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

Yoav Burgan - Poalim Sahar Ella Fried - Bank Leumi

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems Second 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 Relations 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 and good day, 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 second 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 would 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.

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 GAAP financial data, as well as the non-GAAP information and a reconciliation in today's press release. Overall, we are pleased with our performance in the first quarter, in particular, with the gross and profitability and a continued positive trend in backlog. I will now highlight and discuss some of our key trends and figures. Our second quarter 2017 revenues were $818.3 million, compared to $804.5 million reported to the second quarter of 2016. In terms of revenue breakdown across our areas of operation in the quarter, airborne systems was 37%, C4ISR was 34%, land systems was 15%, electro-optics was 11% and the rest was 3%. Compared with the second quarter of last year, land systems and electro-optics were higher, while C4ISR and airborne was slightly low. In terms of geographic breakdown for the quarter, we were fairly even diversified in the quarter with North America at 26% of revenues; Europe at 25%; Asia Pacific as 20%; Israel at 20%; Latin America at 7% and the rest of the world at 2%. Compared with the second quarter last year, we saw increased contribution from Europe, primarily due to sales of artillery communication equipment and lower contribution from Asia Pacific. For the second quarter, the non-GAAP gross margin was 30.4%, versus 30.3% in the second quarter of 2016. Our GAAP gross margin was 29.6% versus 29.4% last year. The second quarter non-GAAP operating income was $82.7 million or 10.1% of revenues, compared with $80.5 million or 10% of revenues last year. GAAP operating income increased by 7.6% to $75.3 million or 9.2% of revenues versus $70 million or 8.7% of revenues last year. In terms of our expenses for the quarter, total operating were 20.4% of revenues, compared with 20.7% of revenues in the second quarter of last year. The breakdown was net R&D expenses at 8.2% of revenues versus 8.4% last year, marketing and selling expenses at 8.1% of revenues versus 7.5% last year, G&A expenses at 4.1% of revenues versus 4.8% last year. The relatively lower G&A expenses in the quarter were a result of the reevaluation of certain liabilities related to the purchase of businesses and activities and assets in prior years. We view both our R&D and marketing expenses together as an investment in our future and over the past few quarters, we have increased a cumulative total to over 16% of sales. We have done this to capitalize on increased sales opportunities we are currently pursuing in many of end markets where the environment is currently favorable to electronic defense spending. Financial expenses for the second quarter of 2017 was $6.8 million compared with financial expenses of $5.5 million in the second quarter of last year. For the second quarter, non-GAAP net income was $68.8 million or a net margin of 8.4% versus $62.9 million or a net margin of 7.8% last year. Non-GAAP diluted earnings per share were $1.61 compared with $1.47 last year, an increase of 9.5%. On a GAAP basis, second quarter net income was $62.6 million or a net margin of 7.6% versus $54.1 million or a net margin of 6.7% last year. GAAP diluted earnings per share were at $1.46 compared with $1.27 last year, an increase of 15%. Our backlog of orders as of June 30, 2017 was $7.33 billion, $511 million higher than the backlog at the end of the second quarter of 2016. This is an increase of 7.5%. Approximately, 57% of the current backlog is scheduled to be performed during 2017 and 2018. Operating cash flow for the quarter was a positive of $54 million, compared with a negative cash flow of $38.6 million in the same quarter last year. The Board of Directors declared the dividend of $0.44 per share for the second quarter of 2017. That ends my summary and shall now turn it over to Mr. Machlis. Proceed, please.

Thank you, Yossi. We are pleased with this quarter's results. Our backlog growth was especially strong along our goal of 7% from last year. The long growth term component of the backlog was particularly strong in this quarter, supporting steady ongoing growth in revenue over the long term. Another important aspect for our results in this quarter is through global diversity and spread in our revenues. New opened units states each provided approximately a quarter of revenues in the quarter and Asia Pacific and Israel provided slightly less than that. Thus, our exposure to any one particular region is limited and right now, we are benefiting from worldwide growth in the same spending. Our recent growth in sales, marketing and R&D spending has allowed us to capitalize on the increased opportunities and as we can see forms of growth in our backlog, we are already seeing the fruits of these investments. While we have had the lot of activity in the past few months, I would like to highlight some of our recent success. In May, we won a three-year $25 million contract for the supply of [indiscernible] direct infrared countermeasures and protection system to an international organization and later in June, we were awarded a one-year contract of more than $20 million by an African based customer to a quick J650 Aircraft with our [indiscernible]. Also in May, we won a two-year $390 million contract to supply a unique intelligent solution including an array of grand electronics intelligence capabilities to a European country. The contract includes various intelligence capabilities as well as communication and command control solutions. Also in Europe, in July, we received a two-year $35 million contract for thousands of our advanced electro-optic systems for individual infantry soldiers [ph]. In June, we were awarded a contract by Lockheed Martin Optics to develop a cockpit display replacement for the F-35 Aircraft. This further extend our work on the F-35 which already includes power amplifiers, structure and system [ph], as well as the helmet mounting display system; so our joint venture with Lockheed. These efforts reinforced our position as a leading provider of advanced cockpit and intelligent pilot interface solutions that help improve pilot's situation awareness and mission effectiveness. And finally, a few weeks ago, we announced that our integrated six towers, OICT Border Security System passed U.S. Customs and Border Protection System Acceptance testing. As a system integrator, we provide the sensor towers with radars, date and night cameras and command control software, which call its sensor information to provide a single operation picture. This particular IST system located on the Douglas Arizona sector marks our second successful deployment of the system with the first occurring [indiscernible]. Overall, as you can see, we continue to win ongoing businesses and achieve successes at Elbit Systems. Based on our backlog growth, we expect our positive performance to continue smooth through 2017 and beyond. As we have shown, our continued success comes about because we continue to invest in the right areas in the electronic defense area, targeting the right customers and meeting them. Looking ahead, in many of our target's geographical defense spending is now on the rise and increased portion is gearing towards the electronic defense system, our businesses is well positioned to capitalize on the trend. We remain very well-diversified on both geographical point of view, as well as through our broad spectrum of technology and products. And with that, I will be happy to take your questions.

[Operator Instructions] The first question is from Yoav Burgan of Poalim Sahar. Please go ahead.

Hi, Butzi, hi, Yossi. I just have one specific question. I noticed recently that you won patent infringement case in Texas. I see that the awarded damages of about $20 million. The case was against Ecostar. I was just wondering, I guess the question is for you, Yossi, when should we expect that you recognize this in your P&L? Would it be in Q3 or Q4? Thank you.

You mentioned this correctly. This event has taken place. However, we expect the final decision on that. Although the jury has decided, there may be some appeal, there may be some other activities related to that. Once we consider that as a final decision, then we'll definitely have a release on that and let everybody know the details of it and the actual recognition in our P&L would be upon the occurrence of this.

Okay, great. Thank you. That's all for me this time. Thanks.

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

Good afternoon. Very impressive backlog and I have two questions. First, could you update us please, say, on the progress of privatization of [indiscernible] standing; and the second question is could you please provide some figures in compass of those opportunities you mentioned - light door, light helmets. At least in terms of hundreds of millions, in which ranks should we expect if these opportunities mature, all of them?

With regards to the first question, as you all know, acquisition is part of our strategy. We have a strong balance sheet which can support several acquisitions and we look for the right position for the company, as well as one abroad. I, Mike can be available candidate for liquidation. However, what need to be done in the right conditions, which fits our view about this company. So it's still relevant. However, we look for other opportunities in parallel in our main target areas. And the process is managed by the government and I'm sure that they can answer about the speed of the process and about the continuation of the process.

But do you have a deadline? If you find anything interesting before there?

As I said, we can support several acquisitions in parallel and we are looking for addition opportunities as well.

Okay, thank you. And to the second question, it's about putting some figures on those opportunities you found very promising?

As you know, Ella, we do not give guidance and we report on contracts as we get them signed and firmed. Over the recent periods, we did mention that the number of opportunities that we are tackling and dollar value of these opportunities has increased over time and we definitely see the result of that in the backlog. I won't be able to say that we definitely see this trend to continue. But I am sorry, I cannot give you numbers.

Okay. Thank you very much.

[Operator Instructions] 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 two hours after the conference ends. In the U.S., please call 1-888-782-4291; in Israel please call 03-925-5904; 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 continued support and interest in our company. Have a good day and good bye.

Thank you. This concludes the Elbit Systems Limited Second Quarter 2017 Results Conference Call. Thank you for your participation, you may go ahead and disconnect.