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Elbit Systems Ltd. (NASDAQ:ESLT)

Q3 2008 Earnings Call

November 25, 2008 08:30 am ET

Executives

Ehud Helft - GK Investor Relations

Joseph Ackerman - President and CEO

Joseph Gaspar - CFO

Analysts

Tsahi Avraham - Clal Finance

Yoav Burgan - Leader Capital Markets

Roni Biron - UBS

Jonathan Raven - Deutsche Bank

Yoav Burgan - Leader Capital Markets

Operator

Welcome to the Elbit Systems Ltd. third quarter 2008 results conference call. All participants are present in a listen-only mode. (Operator instructions). As a reminder this conference is being recorded November 25, 2008. I would like to remind everyone the Safe Harbor language contains in today's press release also pertains to all contents of this conference call.

If you have not received the copy of today's release and would like to do so, please call Gelbart Kahana Investor Relations at 1-866-704-6710 or 972-3607-4717. I would like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Ehud would like to begin.

Ehud Helft

Thank you and good day everybody. On behalf all the investors I would like to thank Elbit Systems Management for hosting this call. Joining us on the call today are Mr. Joseph Ackerman Elbit Systems President and CEO, Mr. Josy Gaspar, Elbit Systems, Chief Financial Officer.

Joseph would begin by providing a discussion on the financial results of the quarter followed by Joseph 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. With that I would like to turn over the call Josy. Josy Please?

Joseph Gaspar

Thank you. Hello everyone and thank you for joining us today. Again we had another quarter of strong growth and improved profitability. You can find all the details figures in the press release we issued today, which is also available on our website.

We reported third quarter revenues of $671.2 million growing more than 29% over the third quarter of last year. All of this in organic growth. In terms of revenue breakdown across our areas of operation in the third quarter Airborne Systems was 24.1% of revenues, C4ISR was 44.3%, Land Systems was 18.3%, Electro-Optics was 9.5%, and the other businesses accounted for 3.8%.

All sectors grew year-over-year on absolute basis, with the C4ISR leading. On a geographic basis, we saw strong growth in all regions year-over-year, on an absolute basis. The United States remained our largest region, accounting for 33% of our revenues, Europe was 23.5%, Israel 19.6%, and the rest of the world was 23.9%.

Our gross profit grew very strongly, 41.5% over the last year to $198.3 million with a gross margin in the quarter of 29.5% compared to 27% in the third quarter of last year. The strong improvement was partly due to previously mentioned high margin short-term delivery contracts, as well as the mix of projects performed in the quarter, and generally improved processes within the company.

During the third quarter pre-events occurs that in an aggregate has minimum total net effects on our net profits. There was a one time income of $6 million related to a legal settlement involving a US subsidiary of the company, which benefited the G&A cost. Balancing this, there was also a financial expense related to the write off of Auction Rate Securities totaling $5.7 million.

Our operating profit in the quarter more than doubled over the last year to $78.3 million representing an improved operating margin of 11.6% in the quarter compared to 6.8% in the third quarter last year. This margin improvement is a result of the higher gross margins, while controlling the growth in operating expenses and also the additional benefit provided the settlement we mentioned above.

While we so far have not seen any significant impact on our business from the new and challenging macro-economic environment, we put a particular emphasis on controlling our expenses in such uncertain time.

Financial expenses were $60 million compared to less than a $1 million in the third quarter last year. The large increase was due to the above mentioned $5.7 million ARS write-off as well as the weakening of the US dollar against the Israeli shekel over the reported period.

Net profit increased year-over-year by 35% to $35.6 million, with a net margin of 5.3% of revenues, compared to 5.1% in the third quarter last year. Our diluted earnings per share for the quarter were 83% versus 62% in the third quarter last year.

Our visibility remains strong. The backlog of orders at quarter-end was $4.87 billion compared with $5.05 billion as of June 30, 2008. While our vessels was slightly below that of the last year, we believe our backlog remain strong. For example, the Brazilian win of over $180 million occurred just the short time after the end of the third quarter. 71% of the backlog relates to orders outside of Israel, representing the global diversity of our business.

Our visibility also remains strong with 57% of the company's backlog scheduled to be performed during the remainder of 2008 and during 2009. Operating cash flow for the quarter was negative of $17 million which resulted in a $113 million positive operating cash flow for the nine months ended September 30 this year.

Finally, the Board of Directors declared a dividend of $0.22 per share for the third quarter of 2008. That is end my summary and I shall turn the call over to Mr. Ackerman.

Joseph Ackerman

Thank you Josy. I am pleased to report another quarter of solid progress at Elbit Systems with growth across all areas of operation and in all geographies. Company wise, we continue to improve with sustained growth on both the top and bottom line driven both by strong organic growth as well as the contribution through our acquisitions.

In addition, in only the first three quarters of 2008, we have already surpass the whole of last year's net income achieving just high of $100 million in net profit. We are examining the potential implication of the global economic on our company. While we have not seen any impact on us, we are taking measures to rationalize on expenses.

This is to ensure that we are able to maintain our profitability momentum and technological leadership in the coming months ahead. We believe that Elbit System remains very well positioned strategically, operationally and financially.

I would now like to spend a few moments discussing some of the development with regard to our acquisition activity in the quarter. At the start of this quarter, we received all approvals required for the completion of the full merger of Tadiran Communication.

Tadiran price with all of its assets and liabilities to Elbit System merged with and into Elbit System and no longer exist as legal entity. This full measure is part of our plan to actualize synergies through reorganization and we already seeing the fruits of our efforts.

More recently, our US subsidiary Elbit System of America purchased Innovative Concepts from Herley Industries for $15 million. Innovative Concepts is a wireless communication technology firm specializing in real-time embedded system and high speed processing solution for defense and homeland security applications.

Innovative Concepts will become part of our C4I solution business and the acquisition is part of our long-term strategy to provide advance C4I system solution to the US Department of Defense, and Department of Homeland Security.

Finally, only few weeks ago, we purchased a minority interest in the Israeli company called Azimuth. The company has superior technologies for target acquisition, navigation and orientation solutions, cameras for defense application.

The technology has significant value to Elbit System and there are many, many application of this technology across our entire product portfolio, both to internal growth as well as our acquisition of highly synergistic businesses in our field, Elbit System is becoming ever more a global leader in the electronic, defense industry.

Now I would like to briefly highlight just a few of the many recent events in the quarter and beyond. As always, our UAV's had had particular success. We were awarded at third quarter to supply the Australian Army with more Skylark I UAV system for several million dollars. In addition, we signed a $25 million of contract to supply UAV to a country in the Americas. Our subsidiary Cyclone achieved a $31 million from Boeing to supply it with components for the F-15 including external fuel tanks, pylons, horizontal stabilizers.

Following end of the quarter, we achieved a $100 million worth in order for military communication systems to be used by three customers in Europe, South America, and Asia, all to be delivered by the end of 2009. Finally, a few weeks ago after the end of the quarter, we received a large order by Embraer, the Brazilian aircraft company for avionics, for the upgrade of the Brazilian AMX jets. The initial development and prototype phase of this contract is approximately $67 million.

The entire contract, including the production phase is approximately $187 million and is scheduled to be completed through 2014. We take great pride in our selection for this important project. We believe our selection reflect the satisfaction of our Brazilian customer from our past performance.

Under the project, Elbit Systems and our fully owned subsidiary Brazil, AEL will supply the central mission computer of AMX, as well as display system, the ammunition management system and additional electronic systems.

Our subsidiary Elisra, will supply the electronic warfare system as a major subcontractor to AEL. Our ability to incorporate all those systems in this upgrade project testifies to the synergy within Elbit System portfolio, which enables us to provide our customer with a wide variety of innovative end-to-end solution.

In summary, a strong performance also into 2008. With that, I would like now to open the call for questions-and-answer, operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instruction) The first question is from Tsahi Avraham of Clal Finance. Please go ahead.

Tsahi Avraham - Clal Finance

We know that you like to give conservative guidance, but since your backlog had declined this quarter after a very long time, could you be more specific regarding the backlog issue?

Joseph Ackerman

Yes. I can tell you in few words that this is a question of timing. We don't see a trend of backlog being weakness and certainly we have a higher backlog in the fourth quarter.

Tsahi Avraham - Clal Finance

Okay. The second question is, could you elaborate on the affiliate companies and the minority interest, you have the Watchkeeper project in this year, so I guess it's not representative for the future for 2009?

Joseph Ackerman

Josy?

Joseph Gaspar

In our line regarding the minority interest, you can see the results potentially relating to the minority companies, so that we have the majority 51% and above. As you know, U-TacS fellow subsidiary in Britain, Kinetics our subsidiary here in the US and Elisra.

I think most of the companies in that line have done well this quarter again and slightly less than what we have seen last quarter. We are looking forward for them to continue to supply good business and bottom-line profits in the future as well, although there might be changes, slight changes in the future.

Tsahi Avraham - Clal Finance

Okay, thank you and good luck.

Joseph Ackerman

Thank you.

Operator

Next question is from Yoav Burgan of Leader Capital Market. Please go ahead.

Yoav Burgan - Leader Capital Markets

Hi and good afternoon or good morning. I just have two, three maybe, short questions. Regarding your operating expenses, if I look at the G&A, even if I put back the one-time items, the $6 million regarding the legal settlement, still it seems to be at a bit of a low level. Could you address that please?

Joseph Ackerman

Josy?

Joseph Gaspar

As I mentioned earlier, we are quite keen interacting our expenses, our operating expenses, the G&A for us being very important for us, that we are looking time again to see if we can save anything on that line.

And this profit is ongoing for quite a long time and I believe that we are seeing now the result of the measures taken over several quarters to reduce this expense as much as possible of course.

Yoav Burgan - Leader Capital Markets

Okay. So this is something that we can assume as representative, I mean looking forward.

Joseph Gaspar

As you know we don't give guidance, but we will continue to monitor this expense as we did in the past.

Yoav Burgan - Leader Capital Markets

Okay. And there is another question regarding the R&D expenses. A bit higher than recent quarters again- is there anything special that happened or….?

Joseph Ackerman

Josy?

Joseph Gaspar

Nothing special. I would say that quarterly fluctuations in our expenses are something that we see. I would not give too much importance for those small fluctuations. Overall, our R&D activity is ongoing according to the long-term plan, the strategic plan and the yearly budget, and we are definitely achieving our goals of technology and product development.

Yoav Burgan - Leader Capital Markets

Okay, thank you very much.

Operator

The next question is from Roni Biron of UBS. Please go ahead.

Roni Biron - UBS

Hi, guys. Regarding the backlog, how does it break down geographically and what should we assume in terms of the currency impact from the appreciation of the US dollar against the euro and shekel.

Joseph Ackerman

Josy?

Joseph Gaspar

Well, I believe that we do not release the geographic break down of the backlog, but in general we’d say it is not very different from what it used to be for sometime now. So, no significant changes from what we had seen in recent periods in the breakdown.

Regarding the currency, as we were able to manage with small fluctuations and changes, the downsize of the currency exchange US dollar versus the shekel, I believe that we’ll manage the upsize as well. That means that we do not expect significant or any drastic impact on our expense level due to these changes.

Roni Biron - UBS

And, could you indicate what was the organic growth this quarter?

Joseph Gaspar

All the growth was organic, so it's about close to 30%.

Roni Biron - UBS

Close to 30%?

Joseph Gaspar

About 29 something.

Roni Biron - UBS

Okay. Thank you.

Operator

The next question is from Jonathan Raven of Deutsche Bank. Please go ahead.

Jonathan Raven - Deutsche Bank

Hi, good afternoon. I've got two sets of questions. Taken separately, the first relate to the organic growth. I was wondering whether you believe that whether this level of organic growth is sustainable and if not, what level do you foresee? And either way, how do you intend to maintain the solid organic growth?

Joseph Ackerman

Due to the firm backlog that we have and also the opportunities that we are now pursuing that in the pipeline to be awarded in the coming quarters, and due to the fact that as you all know we have what we call soft backlog, I mean order of that we got, but are not funded, so they are not recorded in our backlog, so due to all of those we are very optimistic that we will continue to see an organic growth also from 2009, which will be a two digit organic growth.

Jonathan Raven - Deutsche Bank

Okay. Thank you. And the second question relates to the long-term debt on the balance sheet. I notice that it was a repayment in this quarter alone of about $159 million of long-term debt and a receipt of about $85 million in this quarter. I was wondering is that to do with the refinancing over the maturities that you had for 2009 to personal [write up].

Joseph Ackerman

This is related to the arrangement that we had when we bought Tadiran Communications or for those who know the history, Tadiran Communications had some cash when we bought them. And, once we have that completed our merger and got all the approvals from the right, from the authorities, we decided that in view of the recent short-term requirements for cash, it is best for our business to reduce the long-term debt and of course reduce the future expenses related to that.

Jonathan Raven - Deutsche Bank

Okay. Thank you.

Operator

(Operator Instruction). The next question is from Yoav Burgan of Leader Capital Market. Please go ahead.

Yoav Burgan - Leader Capital Markets

Just one more question, Josy you mentioned before that you do not expect any material effects of foreign exchange fluctuations. I mean, until now or at least until the second quarter, you managed very nicely the depreciation of the US dollar and mainly in Q3, we see a very significant depreciation of the dollar. Isn't this, I mean, to have a positive, maybe even significant debt affect on you?

Joseph Ackerman

I believe that in general, it has a positive affect. The extent to which that affect is significant, we will see it later on, in general it is positive. I do not expect to have a material impact on the result in the first quarter.

Yoav Burgan - Leader Capital Markets

Okay, great, thank you very much.

Joseph Ackerman

Thank you.

Operator

Next question is Bernard Manor of (inaudible) Insurance. Please go ahead.

Unidentified Analyst

Yeah. Hi, hello, guys, Mr. Ackerman, [Josy] Gaspar, and congratulations for the strong numbers for the quarter. I would like to know, where do you think is the weaker link in your geographical markets? Where do you expect may be the backlog to be softer or the orders to be postponed in respect of the market situation and the economic slowdown? And if you can refer to the opportunities in the UAV market and the Electro-Optic, how do you see the growth rate there for the coming quarters? Thank you.

Joseph Ackerman

Quite a long question, I will try to do my best. The current backlog and what we have in our pipeline and the soft backlog that we have is a result of a long-term strategic planning and the plan was and we say that more than once, our plan is to have 20% and plus in Israel of our revenues, 30% plus in the US, 20% plus in Europe and the rest which is around 20% in Asia and South America.

This split is going to continue also in the future. We believe this is the right strategic split that will support our growth in the coming five, even ten years. So this is not going to change and as we talk to our customers even these days – [asking the broader] customers both in Europe, in US in Israel we don’t see as of today any desire to change their plan with Elbit System.

I'll talk about our type technology, all type of solutions. So, this is why I am quite optimistic that this split will continue. And certainly as you mentioned, the need for more UAVs in the marketplace, more C4I in the marketplace, we see growing demand for Electro-Optics. This is why our anticipation is that our growth plan will continue and I must say that even during this economic crisis, sometimes we see some opportunities for a company like Elbit. So, maybe to summarize what I have said is that as of this moment, we don’t see any impact on our businesses, all those customers and we do our business as usual.

Unidentified Analyst

Right, thank you and good luck.

Joseph Ackerman

Thanks

Operator

There are no further questions at this time. Mr Ackerman, would you like to make a concluding statement?

Joseph Ackerman

Yes, I would thank everybody, everybody for joining us today in our conference call and I am looking forward to being with you in our next conference call, next quarter. Thank you.

Operator

Thank you. This concludes Elbit Systems Limited third quarter 2008 results conference call. Thank you for your participation, you may go ahead and disconnect.

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