Elbit Systems Ltd. (ESLT) Q2 2008 Earnings Report, Transcript and Summary

Welcome to the Elbit Systems Ltd. Second Quarter 2008 Results Conference Call. All participants are at present in a listen-only mode. (Operator instructions). As a reminder, this conference is being recorded, August 12, 2008. I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to all content of this conference call. If you have not received a copy of today's release and would like to do so, please call Gelbart Kahana, Investor Relations at 1-866-704-6710 or 9723-607-4717. I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Ehud, please go ahead. Ehud Helft – Gelbart Kahana: Thank you and good day, everybody. On behalf of all the investors, I would like to thank Elbit management for hosting this call. Joining us on the call today are Mr. Joseph Ackerman, Elbit Systems President and CEO, and Mr. Joseph Gaspar, Elbit Systems Chief Financial Officer. Joseph will begin by providing a discussion of 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. Before we begin, I would like to point out that Safe Harbor statement in the Company's press release issued early today refers to the content of this conference call. With that, I would now like to turn over the call to Joseph. Joseph, please.

Thank you, Ehud. Hello, everyone, and thank you for joining us today. Again, we had another quarter of strong growth, strong profitability, and record financial results across the board. You can find all the details present in the press release we issued today, which is also available on our Web site. Before starting, I would like to point out that during the second quarter, we reported two events that in the aggregate, had a minimal total net effect on the bottom-line. These were a one-time, net after tax expense provision of $10 million, related to a court ruling against a U.S. subsidiary of the Company. The other was the significant contribution by contracts with short-term delivery, which also had a high level of revenues and margin. Now to the results. We reported second quarter revenues of $653.2 million, growing 40% over the second quarter of last year. While this also includes the acquisition of Ferranti in the first quarter of last year, and part of Tadiran Communications during the second quarter of last year, our year-over-year organic growth rate was also very strong, and to that, approximately 35%. In terms of revenue breakdown across our areas of operation in the second quarter, Airborne Systems was 24.1% of our revenues, C4ISR was 33.1%, Land Systems was 23.5%, Electro-Optics was 11.2%, and the other businesses accounted for 8.1%. Most sectors grew year-over-year on an 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 33.3% of our revenues, Europe, 30.5%, Israel 15.9%, and the rest of the world was 20.3%. As you can see, and as we mentioned in the past, Europe has become a major growth engine for the Company.…

Thank you, Joseph. I am pleased to report another quarter of strong growth, with record financial results, and very significantly, as Joseph mentioned, our backlog grew and crossed the $5 billion milestone. While all parts of the businesses are performing in accordance with our plans, our subsidiaries in particular performed very well, and were an important factor in our success this quarter. Company-wide, we continued to improve with sustained growth on both the top and bottom lines, driven both by strong organic growth as well as the contribution through our acquisitions. I would like to spend a few moments discussing some of the developments with regard to our acquisition activity in the quarter. Following the end of the quarter, we received all approvals required for the completion of the full merger of Tadiran Communications. Tadiran starts with all fixed assets and liabilities throughout the systems, merge with, and into, Elbit Systems, and no longer exists as a legal entity. This full merger is part of our plan to actualize synergies through reorganization, and we believe that we can already see the fruits of business growth from this effort in the coming months. Towards the end of the quarter, we acquired all of the shares of the Israeli company Electro Optic Research and Development Company, also known as EORD. The company is engaged in the research and development of remote sensing technologies, including acoustic and seismic sensors. As you can tell, the technology in itself has significant value to Elbit Systems, and there are many applications of this technology across our entire product portfolio. Similarly, our subsidiary Elop acquired another Israeli company, called Bar-Kal, with important R&D assets. Bar-Kal is engaged in research and development of technologies related to hyperspectral remote sensing, primarily targeted to defense customers. Bar-Kal will become a…

Thank you, sir. (Operator instructions). The first question is from Tsahi Avraham from Clal Finance. Please go ahead. Tsahi Avraham – Clal Finance Batucha: Hi, yes, Joseph, good afternoon. And could you elaborate about your impressive revenue growth you showed in this quarter? Is it sustainable also for the second half of the year? And also, if you could tell us what was the organic growth year-over-year?

The organic growth in the quarter over quarter was about 35%, when we take into account the acquisition of Tadiran in the second quarter of last year, and of Ferranti in August of last year. So it's approximately 35%. Regarding for the second half, our backlog, as we said, shows strong growth, and does provide us relatively good visibility for the second half of the year. And although we do not give forecasts, we feel comfortable that the Company will continue to prosper in the second half. Tsahi Avraham – Clal Finance Batucha: Okay. My second question is regarding your gross margin. It is clear that you were affected from the short-term contract, but would we see an improvement in the gross margin also without it, if we compared to the 27.1% you showed last quarter?

I think the gross margin result comes from, as you mentioned, the short turnaround contracts, on one hand, a mix of the various programs that we performed in the quarter, and some efficiency and improvements in the processes of the Company. It's a combination of all of the above. And definitely, the contribution of the short-term contracts in the quarter, which did not need additional overhead expenses, and using the same infrastructure, did contribute significantly to the improvement. Tsahi Avraham – Clal Finance Batucha: Okay, so you can't tell us if it's more or less than 27%, or –

I think in general, all of the business of the Company continued to improve. Tsahi Avraham – Clal Finance Batucha: Okay, thank you. Bye-bye.

Thanks.

Thank you. The next question is from Roni Biron of UBS. Please go ahead. Roni Biron – UBS: Hi, guys. Congratulations on another strong quarter. From my calculation, you currently have about zero net debt. Do you have any plans to gear up your balance sheet, and then also, how should we – what should we expect in terms of financial expenses, now that the currency impact on your balance sheet seems to have reversed?

Your calculations are correct – we are close to zero net debt. And although we have a significant amount of cash, and an equivalent amount of debt, loans. So I'm not sure what effect are you asking? Roni Biron – UBS: I'm asking – basically, you are generating cash every quarter, and it seems like you're going to be cash positive within the quarter too, which is somewhat different than the typical structure in the industry. I'm just wondering if you are expecting to maybe raise some debt going forward, or just remain cash positive?

I think that the Company's policy, as it was said by our President, is that we continue to look for acquisitions, mergers and acquisitions. We have shown that in the past. This is a strategy. And we probably, for that, as one of the places that we will use the cash in the future. But Joseph, would you like to add?

Yes. As you all know, Elbit's growth strategy is comprised of two components. One component is organic growth. The second one is M&A, as we did in the last eight years. And we are continuously looking for a good target for acquisitions. This is why we need the strong balance sheet for. Roni Biron – UBS: Okay, thank you.

The next question is from Jonathan Rayven [ph] of Deutsche Bank. Please go ahead. Jonathan Rayven – Deutsche Bank: Hello, gentlemen. I have two questions for you today. The first one relates to the backlog. I was wondering whether – when your results come out each quarter, you revalue the backlog when different parts of it are in currencies other than US dollars.

Yes, we do. We reevaluate it according to the, especially the shekel backlog. We are looking at that quite conservatively, in the view of what are the estimates for the near future. But we do reevaluate it, yes. Jonathan Rayven – Deutsche Bank: Okay, thank you. And my second question relates to the minority interests, which we noticed were fairly large again this quarter. I was wondering if you could, once again, give some more color on what's comprised in there.

The major companies that we own less than 100% and more than 50% ownership are Elisra – we own 70%, and U-TacS in the US, in the – in England and the UK, we own 51%, and Kinetics, in Israel, we own 51%. This is their performance, essentially. It's composed in that number. Jonathan Rayven – Deutsche Bank: Okay, so could you fill us in on the – any progress in the turnaround with Elisra?

Yes. I think that in Elisra, we see a very nice prospect in interest our customers are showing in Elisra technology. So backlog-wise, technology-wise, we are very optimistic. Still, there is a lot of work to do in regard to efficiency. Still, the bottom line is only zero plus, minus. So I'm saying, there still is a lot of work to do to bring Elisra to the level of (inaudible) Elbit Systems. But it will take more time than we originally planned, this is – we understand that. But basically, the strategy that it was giving us to acquire Elisra still exists, and looking at the marketplace, Elisra is very well-positioned. Jonathan Rayven – Deutsche Bank: Do you have a timeframe you can give us?

I do hope that we see in a year or two, we'll bring them to the positive. Jonathan Rayven – Deutsche Bank: And one last question, and then I'll end. Do you think that – does Elisra have a material impact on keeping the net margin flat?

I'm sorry – I'm not sure I understood the question. Jonathan Rayven – Deutsche Bank: Gross margins expanded quite nicely, but the bottom – that didn't flow through to the bottom-line. I was wondering whether Elisra is a large component of that.

Not necessarily. They didn't contribute too much to the profit, but as Joseph said, they are plus, minus around zero. Jonathan Rayven – Deutsche Bank: Okay. Thank you very much.

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

Yes. I would like to thank all of you for joining us today, and I'm looking forward to see you all in our next conference call. Thank you.

Thank you. This concludes the Elbit Systems Ltd. Second Quarter 2008 Conference Call. Thank you for your participation. You may go ahead and disconnect.