Elbit Systems Ltd.
Q2 2014 Earnings Call Transcript

Published: 6 Aug 2014

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' Second Quarter 2014 Results Conference Call. [Operator Instructions] As a reminder, the 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 Relations or view it in the News section of the company's website, www.elbitsystems.com. I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Ehud, please go ahead.

[Ehud Helft:]

Thank you, operator. Good day, everybody. On behalf of all the investors, I would like to thank Elbit Systems management for hosting this call. Joining us today on the call today are Mr. 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 of the quarter, followed by Butzi, who will talk about some of the significant events during the quarter and beyond. We'll then turn over the call to the question-and-answer session. Before we begin, I'd like to point out that the Safe Harbor statement in the company's press release issued earlier today also refers to the content of this conference call. With that, I would like now to hand over the call to Yossi. Yossi, please?

[Joseph Gaspar:]

Thank you, Ehud. Hello, everyone, and thank you for joining us today. Like last 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, in today's press release. We are happy with our second quarter 2014 results. Our results indicate a solid business base. Thanks to our ongoing efficiency measures, we were able to keep our operating expenses at similar levels to last year despite a stronger shekel versus the U.S. dollar. Additionally, we demonstrated continued improvement in our backlog, which is a good sign for the future potential growth in revenues. I will now highlight and discuss some of the key figures and trends. Our second quarter 2014 revenues were $702.6 million, at almost the same level as last year. In terms of revenue breakdown across our areas of operations in the quarter, C4ISR systems was 37%; airborne systems was 41%; Armored Vehicle Systems was 9%; electro-optics was 9%; and the rest was 4%. Compared with last year, the makeup of the overall mix was essentially the same, with some growth in airborne systems and some decline in electro-optics. In terms of geographic breakdown in the second quarter

[Bezhalel Machlis:]

Thank you, Yossi. I am pleased with the results and particularly the solid growth in our backlog. This is a good indication to our potential to grow while providing us with visibility into the coming years. During the quarter, we also saw a general resurgence of activity in certain geographical regions, such as Latin America and Asia Pacific. While we see much long-term growth potential in the defense area, I am particularly pleased with the return to growth in Latin America, an area of focus for us. We also received some recent orders in these regions which have added to our backlog over the past few months. In May, we were very pleased to have won a 1-year $133 million Homeland Security order for Latin American customer to be performance over the next year. This award allows the -- followed the $100 million award that we received in April in the region for a new innovative intelligence-gathering system, also to be performed over the coming years. This second award is an important milestone for us in the Homeland Security field, in which, we are witnessing a growing demand worldwide. The systems are based on highly advanced and unique technologies, which benefit from synergies across our divisions. These include Command and Control and intelligence capabilities to be operated via dedicated control centers intended to play a major role in fighting crime, preventing violence and improving citizen's safety and security. Our technological edge and vast operational experience in command and control missions or defense applications have positioned us as market leaders for Homeland Security projects, especially in emerging defense regions. In the Philippines, in June, we were awarded a $20 million contract for the supply of upgraded Armored Personnel Carriers to the Philippine Armed Forces. The contract marks a significant breakthrough for us, and details the first won award to us in the Philippines, an important customer in the Asia Pacific region. This award is a further demonstration of our leadership position in the field of ground vehicle upgrades, and follows an order received earlier this year for $219 million for a tank upgrade program for a customer in the Asia Pacific region. While [indiscernible] revenues was weaker this quarter as Yossi mentioned, we don't see this as indicative of a trend, and we have continued to win important businesses in the region. A few weeks ago, we were informed by the Swiss Federal Department of Defense, Civil Protection and Support that we were selected as a preferred supplier for UAS 15 new reconnaissance drone program. In such, they have selected our Hermes 900 heavy-fuel engine. While it is still early, and the selection has not yet led to orders, the decision to use our system after extensive competitive price is an important mark of the success and superior capabilities of our unmanned reconnaissance systems. In summary, our businesses is performing well. We are winning new businesses in all our regions, including key contract wins in target growth markets. While the current results are very similar to those of last year, the fact that our backlog is $370 million ahead of where it was the same time last year bodes very well for the future. Elbit Systems remains very well-positioned, both physically and financially, and I look forward to the opportunities ahead. With that, I will be happy to take your questions. Operator?

[Operator:]

[Operator Instructions] The first question is from Gilad Alper of Excellence.

[Gilad Alper:]

I have a question on the implications from the war in Gaza. So firstly, do you see any risk of contracts being canceled because of the war? And secondly, exactly the opposite, do you see any upside for new contracts based on the way your commitments performed during the war?

[Bezhalel Machlis:]

Our systems are being used by the Israeli Armed Forces, and it's once again a strong evidence for us that we are very relevant. We are -- these technologies that we have in the -- we are supplying defense and warning systems, is very well appreciated all over the world by different customers, and I don't see major risks for us in the future. And we've got the local support from different customers all over the world during the activity in Gaza. I just want to remind all of us that we are also supplying many jobs in -- all over the world via subsidiaries and via joint ventures that we have. So I don't see -- and based on the previous experience we have in the past, I don't see any major changes in the potential that we are heading -- that we have ahead of us.

[Gilad Alper:]

Okay. Just a very quick follow-up. Assuming that you do get some new contracts because of the war, what's the timeframe at booking basically like? Is it like the new next quarter or the next 2 quarters, the next 2 years?

[Bezhalel Machlis:]

It's a bit early to judge, and of course, the IAS and other customers have to take their decisions. It's a little bit too early for me to answer this, to give you a clear answer about this.

[Operator:]

The next question is from of Katya Schneiderman [ph] of Citibank.

[Unknown Analyst:]

I have a few questions, please. First of all, your sales were flat in this quarter, but the backlog keeps growing. So I wanted to ask should we expect revenues to jump in the second half of this year or it will be posting to 2015?

[Joseph Gaspar:]

I wouldn't it use the word jump, but we definitely are optimistic about growth in revenues in the second half compared to the first half. And of course, 2015 will also reflect the growth in the revenues moving in -- the growth in the backlog moving into revenues.

[Unknown Analyst:]

Okay. So just a follow-up. So can we expect this level of backlog growth of 5% or 6% year-on-year, is it sustainable?

[Bezhalel Machlis:]

There are many opportunities ahead of us. This is hard to predict. But I can tell you that we -- the portfolio that Elbit has is very relevant, and we offer more for less and with -- there is a lot of demand for high [ph] stock capabilities, for Homeland Security capabilities, for different UAVs and other type of systems. And I'm very optimistic about the future because, as I already said, I see a lot of potential for the company in the future.

[Operator:]

[Operator Instructions] A follow-up question from Gilad Alper.

[Gilad Alper:]

Just if we look at the geographies, Latin America and the Far East, I think, for the first time equaled in terms of size to revenues coming from the U.S. or from North America. Should we expect that in the near future or maybe in the longer-term, the Far East and Latin America are going to become the most important geographies for Elbit?

[Joseph Gaspar:]

From what we see in our backlog, we have -- we are optimistic about growth of revenues in these emerging markets. However, I would say that the U.S. market is also a very solid one, and presently the biggest one. We are encouraging the race between these 2.

[Operator:]

The next question is from Ella Fried of Bank Leumi.

[Ella Fried:]

My question relates to the current level of operating profit and gross profit. Can we look at these levels as representative of the next few quarters, or do you think we'll have to see a further erosions in these levels?

[Joseph Gaspar:]

Well, as you know, we do not give any forecast...

[Ella Fried:]

Yes, well, more the feel and the current level -- of course, if the current level of shekel remains, there is no further appreciation?

[Joseph Gaspar:]

We have intensive activities of improving yield and reducing the cost base of the company. So, hopefully, they will continue to support our business. And will able to support these levels of operating profits. But I would not guess anything for the future because we have seen what happens with the dollar-shekel and other impacts to our business.

[Operator:]

The next question is from Ethan Etzione [ph] of Etzione Portfolio Management [ph].

[Unknown Analyst:]

I wanted to ask about the tax rate. I see this quarter your tax rate was higher than as far back that I can see. You did mention that it depends on the different countries where you operate, but can you give us some sense of where we should see the tax rate going forward?

[Joseph Gaspar:]

I think the tax rate that we see in this quarter is not representative for the long term. It is a specific quarter with income coming from higher taxable regions. I think if you look at what we were -- have experienced in the last 4, 5, 6 quarters, that's more representative for the future.

[Operator:]

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 [phone]. In Israel, please call [phone], and internationally, please call 972-3-925-5901. A replay of the call will also be available at the company's website, www.elbitsystems.com. Mr. Machlis, would you like to make a concluding statement?

[Bezhalel Machlis:]

Yes. 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.

[Operator:]

Thank you. This concludes the Elbit Systems Ltd. Second Quarter 2014 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.