Elbit Systems Ltd (ESLT) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems First Quarter 2018 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 Systems' Investor Relations team at GK Investor and Public Relations at 1 (646) 688-3559, or view it in the Investors Relations 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, and 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. 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 first quarter of 2018; 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 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 reconciliation in today's press release.

Overall, we are pleased with our performance in the first quarter of 2018. In particular, we saw a solid increase in our backlog over the long term as well as each shorter-term component. This supports top line growth for the future. I also want to highlight that starting from this quarter, based on our GAAP requirements, we implement -- we implemented the ASC 606 accounting standard. The adoption of the new accounting standard has partial influence on the revenue growth in the first quarter of 2018. At year-end of 2018, we will publish our financial statements based on ASC 606 standard, and we'll include notes with financial results according to the ASC 605 standard. Please note further clarifications on the accounting policy is updated in our press release.

I will now highlight and discuss some of the key figures and trends in our financial results. The first quarter of 2018 revenues were $819 million compared with $749 million reported in the first quarter of 2017, up 9.3% year-over-year. The growth was driven by sales from increased backlog and the adoption of the ASC 606 revenue recognition standard.

In terms of revenue breakdown across our areas of operation in the quarter, airborne systems was 38%; C4ISR was 34%; land systems, 14%; electro-optics was 11%; and the rest was 3%.

Compared with the first quarter of last year, sales as a percentage of revenues of our main areas of operation were similar to those as of the first quarter of last year, with a slight increase in land systems' sales due to increased Homeland Security sales and a slight decrease in C4ISR sales.

In terms of geographic breakdown for the quarter, we continued to be fairly evenly diversified among the various regions in which we operate, with North America at 25% of our revenues; Europe at 19%; Israel at 23%; Asia Pacific at 21%; Latin America at 5%; and the rest of the world, 7%.

For the first quarter, the non-GAAP gross margin was 29.3% versus 30.3% last year. Our GAAP gross margin was 28.8% in the quarter versus 29.5% last year.

Our gross margin was affected by the product mix as well as by a less favorable exchange rate environment during the first quarter, where the average shekel rate in the quarter strengthened versus the U.S. dollar compared with the first quarter of last year.

The first quarter non-GAAP operating income grew 6% to $69.4 million or 8.5% of revenues compared with $65.5 million or 8.7% of revenues last year.

GAAP operating income in the quarter increased by 9% to $63.3 million or 7.7% of revenues compared with $58.2 million or 7.8% of revenues last year.

In terms of our GAAP expenses for the quarter, the total operating expenses were 21% of revenues compared with 21.7% of revenues in the first quarter of last year.

The operating expense breakdown in the quarter was as follows: net R&D expenses were 8.3% of revenues versus 7.8% last year; marketing and selling expenses were 8.3% of revenues versus 8.8% last year; and G&A expenses were at 4.4% of revenues versus 5.2% last year.

Financial expenses for the first quarter of 2018 were $10.2 million compared with financial expenses of $8.6 million in the first quarter of last year. The increase was mainly due to higher debt level and an increase in interest rates.

Taxes in the first quarter were $6.3 million (sic) [6.4 million] or 12% of pretax income versus $5.3 million or 10.6% of pretax income in the first quarter of last year.

For the first quarter, non-GAAP net income was $54.9 million or a net margin of 6.7% versus $51.7 million or a net margin of 6.9% last year.

Non-GAAP diluted earnings per share were $1.28 compared with $1.21 last year, an increase of 6%.

On a GAAP basis, first quarter consolidated net income was $49.6 million or a net margin of 6.1% versus $45.6 million or a net margin of 6.1% as last year.

GAAP diluted earnings per share were $1.16 compared with $1.07 last year.

Our backlog of orders as of March 31, 2018 was $8.046 billion, $979 million higher than the backlog at the end of the first quarter of 2017. This represents an increase of 13.9% in the backlog.

To provide some further color on the growth of the backlog, the short-term portion of the backlog due to the remainder of this year and 2019 grew by 7.3% over that at the same time last year. These numbers provide potential for future revenue growth.

Approximately 60% of the current backlog is scheduled to be performed during 2018 and 2019, and 40% of the current backlog is scheduled for 2020 and beyond. The ratio as at the same quarter at the end of last year was 64% and 36%, respectively.

Operating cash flow for the quarter was a negative $147.9 million compared with a negative cash flow of $51.3 million the same quarter last year. The cash flow reduction reflects an increase in receivables, partially due to longer payment terms to some customers.

We do not believe that there is an increased risk within our receivables.

The Board of Directors declared a dividend of $0.44 per share for the first quarter of [2018].

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

Thank you, Yossi. As Yossi mentioned, we are pleased with our continued growth in the first quarter of 2018.

In particular, the highlight is definitely the strong growth in backlog, increasing by 14% in a one-year period, which, on an organic basis, is the highest growth rate we have seen in many years.

While the long-term portion of the backlog has been growing strongly for a number of quarters now, even the short-term portion over the next 7 quarters grew by over 7% versus the same time last year, which gives me confidence in our growth in the coming 2 years.

The backlog is a metric that I believe is a strong indicator for the health of our businesses. Moreover, it continues to provide us with [either] improving revenue visibility into our businesses.

Our long-term growth and development is built on both investing in our businesses and growing on an organic basis as well as acquiring and adding synergistic businesses to our overall organization.

In April, we completed the acquisition of an Arizona-based company, Universal Avionics, for approximately $120 million.

They develop commercial avionics systems for the retrofit and [forfeit] market, including flight management systems, displays, communication systems, complete cockpit solutions and additional advanced commercial avionics systems. We see these products as complementary to our existing commercial avionics systems, our Enhanced Flight Vision System and our commercial Heads-up Display product lines.

We believe that the newly combined portfolio creates synergies that will strengthen our competitive position in the commercial avionics market.

Furthermore, in the recent months, there has been some coverage in the Israeli press as well as Israeli government statements with regards to the privatization of Israeli Military Industries (sic) [Israel Military Industries], or IMI, and the potential [self] to help it.

While this has been a long process, we have been in discussion with the Israeli government, which recently made progress. We believe IMI brings Elbit access to new markets and products, and we can leverage our existing business platform. There are many synergies which we can realize once the 2 companies are combined, and while it may take time, Elbit has proven numerous times that we are highly adept at making acquisitions work. We will update you if and when this acquisition moves ahead.

In terms of our organic growth, we have been working hard to capitalize on the increased opportunities and positive momentum we are seeing in many of our end markets.

As the strong growth in the backlog demonstrates, we have been successful at winning new contracts with existing as well as new customers diversified geographically around the world.

I will now be happy to take your questions. Operator, please.

(Operator Instructions) First question is from Michael Klahr of Citi Bank.

My questions -- first question is on the adoption of Accounting Standards 606. What impact did that have on working capital? You provide some numbers in the statement. Is it about a $6 million impact on working capital? Is that right? That's my first question.

My second question is, if you could give us some numbers around the Universal Avionics acquisition in terms of revenues or earnings? And my third question is, you spoke about IMI in your comments, when -- what's the time line on that proceeding? Can you give us any color on time line? Is it expected this year?

I'll answer the working capital question, Michael. Essentially, you are right, although we have not completed all the calculations and all the adaptation of the 605 compared to 606. But as you have seen in our press release, the numbers add up to essentially the numbers that you quoted. Regarding Universal. We acquired the company in early April that -- I believe 10th or 11th of April. Universal will be consolidated in our financial results in the second quarter. We expect to have some increase in revenues because of that compared to the $3.5 billion that we will have for the full year. We don't expect that to be a very material number, but it's definitely a positive add to us. Other -- in general, the profitability of the company is in the same line like what we experienced in Elbit with minor changes. So there might be some transition numbers as always when we acquire a business. But in general, it's (inaudible) acquisition to the company.

Michael, it's Butzi. With regards to IMI, the process is progressing. And I believe that this process, the (inaudible) process, will be concluded soon. I certainly believe it will happen this year.

The next question is from Ella Fried of Bank Leumi.

I will follow Michael on the 606 revenue recognition standard. I wonder whether you could provide us, maybe not with exact numbers, but with either a range or a foreseeable pace of the impact in the following quarters, but some kind of anchor in order to separate the organic growth and the impact of the standard before consolidation of Universal in this quarter and the end of day from probably -- in consolidation of IMI. So in order to follow the growth and then to analyze it, it would be great if you could give us some kind of signs.

Hi, Ella. This is Yossi. I'm sorry, but we cannot provide exact numbers on this item. They are still in work and will definitely be concluded yearly numbers, when we have our financial statements of 2018 with comparable numbers for the full year in both standards. However, having said that, we did see this quarter significantly, I would say, to some extent, extraordinary growth in revenues. Part of that, as I said, was regular, organic growth. And I would say, in comparison with the growth that we had years ago in the first quarter, we definitely exceeded that organic part. The other part is regarding the 606 revenue recognition standard, which will go -- we will on -- we will go on for the following quarters. So actually, looking at the growth in our backlog, I would say the meaning of the 606 will diminish more and more over the coming quarters as we take the backlog and transform it into revenues. So bottom line is that part of that comes from the revenue recognition standard. But this thing, I would say, I'm sorry I cannot give you exact numbers.

Okay. And was the backlog itself impacted by this adoption of the standard? Or it's non-affected?

No, it's not affected.

Okay. And the -- another question. In the following quarter, will you consolidate the backlog of Universal already?

Yes, second quarter numbers will consolidate all the financial performance of Universal, including their backlog. I would just warn that in the business, in the commercial area, the business is -- has a different kind of backlog ratio to revenues as you know that from the defense business that we are operating in. It's a more quicker turnaround backlog than in our defense business. So the numbers, we do not expect to have then a huge impact.

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

I wanted to ask, there was this agreement with the Obama administration that said that all the military aid has to go to American companies. I wanted to ask if that affects you.

I just want to remind all of us that we are active in the U.S. market via a company. We have in the U.S. Elbit Systems of America. Our U.S. activities are strong and an important part of our revenues and backlog. This company, Elbit Systems of America, most of its activity -- most of its activities are for the U.S. market. And -- but they do also some [SMS] activities -- [FMS] activities for the Israeli market. So the answer is, no. I don't see any effect on Elbit. On the contrary, I believe that we are very well prepared for this transition.

Second question, please. In the previous call, you mentioned headwinds. I assume that was related to the currency that was -- the dollar that was low at that time. Now that the dollar strengthened somewhat, is it fair to say that the headwinds have gone away?

I would say the following: the first quarter of this year, we definitely were impacted negatively by the strong shekel. Compared with the first quarter of last year, the shekel was stronger by about 6%, 7%, and including our hedging, close to 9%. However, we were able, as you have seen in our results, to overcome that. And due to operational efficiencies and other activities that we did in the company, we were able to reach essentially the same operating profit rate like last year. So following the first quarter, we have seen some strengthening of the U.S. dollar versus the Israeli shekel. It did reach about ILS 3.6 to the dollar as you know. And that has helped us in doing some hedging activity. Looking forward, we expect that this will help us in the future quarters. And compared to the first quarter, we expect to have less of hedging -- less of friction from that point of view with the shekel. But still, we are -- we have the challenge of ILS 3.5, ILS 3.6 range to the dollar.

Now at the current rate, that's a rate achieved that you're comfortable with? Or...

Yes, well, I'm not happy with the current rate, but it is better, much better, than what you -- what -- than the one that we had in the first quarter.

With regards to the growth in the backlog, is that -- you didn't announce that many large contracts. So is it many small contracts? Or is there something larger?

We did not change our policy of reporting to the market. So coming from that point of view, we had many medium-sized and small contracts on one hand, and also follow-on contracts on the other hand. We did report one major one with Australia, Command and Control Systems. But other than that, we had many, many medium-sized and smaller ones, which definitely give us a very good feeling that if there is any risk in any contract, it is spread over many of those. So we feel very comfortable with what we have in the backlog.

Final question, please. I see the share in affiliates increased to $3.1 million. Is that representative? What is the source of the increase, please?

What did increase? I didn't get you.

The profit from share in affiliates.

Oh, that one. Yes, well, it -- first of all, I wouldn't give a lot of weight for quarterly numbers in our business. You have to look at the overall yearly performance. However, yes. We did see improvement in our partnerships, in the performance of them. One of them is here in Israel, but we did contribute very nicely to our performance. The other one is the U.K. And there are -- we have quite a lot of those. Overall, most of them did much better than last year.

So is this representative, the current quarter?

We hope so. We are not sure. We do not give guidance, as you know, but we hope so.

We have a follow-up question from Michael Klahr of Citi Bank.

Can you comment on the -- on working capital? I see it was $130 million outflow in the first quarter last year, $230 million outflow this year. Is there something specific driving that? Is it a particular geography or segments? If you could give us some comments on that?

Yes. Well, if you look at our financial statements, you will see in this quarter, you will see 2 things. One is ongoing continuation of our general policy that we use our strong balance sheet to win contracts, to provide our customers with the required payment terms as -- in compliance with their budgets. This drives definitely, to a higher level, the working capital. And of course, it helps us win positions in strategic markets. This is -- this part is essentially a continuation of what has happened over the last 2 to 3 years, and it looks like a very good strategy and helps us grow the backlog and win positions in the market. These customers are grade A customers with very, very low risk with a long-term working relationship with the company. And we are very confident that we are going to collect that money in due time according to the contracts. So that's one aspect of that.

The other aspect is, you have seen this quarter, specifically growth actually in the payment to our suppliers, which reduced the line of payables compared to what we had before. And that is due to preparation; acceptance of deliveries from our suppliers; and accordingly, growth in inventory in preparation of future deliveries from our company to our customers. So these 2 combined have driven some growth in the working capital.

Is that -- you mentioned about change of terms. Your first one about change of terms with customers to [ease] your balance sheet to win contracts. Is that -- where -- are you now at terms that you're comfortable with? Or will we see that as terms of business, at least on the cash flow side, continues to deteriorate?

I think we are in a very well-balanced point in our -- in running the business. I would not expect a significant growth in that area except as related to the adoption of the 606 standard, which as you know, revenues are recognized upon the input method as cost is incurred, while there might be some time delay from the time cost is incurred until the payment -- the deliveries are made and payment is received. So here we might see some increase in the future working capital. I would not expect any extraordinary growth.

The next question is from Dan Stolper of Stifel.

[Herbert Binder]. Can you comment on any developments with the virtual wall in the United States?

The program is progressing. The part of the system is already -- the system is already operational in several areas along the border in Arizona. And from what we understand, this solution [is really] successful -- the system is successful and the customers are satisfied. And we look forward to get additional activities around if -- around disposal.

Can you tell how much interest there is from the Trump administration to try to use this instead of a physical wall?

It's difficult for me. It's difficult for me to answer this question. I believe that a possible solution might be a combination of physical wall with a virtual one.

(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 039-25-5904. And internationally, please call 9723-925-5904. A replay of the call will be -- will also be available on the company's website at www.elbitsystems.com. Mr. Machlis, would you like to make your concluding statement?

Thank you. 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.

Thanks. This concludes the Elbit Systems First Quarter 2018 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.