Ehud Helft - IR Yossi Gaspar - CFO Butzi Machlis - President and CEO

Yoav Burgan - Poalim Sahar Ella Fried - Bank Leumi Michael Klahr - Citibank David Winters - Wintergreen Advisers

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems First Quarter 2017 Results Conference Call. All participants are at present in listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. 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 Relation at 1646-688-3559 or view it in the News section of the company's website, www.elbitsystems.com. I would now like to hand over the call over to Mr. Ehud Helft of GK Investor Relations. Ehud, please go ahead.

Thank you, operator, 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. Butzi' Machlis, Elbit's President and CEO, and Mr. Yossi Gaspar, Elbit's Chief Financial Officer. Yossi will begin by providing a discussion of the financial results of the first quarter of 2017, 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'd 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. With that, I would now like to turn over the call to Yossi. Yossi, please begin.

Thank you, Ehud. 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 information and the reconciliation in today's press release. Overall, we are pleased with our performance in the first quarter, in particular with the growth in revenues and the continued positive trend in backlog. I will now discuss some of the key figures and trends. Our first quarter of 2017 revenues were $749.2 million, an increase of approximately 4% compared with $721.2 million reported in the first quarter of 2016. In terms of revenue breakdown across our areas of operation in the quarter, airborne systems was 39%, C4ISR was 37%, land systems was 11%, electro-optics 10%, and the rest was 3%. Compared with the first quarter of last year, land systems revenue were lower, mainly due to higher than usual level of Asia-Pacific sales of land systems last year, due to the completion of the Tank Fire Control System Program to this area. C4ISR revenues were higher this quarter, mainly as a result of radio and communication systems sold to European and Israeli customers. In terms of geographic breakdown for the quarter, North America was 26% of our revenues, Europe was 22%, Asia-Pacific was 22%, Israel was 22%, Latin America 5%, and the rest of the world was 3%. Compared with the first quarter of last year, we saw increased contribution from Europe primarily as well as Israel and lower contribution from Asia-Pacific and Latin America. For the first quarter, the non-GAAP gross margin was 30.3% versus 30.5% in the first quarter of 2016. Our GAAP gross margin was 29.5% versus 29.4% last year. The first quarter non-GAAP operating income was $65.5 million or 8.7% of revenues compared with $66.9 million or 9.3% of revenues last year. GAAP operating income was $58.2 million or 7.8% of revenues versus $63.3 million or 8.8% of revenues last year. I note, that in the first quarter of last year we had one-time $7 million in accounting income from increased in value of a subsidiary, due to gain from reevaluation of an investment in our commercial spin-off. In terms of our expenses for the quarter, total operating expenses were 21.7% of revenues compared with 20.7% of revenues in the first quarter of last year. The breakdown was in research and development 7.8% of revenues, the same essentially as last year, marketing and selling expenses at 8.8% of revenues versus 8.5% last year and G&A expenses at 5.2% of revenues versus 5.4% last year. We view both our R&D and marketing and selling expenses together as an investment in our future, and we have increased the total amount of about 16% of revenues, in order to capitalize on the increased opportunities we are currently pursuing in many of our markets. Financial expenses for the first quarter of 2017 were $8.6 million compared with financial expenses of $1.7 million in the first quarter of last year. Last year, we had lower than typical financial expenses, due to gain from various currencies exchanges rate differences. I also note, that in the first quarter of last year, we recorded $3.9 million capital gain in the other income line related to the sale of real-estate while in the current quarter, other income was essentially zero. For the first quarter, non-GAAP net income was $51.7 million or a net margin of 6.9% versus $51.2 million or a net margin of 7.1% last year. Non-GAAP diluted earnings per share were $1.21 compared with $1.20 last year. On a GAAP basis, first quarter net income was $45.9 million or a net margin of 6.1%, versus $52.3 million or net margin of 7.3% last year. GAAP diluted earnings per share were $1.07 compared with $1.22 last year, which included earnings per share of $0.26 related to the gain from reevaluation of investment and the sale of real-estate. Our backlog of orders, as of March 31, 2017 was $7.07 billion, $292 million higher than the backlog at the end of the first quarter of last year. Approximately 64% of the current backlog is scheduled to be performed during 2017 and 2018. This figure is a particular proportion of the backlog scheduled to be perform in the upcoming two years, compared to that at the same time last year. Operating cash flow for the quarter was negative $51 million, compared with a positive cash flow of $24 million in the same quarter of last year. The Board of Directors declared the dividend of $0.44 per share for the first quarter of 2017. That ends my summary and I shall now turn over the call over to Mr. Machlis. Butzi, please go ahead.

Thank you, Yossin. Our first quarter results represent a good year 2017. We had continued growth in backlog as well as in revenue. Our backlog crossed the $7 billion amount for the first time, standing around 4% [ph] ahead of where it was at this time last year. Backlog has grown continuously for the past few years, which feed into our solid and steady ongoing growth in revenue over the long-term. In today's geopolitical environment, we are seeing a trend of increasing defense spending in many of our target markets, particularly in the electronic defense field. We have therefore this quarter stepped up the level of our investment in marketing and R&D in order to capitalize on the increasing opportunities. I'd like to highlight some of our recent successes. In Brazil we were awarded a two year $40 million contract for Brazilian Marine Corps for the supply of advanced C4ISR, electronic warfare, radio and communication systems. The system will be deployed in fixed and deployed command centers and in armed personnel carriers, and dismounted configuration. We believe they will significantly enhance the Marine Force operational effectiveness, with our C4ISR systems, that are based on decades of operational use and combat proven by many of our customers worldwide. Also within the C4ISR area, we received an award for satellite-on-the-move systems from the Israeli Ministry of Defense. The system allow high data rate broadband capabilities to be available to land vehicles on the move, anywhere, anytime based on utilizing various communication satellites. In March, we received the $100 million 5 year contract from the Israeli MOD for advanced radio systems, a portion of which will be subject to U.S. military funding. We also expect to receive an additional order for maintenance services for a period of 15 years. We will provide the Israel Defense Forces with hand held, vehicle mounted and airborne third generation Software Defined Radios, enabling advanced network services at high security level. In March we received an $80 million full year follow -on order, from an Asia Pacific country for comprehensive Electro-optic airborne solution for use in intelligence, surveillance, target acquisition and reconnaissance missions. This follow-on contract attest to these customers satisfaction, with the quality of the previous solutions we have provided them, which are well suited for the global intelligence needs, we see an ongoing growing global demand for ISTAR solutions. In April we were awarded a highly acute contract for approximately $50 million by the U.S. Navy, to provide the Helmet Display and Tracker System with Continuously Computed Impact Point algorithm for the MH-60S Helicopter. The work will be performed in Fort Worth Texas, and is expected to be completed in 2021. An initial order of approximately $14.2 million was received. This award represents the Navy's first production order for the line-of-sight Helmet Tracking System and the integration of targeting symbiology in the Armed Helicopter Weapon System for the MH-60S fleet. Overall as you can see, we continue to win businesses which hedge to our backlog and based on such backlog growth, we expect our solid performance to continue for 2017. As we have shown throughout our history, our continued successes is a function of our continuing to invest in the right areas in the defense and security arenas, targeting the right customers and meeting their needs. Looking ahead in many of our target market, defense spending is on the rise and an increased portion is geared towards the electric defense field. Our businesses is well positioned to capitalize all the trends, we remained well diversified with broad spectrum of technologies and products with sales into many countries and regions. And with that I will be happy to take your questions.

Thank you. Ladies and gentlemen at this time we'll begin the question and answer session. [Operator Instructions] The first question is from Yoav Burgan of Poalim Sahar. Please go ahead.

Hi, I just have one question on your new artillery system for the IDF. I would just like to fully understand, how do you consider the current status of this project? And at what point will you start including it within your firm backlog? Thank you.

We see a big - we see a large demand for advanced artillery solutions all over the world and such a need [indiscernible] in Israel is IDF. We have advanced third generation autonomous artillery solution by the name of [indiscernible] and we understand that there is an interest by IDF to acquire this system. We are already in negotiation and you know the Ministry of Defense taking decision to acquire such a system from us after evaluating additional possibilities in the market and we are right now discussing with them, and negotiating with them a contract, we don't yet have a contract, when we will have a contract of course we will report it and then we'll start to sell you will see it in the numbers. And we all understand that it's a strategic move for the IDF, of course it's a strategic move for Elbit as well and we see a big potential for Elbit and this domain in Israel and as well as in other countries. And I must say that we have a lot of success recently, selling such product all over the world.

Okay. Thank you.

The next question is from Ella Fried of Bank Leumi. Please go ahead.

Good afternoon and congratulations on the backlog. I have two questions, the first one is, did you make any additional acquisitions even for a smaller scale in the first quarter? And the second is, could you go into more detail on the operational cash flow?

Hi, this is Yossi. Regarding acquisitions, we had during the quarter some very small acquisitions made, one here in Israel and more technology oriented and one overseas in Latin America. Very small but according to our strategy as we always explain that complement our offerings technologically or better additional access to markets, they are not material to be reported and they are small but we definitely believe that they have a very good potential to grow our business in the future. Regarding the cash flow, the cash flow this quarter was negative as we reported. A quarterly cash flow in our business is not very representative of overall yearly numbers, as we have shown for many years, we generate the cash that is approximately at a profit level or higher and we did it very nicely last year and the year before that which even higher than higher cash. The lower cash this quarter was a result of increased payments to our suppliers and some reduced payments from our customers. Including some growth in the inventory which of course is prepare to be delivered in the following quarters. We expect cash flow to turn definitely positive towards in the following quarters.

Okay. Thank you.

The next question is from [indiscernible] of Chardan Capital Market. Please go ahead.

Good afternoon. I have couple of questions on the results and the follow-up question. So, my first question is, there is a significant increase in revenue from other regions, is there something specific and there is a new important region emergent for Elbit business? And the second question is on dividend, there is an increase in quarterly dividend, should we expect same payments in the coming quarters later this year? And I'll get back to the follow-up question after. Thank you.

Regarding the other regions, we categorizing the other regions territories that are not included in the prime regions that we define specifically and one major one is of course Africa, various countries in Africa. So we have seen due to our increased marketing efforts in this continent, we start seeing the revenues coming in. That is for other regions the dividends, we don't have a defined and declared policy by our Board of Directors. However if we look back and history of the company, we do payout every quarter dividends at the rate of about approximately 30% of our net income and this is the case right now as well as you probably have noticed in the last quarter last year, 2016 first quarter we raised the dividend significantly to 10% actually we increased that to $0.44 per share. We did payout, we are going to payout $0.44 this quarter as well. And looking forward, I would not make any processes but looking based on history that's probably was we are going to happen in the future as well.

Okay. Thank you. And to clarify one ATMOS, so if the Ministry of Defense decision to select Elbit as a supplier is final. And what's the risk for them to review their decision? And could you please confirm that the size of the contract $1.5 billion as it was stated in the local press?

As I mentioned earlier, the decision was made to - the decision was made to acquire such systems from us, after evaluating the different possibilities in the model. There is we are right now negotiating the program with them the contract with them. And it's too early to tell what will be the size of the contract, it's probably would be a one year contract, it will be a multi-year contract. And of course, when such, when this dialogue will be concluded, we reported to the market of course it's a big program, it will be, I hope and believe, it will be a big program for us. And but, we don't have it yet, it still under negotiation and I hope it will have.

Thank you.

The next question is from Michael Klahr, of Citibank. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. First, you mentioned in remarks in your comments about the high sales and marketing efforts to take advantage of opportunities. Could you give us a bit of color around this, as around new product new geographies, making changes in existing geographies? And related, could you tell us about that item going forward, is that one-time in nature that's the first question. Thanks.

We see many opportunities for us and mainly in North America as well as in Europe and in Asia-Pacific. That's the reason for us to take a decision to invest more in R&D and marketing. I believe that this level of investment is will be required for the future, I don't expect a higher investment in the future. And I believe this investment will help us capitalize to all the opportunities that we are seeing ahead of us. And we see many opportunities actually all the way for most of the portfolio all over the world. And we see opportunities C4ISR systems, and we see opportunities for fiber, we see opportunities in the home and security domain and we also see many opportunities for protection suites for aircraft solution. So we see more opportunities for the company that's the reason for increased for the level of investment in R&D and marketing. That I believe that is sufficient investment, I don't see us investing more than that in the future.

Okay thank you. And I just want to talk about the size of this acquisition from 18 months ago. And there were some earn outs related to that many of those being paid or do you expect them to be paid?

Right now, the forecast for the performance of the business and the actual performance of the business is according to the plan that we have anticipated. We're optimistic on that at this point in time and we'll see how it develops over this year and early next year and then of course based on that, we'll decide on the earn out amount.

Okay thank you.

The next question is from David Winters of Wintergreen Advisers. Please go ahead.

Really two questions. First of all, could you just touch on how you protect your intellectual property, because it's the core of the business. And then secondly with this massive cyber-attack that's happened globally. I mean if you could just touch generally on the opportunities for your cyber protection business. Thank you very much and thanks for doing such a good job.

Okay. Regarding the IP, I'll try to answer that. We have definitely an internal process in the whole company over all the subsidiaries that we follow, which relates to recording the IP has generated with relates to patterns that we applied for and also relates to making sure that our IP is used properly by our companies and is not used, actually is not used by third-parties. From time-to-time we do provide licenses to manufacturers or parts of our systems. Under those license agreements things are very well defined. We actually follow processes that are very well known like U.S. and European companies. So that is the way we do it, actually it is run their all IP process and control is run by our company's Secretary and by our Executive Vice President for R&D. These are the two responsible figures that manage the whole thinking and in organizations we have specific people that take care of these aspects of managing the IP.

With regard to Cyber-security, we have two line of business, the first one is we integrated the protection fleet which we provide for big organization and for government based on a solution we are providing here for the Israeli Ministry of Defense in Israel. That's one line of business that we have, we can take sensitive IT network and protected A to Z. The second line of business is mainly with the commercial market there we provide product, different products to the market. We have those advanced training systems, some of them we're closed in the U.S. in millennium as well as little over Europe, in Japan, in Korea. We have also SCADA protection solutions to protect the SCADA network such as utility and guards in all network. And we also have solutions product to protect IT, Private IT network for Bank, for Insurance Companies and for businesses. So, one line of business deals with enhanced integrated fleet and the other line of business deals with product, both of them are very successful. Their businesses growing, we see many opportunities and one of the reasons for the increase in marketing is because we invest more in marketing efforts in this area.

Thank you very much.

You're welcome.

[Operator Instructions] There is a follow-up question from Ella Fried. Please go ahead.

Hi, just few days ago a Parliamentarian committee approved the first part of released package for defense experts, I wonder does it have any improved influence on your business?

Which committee?

A Parliamentarian committee, approved the first part of release package for defense experts.

For expert.

For defense expert.

No, I don't see any effect on the company on the country. We will of course comply with all the evolution and I believe that the release we give will simplify the process and will help us in our marketing and export vessels. So, I see - I believe that this decision which was made two days ago is in the right direction and it will help us and to simply all the processes prior to that quarter.

Okay. Thank you.

There are no further questions at this time. Before I ask Mr. Machlis to go ahead with his closing statements, I would like to remind participants that a replay of this call will be available few hours after the conference ends, in the U.S. please call 1888-326-9310, in Israel please call 039-255-904 and Internationally please call 972-392-55904. 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.

I would like to thank all our employees for the continued hard work, to everyone on the call thank you for joining us today and for your continuous support and interest in our company. Have a good day and good bye.

Thank you. This concludes the Elbit Systems Limited first quarter 2017 results conference call. Thank you for your participation, you may go ahead and disconnect.