Elbit Systems Ltd (ESLT) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' Third 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 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 the call over to Mr. Kenny Green, GK -- of GK Investor Relations. Kenny, please go ahead.

Thank you, 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. Bezhalel 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.

And with that, I would like to turn the call over to Yossi. Yossi, please go ahead.

Thank you, Kenny. Hello everyone, and thank you for joining us today. As we do every quarter, we would 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 a reconciliation in today's press release. Overall, we are pleased with our performance in the third quarter, in particular with improvement in our profitability margins as well as the strong growth in the backlog, which set us well for the long-term. I will now highlight and discuss some of the key figures and trends in our financial results.

Our third quarter 2017 revenues were $800.7 million compared with $780.8 million reported in the third quarter of 2016. In terms of revenue breakdown, across our areas of operation in the quarter, airborne systems was 38%, C4ISR was 34%, land systems 15%, electro-optics was 11% and the rest was 2%.

Compared with the third quarter of last year, land systems revenues were higher, driven in part by artillery sales to the Asia-Pacific region, while C4ISR revenues were lower due to lower sales of communication equipment to Latin America.

In terms of geographic breakdown for the quarter, we continue to be fairly evenly diversified with North America at 24% of revenues, Asia-Pacific at 23%, Israel at 22%, Europe at 20%, Latin America at 7% and the rest of the world at 4%.

Compared with the third quarter of last year, we saw increased contribution from the rest of the word segment related to increase electro-optics sales.

In the third quarter, the non-GAAP gross margin was 32% versus 30.5% in the third quarter of 2016. Our GAAP gross margin was 31.3% versus 29.5% last year. These margin are at record levels.

I know that the particularly high level of gross margin represents a favorable mix of products and projects during the quarter and the long-term trade of improvement in operations.

In the third quarter, non-GAAP operating income grew 15% to $89.2 million or 11.1% of revenues compared with $77.9 million or 10% of revenues last year.

GAAP operating income increased by 5% to $82.2 million or 10.3% of revenues versus $78.3 million or 10% of revenues last year.

It is important to note that in the third quarter of last year, we received a $10.5 million capital gain from a commercial spinoff, which lowered our GAAP operating expenses.

In terms of our expenses for the quarter, total operating expenses were 21.1% of revenues compared with 19.5% of revenues in the third quarter of last year or 20.9%, excluding the above-mentioned capital gain of $10.5 million.

The operating expense breakdown was as follows: Net R&D expenses at 8.4% of revenues versus the same -- essentially the same number last year; marketing and selling expenses at 8.4% of the revenues versus 7.8% last year; and G&A expenses at 4.3% of revenues versus 4.6% last year.

Our relatively high level of marketing expenses is an investment in our future in order to capitalize on increased sales opportunities we're currently pursuing in many of our end markets, where the environment is currently favorable to electronic-defense spending. The increase in backlog that we are seeing success in this regard.

Financial expenses for the third quarter of 2017 were $9.3 million compared with financial expenses of $7.3 million in the third quarter of last year. Taxes in the third quarter were $14.6 million or 20% of pretax income versus $8.9 million or 12.5% of pretax income in the third quarter of last year. This higher level of tax paid in the current quarter was primarily due to the geographic mix of taxable income in the quarter, favoring higher tax regions. For the third quarter, non-GAAP net income was $67.3 million or a net margin of 8.4% versus $62.5 million or a net margin of 8% last year. Non-GAAP diluted earnings per share were $1.57 compared with $1.46 last year.

On a GAAP basis, third quarter net income was $61.5 million or a net margin of 7.7% versus $63.4 million or a net margin of 8.1% last year.

GAAP diluted earnings per share were $1.44 compared with $1.48 last year.

Our record of orders as of September 30, 2017 was $7.64 billion, $805 million higher than the backlog at the end of the third quarter of last year, an increase of 12%. Approximately 45% of the current backlog is scheduled to be performed during 2017 and 2018.

Operating cash flow for the quarter was a negative of $142.6 million compared with the negative cash flow of $17.3 million in the same quarter of last year. This reflects (inaudible) receivables, partially due to the longer-term payment terms to some of our customers, in line with our market trends.

We do expect to collect the cash from these receivables in the coming quarters. The Board of Directors declared a dividend of $0.44 per share for the third quarter of 2017. In total, the past 9 months of 2017, $1.32 per share in dividends have been issued to the shareholders.

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

Thank you, Yossi. We're particularly pleased with our strong growth in backlog this quarter, demonstrating increase of 12% from last year. The backlog is the metrics which is a good indicator for the health of our businesses for the long-term and its strong growth as well as the slight shift to a longer period indicate the potential growth of our businesses for the years -- for years to come.

Another important aspect of our results this quarter was a strong level of corporate margins with gross margin over 30% and operating margin surpassing 10%. This represents a particular cellular mix of product sales this quarter and the ongoing fruits of our efforts to improve businesses, effectiveness and build on intercompany synergies.

As you know, a few quarters ago, we made the strategic decision to increase our investments in marketing efforts in order to capitalize on the increased opportunities and positive momentum we are seeing in Global Defense markets.

Our recent contract wins, which have contributed to our strong backlog growth among others, a result of these efforts. I would like to highlight some of the recent mega successes.

In September, we won a large and important $300 million (inaudible) command and control -- contract for command and control system, 3-year contract with an Asian-Pacific customer. This region was particularly active for us in the past few months. This contract win followed another $11 million maritime C4I contract for navy in the region, including interconnected coastal sensor towers, naval command and control centers and maritime C4I capabilities as well as ongoing maintenance.

In August, we also won a $93 million contract to modernize and upgrade in Asia-Pacific fleet of F-5 aircraft. Our solution will include Head-Up Displays, an advanced cockpit, radars, weapons delivery and navigation system as well as DASH Head Mounted Systems.

In September, we announced a $240 million, 2-year contract with an African country for a broad range of Defense Electronic Systems. This is a new trend we are seeing in our markets and our unique bought-off synergistic business structure enable our customer to benefit from our wide capabilities, while at the same time, cater to their specific requirement.

The system we will provide includes Direct Infrared Countermeasure System to protect aircraft from shoulder fired missiles and include Missile Warning Systems, radio communication systems, land system, mini-UAS systems and helicopter upgrade.

And finally, in the U.S., we are awarded a 2-year, $31.5 million contract to provide the U.S. Defense Logistics Agency for land and maritime with Aviator Night Vision Imaging System Head-Up Displays. The systems are used for both day and night missions by the U.S. Army, Navy, Marine Corps, Air Force and Coast Guards.

Overall, we continue to win ongoing businesses which contributes to our backlog growth. In many of our targeted geographics, defense spending is now on the rise and the electronic defense spending is getting a greater portion of the overall price. We'll remain well positioned to capitalize on the trends.

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

(Operator Instructions) The first question is from Lena Rogovina of Chardan Capital Markets.

My question is about the revenue growth. Given a couple of very material contracts which you signed in 2017, should we expect significant revenue growth acceleration in Q4? Or should we expect normal seasonality?

Lena, this is Yossi. As you know, we do not provide guidance regarding financial parameters on anywhere else. But if you would look at the spread of the backlog for future quarters, we do see for the next 5 quarters growth in backlog year-over-year of approximately 6% compared to (inaudible) to year before. So that could be one indicator of where we are going. Although, it's not the only one.

(Operator Instructions) The next question is from David Winters of Wintergreen Advisers.

Is the company also continuing to look for opportunities for acquisitions? I know it's a tough thing to do, but you've done it so well in the past.

The answer is yes. We've some benefit as you all know and part of our strategies, to look for acquisitions as well. There are some opportunities in Israel as well as in other target markets and we are exploring now. But certainly, acquisition is part of our strategy.

(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 03-925-5928, and internationally, please call (972) 3-925-5928. 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 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. Third Quarter 2017 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.