Elbit Systems Ltd (ESLT) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' Fourth Quarter and Full Year 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 at www.elbitsystems.com.

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

Thank you, operator. Thank you everyone, and good day. 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 fourth quarter and full year of 2017, followed by Butzi, who will talk about some of the highlights and significant events during the quarter and beyond. We will then turn the call over 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 now like to hand 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 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 2017 as well as the fourth quarter. In particular, we believe the strong growth in our backlog as well as the increased portion of the long-term projects within the backlog sets up well, not only for the coming years but also for the longer term.

I will now highlight and discuss some of the key figures and trends in our financial results.

Our fourth quarter 2017 revenues crossed the $1 billion revenue mark for the first time in our history, reaching $1,096,000,000 compared to $953.7 million reported in the fourth quarter of 2016, up 5.9% year-over-year.

For 2017 as a whole, our revenues were $3.38 billion versus $3.26 billion last year, representing a growth of approximately 3.7%.

In terms of revenue breakdown across our areas of operation in the quarter, airborne systems was 37%, C4ISR was 33%, land systems was 16%, electro-optics 9% and the rest was 5%.

Compared to the fourth quarter of last year, sales as a percentage of revenues of our main areas of operations were similar to those as our fourth quarter last year, with a slight increase in airborne and land system sales and the slight decrease in C4ISR and electro-optics sales.

In terms of geographic break down for the quarter, we continue to be fairly evenly diversified between the various regions in which we operate with North America at 24% of revenues, Europe at 23%, Israel at 23%, Asia-Pacific at 16%, Latin America at 4% and the rest of the world at 10%.

Compared with the fourth quarter last year, we saw a lower contribution from Latin America and Asia-Pacific, a slight increase in Israel, and increased sales to the rest of the world mainly due to increased electro-optics sales.

Looking at 2017 as a whole, we saw increased contribution from land systems and electro-optics, and lower contribution for C4ISR.

Geographically in 2017, our revenues were fairly diversified between North America, Asia Pacific, Europe and Israel, all between 20% to 25%.

Compared with last year, we saw increased contribution from Europe and a decreased contribution from Asia-Pacific.

For the fourth quarter, the non-GAAP gross margin was 28.6% versus 30.3% in the fourth quarter of 2016. Our GAAP gross margin was 28.1% versus 29.4% last year.

For the full year of 2017, gross margins were at similar levels to those of last year. Non-GAAP gross margin was 30.2% versus 30.4% last year. GAAP gross margin was 29.5% versus 29.4% last year.

The fourth quarter non-GAAP operating income grew 14% to $110.5 million or 10.9% of revenues compared with $97.3 million or 10.2% of revenues last year.

GAAP operating income increased by 18% to $103.6 million or 10.3% of revenues versus $87.5 million or 9.2% of revenues last year.

For 2017 as a whole, non-GAAP operating income grew 8% to $347.9 million or 10.3% of revenues compared with $322.5 million or 9.9% of revenues last year.

GAAP operating income grew 7% to $319.3 million or 9.5% of revenues versus $299 million or 9.2% of revenues last year.

During 2016, we had other income of approximately $17.6 million, which we do not include in our non-GAAP results. This was due to gains from 2 of our commercial venture subsidiaries in energy and automotive areas, following a round of outside investments.

In terms of our GAAP expenses for the quarter, total operating expenses were 17.8% of revenues compared with 20.3% of revenues in the fourth quarter of last year.

The operating expense breakdown in the quarter was as follows: Net R&D expenses at 7.2% of revenues versus 7% last year; marketing and selling expenses at 8% of revenues versus 9.3% last year; and G&A expenses at 2.6% of revenues versus 3.9% last year.

For the full year, operating expenses were generally similar to those of last year, other than for the G&A, which was lower.

Operating expenses amounted to 20.1% of revenues in 2017 compared with 20.3% last year. The breakdown was: Net R&D expenses at 7.8% of revenues, similar to last year; marketing and selling expenses were at 8.3% of revenues, similar to last year; and G&A expenses at 3.9% of revenues versus 4.6% last year.

I note, that during 2017, and particularly during the fourth quarter, we had a significant decrease in G&A expenses as a result of a reevaluation of liabilities related to assets and activities acquired in prior years.

Financial expenses for the fourth quarter of 2017 were $9.7 million compared with financial expenses of $9.2 million in the fourth quarter of last year.

In 2017, our financial expenses were $34.5 million compared with $23.7 million last year. Financial expenses in 2017 were relatively high, mainly due to losses from exchange rate differences.

In 2017, financial expenses were relatively low due to gains from various currencies exchange rates.

Taxes in the fourth quarter were $25.4 million or 27.1% pretax income versus $9.8 million or 12.5% pretax income in the fourth quarter of last year.

For the year, taxes were $55.6 million or 19.5% of pretax income versus $45.6 million or 16.3% pretax income.

The higher level of tax in the fourth quarter was primarily due to a recent change in U.S. tax regulations, whereby, there was a onetime reduction in our deferred tax assets amounting to $10.9 million. Note that this noncash expense is excluded under our non-GAAP results. We will benefit from the recent changes in the U.S. tax law in the upcoming years.

For the fourth quarter, non-GAAP net income was $86.1 million or a net margin of 8.5% versus $77.7 million or a net margin of 8.2% last year.

Non-GAAP diluted earnings per share were $2.01 compared with $1.82 last year, an increase of 10%.

On a GAAP basis, fourth quarter net income was $69.4 million or a net margin of 6.9% versus $67.1 million or a net margin of 7% last year.

GAAP diluted earnings per share were $1.62 compared with $1.57 last year.

For 2017 as a whole, non-GAAP net income was $273.9 million or a net margin of 8.1%. This is $254.2 million or a net margin of 7.8% last year.

Non-GAAP diluted earnings per share were $6.41 compared with $5.95 last year, an increase of 8%.

On a GAAP basis, full year of 2017 net income was $239.1 million or a net margin of 7.1% versus $236.9 million or a net margin of 7.3% last year.

GAAP diluted earnings per share were $5.59 compared with $5.54 last year.

Our backlog of orders as of December 31, 2017 was $7.64 billion, $738 million higher than the backlog at the end of the fourth quarter of 2016, representing an increase of 10.7%. Approximately 65% of the current backlog is scheduled to be performed during 2018 and 2019, and 35% of the current backlog is scheduled for 2020 and beyond.

The ratio as at the same quarter end last year was 68% and 32%, respectively, hence the backlog has become slightly more longer-term, which provides us with a stability long view.

Operating cash flow for the quarter was a positive of $240.9 million compared with a positive cash flow of $239.5 million in the same quarter last year.

For 2017 as a whole, we had a positive cash flow of $101 million versus $208 million last year.

The cash flow reduction reflects an increase in receivables, partially due to longer payment terms to some customers, in line with our market trends.

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

In total, dividends paid per ordinary shares in 2017 were $1.76, 10% more than in 2016.

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

Thank you, Yossi. As Yossi mentioned, we are indeed pleased with our performance in 2017 and are well positioned for continued growth in 2018, underlying our confidence in the continued strong growth in backlog that we demonstrated again this quarter. It grew by 11% over last year, with a larger portion of the growth being in the longer-term part of the backlog. Even in the short term, covering the next 2 years, our backlog growth remained robust, growing almost 6% ahead of the pace we saw at the same time last year.

The backlog is a metric, which I believe is a strong indicator for the health of our businesses for the near to long-term. It continues to provide us with good revenue visibility into our businesses.

As you know, we have been working hard to capitalize on the increased opportunities and positive momentum we are seeing in many of our end markets, especially in Europe and emerging regions.

Our contract wins are the contributors to our backlog growth. And I would like to highlight some of the major wins that we announced in the past few months.

In January, we were pleased with a major $150 million contract with Australian Department of Defence, which we believe will significantly enhance and strengthen our local support capabilities in that region. The contract was to provide Through Life Support services to the Australian Defence Force for the Battle Management System Command and Control. The contract was for 5-year period with optional extension for up to 7 years that can be exercised in the future. The contract represents our long-term commitment to the Australian Defense Forces [anticipation of].

In January, we also awarded a 4-year $85 million contract from a European customer for a range of advanced ground-based electronic warfare and signal intelligence systems. We are encouraged by the growing demand for our solutions from many countries in Europe, and we see a robust defense spending in this region for the foreseeable future.

Earlier in December of last year, our U.S. subsidiary won a $25 million contract for 1 year with potential value of 1-year extension, amounting up to $176 million from DynCorp International. The contract was to provide Life Cycle Contractor Support for the U.S. Army's C-26 and UC-35 fleet of aircraft. This contract reinforced our U.S. market position as the leading provider for Life Cycle Support for airborne companies.

Furthermore, we also received a follow-on, full year $46 million contract to supply J-Music Direct Infrared Countermeasures self-protection systems to NATO, for its Airbus A330 Multinational Multi-Role Tanker Transport Fleet Program.

And finally, in Israel, we won a $74 million contract with the Israeli Ministry of Defense for flight simulator for the upgraded C-130H and C-130J transport aircraft for the Israeli Air Force.

We will be setting up and operating the IAS joint center for these aircrafts, providing 2 interconnected flight stimulators that enable single and supportive training in the ground core stimulator that enables high-fidelity training of aircraft maintenance procedures. The contract is a long-term one, over a 13-year period, which includes the set up phase of approximately 3 years and then further 10-year operating period.

Earlier this month, the Israeli Treasury Ministry announced the approval of its committee for sale of IMI Systems to Elbit. We are continuing the discussions with the government regarding the conditions to complete disposition. Since this remains diversified in all the major audience. In many of our target geographical defense spending is on the rise, while at the same time, the electronic defense spending is getting aggressive portion of the overall defense budgets.

As always, Elbit remains very well-positioned to continue to capitalize and build on defense, and with that, I will be happy to take your questions. Operator?

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

I've 2 or 3 questions. First one, I guess it's for you, Yossi. If I look at the backlog, at the end of Q4, so obviously on a year-over-year basis, it reflects a significant growth. But if I look at it on a quarter-over-quarter basis, it seems to have stagnated. So is this something that I can assume temporary? Or it's significant because given the orders that came in since the beginning of this year, would it be prudent to assume that the backlog growth has resumed?

No, I would say the following: if you look at the structure of the backlog, and we did address that in our press release, actually, the total backlog has grown close to 11%, actually 10.6% or something like that. However, the new term backlog, that means that the backlog to be transformed in revenues during 2018 and 2019 has grown about 6%. That means that the backlog is a little bit longer term, which gives us a good view for stability. So it is correct that the backlog in the last quarter has grown marginally only. But please keep in mind that we had over $1 billion of revenues, that means we did receive over $1 billion -- more than over $1 billion of new business in the last quarter. So bottom line is that for the near term, that means the '18 and '19, the backlog has grown about 6%, in total, close to 11%. So we do see ground for future growth in the revenue in the quarters to come.

Okay. Good, Yossi. That's helpful. My second question is on the -- is on Soltam, on the ATMOS artillery system and on the Israeli Ministry of Defense, on the Gideon, Gideon multiyear program. This has a potential to be a very significant boost to your backlog. Do you currently anticipate that this will be realized within the current year?

First of all, we've got a problem with decision, affected by the Israeli mobile, and it was approved last week by the cabinet to acquire new orbiters from the IDF common resistance. And we are working together with the Ministry of Defense to conclude the contracts. And I hope it will happen soon, and you're right, there is a lot of potential for this program for Elbit. And in parallel I'd like to mention that we're continuing to deliver advanced artillery systems from our land division, which includes Soltam, part of it to many customers around the globe. So we see a lot of war potential for artillery, this is advanced long range, accurate artillery systems, part of an overall passable solutions for many customers around the globe, including Israel.

Okay. Good. And Butzi, my last question, if I may, is on IMI -- on the IMI transaction. I think there's a bit of a discrepancy. Today, in the Tel Aviv conference that you held, I understood that the issue -- that the remaining issues are pretty much issues that are out of your reach, out of your control. Antitrust stuff and things like that. And then when I look at the report today, you've mentioned that you're continuing the discussions with the Israeli government regarding the conditions to complete the transaction. So I guess my question is, are there remaining commercial discussions between you and the government? On the price? On the deal structure? Or just regulatory issues?

No, there are no major subject to be -- commercial subject to be discussed, actually most of the subjects were concluded already. There are some procedural activities, which need to be done and, of course, we need to get the approval of the antitrust authority.

The next question is from Ethan Etzioni of Etzioni Portfolio Management.

I wanted to ask, what do you see the potential contribution of TAAs? And do you see a significant expense of -- for retiring workers? And how long do you think it will take to bring TAAs up to the profitability that Elbit is used to?

That's a complicated subject to cover in, with few sentences. However, we say that we see a lot of synergies between Elbit and IMI, I just mentioned 3 of them, IMI has a very strong and advanced line of artillery rockets, long-range artillery -- precise long-range artillery rockets. Elbit brings advanced ISTAR solutions reconnaissance and surveillance and command-and-control systems, combining the 2 will enable us to provide the comprehensive solutions and then operational solution for potential customers, and we see many of -- we see opportunities for that around the globe. The second area is around the ammunition, IMI our leading provider of advanced ammunition, air to ground, ground to ground, different type of ammunition. Elbit brings advanced electronics combining the 2, create a strong, precise ammunition portfolio. And we see a lot of demand for precision around the globe to avoid collateral damage. And we believe that combining the 2 portfolios together will enable us to bring very advanced solutions to the market. The last area is around platforms. We have systems for ground platforms, mainly sites, fire control systems, telco systems, life-support systems, communication, command-and-control solutions. IMI brings different types of protection solutions. Reactive systems, very advanced, very modern, very attractive, active advanced protecting solutions. They do also -- about well as they do additional elements on the Sakthi and combining our activities with their activities will enable us to bring the advance solution for customers who want -- these are just 3 examples of synergies between the 2 companies. Now of course, it will take us time to combine capabilities between IMI and Elbit. And -- but I believe, we have the kind of process, actually gave IMI a strong portfolio -- a strong backlog, which will give us enough funds to reorganize the portfolio, to invest in R&D, to bring the current portfolios as well as the future markets -- as well as the future portfolio to the market by our market team network, which is really very advanced. And I'm sure, that it will be a very successful acquisition, similar to the ones we made in the past. And I would like to mention the Elisra, which we acquired several years ago, which at the beginning was not in a good shape. Today it's a very good company, the same goals in the system. So we know how to combine companies and ensure that we are aiming mainly to these international markets. I am sure that we'll be able to bring export contracts to Israel, to Elbit and to Soltam, which will be very important and good for Elbit, for Elbit employees, for IMI employees, for the Israeli economy and for the security of the company.

The next question is from [Vineet Kerov] of Citibank.

I have a couple of them. My first question is, gross margin was higher than normal in 3Q. And lower in 4Q, both the times, due to product mix. Now is this related to higher percentage of land sales in the quarter? Or how should we think about gross margins going forward?

Well, as you know, we do not give guidance on financial parameters. However, we did see in the last several years, a continuous improvement in our gross margin, starting from about 27.5% gross margin to reaching about over 30%. And now we have about 25 -- 29.5% on average for the recent quarters and for the whole year. I think, this is a result of quite a lot of effort that has been done in the company to reduce cost, to reduce overhead, to combine business, to combine activities, divisions and production lines and so on. For going forward, I would say, these activities are reducing the cost basis of the company continue. And for a little bit longer-term, they will be even enhanced by adopting the new ERP system that we are working on. However, we're also facing some challenges, so in 2018, regarding with a strong shackles, which we took in account when we did prepare our budgets for 2018 and going forward. So without giving you a specific guidance, I think that, if you look back on what has happened in the last 4 to 6 quarters on average, that may be something that could be representative of the future.

Okay. And my second question is, should we expect any more readjustments to assets impacting general and administrative? Or is it all done in 2017, only?

This is a result on -- as an outcome of acquisition -- latest acquisition process. When we occasionally have different views from the seller about the future potential growth of the acquired assets or business. We sometimes are a little bit on the conservative side, the seller is on the -- or more optimistic side and the way to bridge between these 2 approaches is to agree on some burnouts over -- by when they are paid out upon reaching some business goals. This is something that we see happening for quite often in the business -- in our business, in our acquisitions, we see that in other companies as well. So maybe, this has happened with the more material numbers this year, but back to your question, I would expect these things to happen in the future, maybe not at the magnitude that has impacted 2017.

(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) 326-9310. In Israel, please call (03) 925-5904, and internationally, please call +972-3-925-5904. A replay of this call will be available -- will also be available at the company's website at www.elbitsystems.com. Mr. Machlis, would you like to make your concluding statement?

I would like to thank all of 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. Fourth Quarter 2017 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.