Israel, please call 039-25-5904, and internationally, please call 9 (723) 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 your concluding statements?

Yes, 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 continued support and interest in our company. Have a good day, and goodbye.

Thank you. This concludes the Elbit Systems Ltd. Second Quarter 2017 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.