Kenny Green - IR Bezhalel Machlis - President & CEO Joseph Gaspar - EVP & CFO

Michael Klahr - Citigroup Ella Fried - Bank Leumi Daniel Stolper - Stifel

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems First Quarter 2018 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 Systems' Investor Relations team at GK Investor and Public Relations at 1-646-688-3559 or view it in the investor relations section of the Company's website at www.elbitsystems.com. I would now like to hand over the call to Mr. Kenny Green of GK Investor Relations. Kenny, please go ahead.

Thank you, operator. Thank you and 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. Bezhalel 'Butzi' Machlis, Elbit's President and CEO; and Mr. Joseph Gaspar, Elbit Systems' Chief Financial Officer. Joseph will begin by providing a discussion of the financial results for the first quarter of 2018, 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 content of this conference call. And with that, I would now like to hand the floor over to Joseph. Joseph?

Thank you, Kenny. 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 and 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 of 2018. In particular we saw a solid increase in our backlog over the long-term, as well as the shorter term component. This supports top line growth for the future. I also want to highlight that starting from this quarter based on our GAAP requirements we implemented the ASC 606 accounting standard. The adoption of the new accounting standard had partially influenced on the revenue growth in the first quarter of 2018. At year end of 2018, we will publish our financial statements based on ASC 606 standard and we'll include notes with financial results according to the ASC 605 standard. Please note, further clarifications on the accounting policies update in our press release. I will now highlight and discuss some of the key figures and trends in our financial results. The first quarter of 2018 revenues were $819 million compared with $749 million reported in the first quarter of 2017, up 9.3% year-over-year. The growth was driven by sales from increased backlog and the adoption of the ASC 606 revenue recognition standard. In terms of revenue breakdown across our areas of operation in the quarter, airborne systems was 38%, C4ISR was 34%, land systems 14%, electro-optics was 11%, and the rest was 3%. Compared with the first quarter of last year, sales as a percentage of revenues of our main areas of operation were similar to those as of the first quarter of last year with a slight increase in land systems sales due to increased homeland security sales and the slight decrease in C4ISR sales. In terms of geographic breakdown for the quarter, we continued to be fairly evenly diversified among the various regions in which we operate with North America at 25% of our revenues, Europe at 19%, Israel at 23%, Asia Pacific at 21%, Latin America at 5%, and the rest of the world at 7%. For the first quarter, the non-GAAP gross margin was 29.3% versus 30.3% last year. Our GAAP gross margin was 28.8% in the quarter versus 29.5% last year. Our gross margin was affected by the product mix, as well as by a less favorable exchange rate environment during the first quarter where the average shekel rate in the quarter strengthened versus the U.S. dollar compared with the first quarter of last year. The first quarter non-GAAP operating income grew 6% to $69.4 million or 8.5% of revenues compared with $65.5 million or 8.7% of revenues last year. GAAP operating income in the quarter increased by 9% to $63.3 million or 7.7% of revenues compared with $58.2 million or 7.8% of revenues last year. In terms of our GAAP expenses for the quarter, the total operating expenses were 21% of revenues compared with 21.7% of revenues in the first quarter of last year. The operating expense breakdown in the quarter was as follows: net R&D expenses were 8.3% of revenues versus 7.8% last year, marketing and selling expenses were 8.3% of revenues versus 8.8% last year, and G&A expenses were at 4.4% of revenues versus 5.2% last year. Financial expenses for the first quarter of 2018 were $10.2 million compared with financial expenses of $8.6 million in the first quarter of last year. The increase was mainly due to higher debt level and an increase in interest rates. Taxes in the first quarter were $6.3 million or 12% of pre-tax income versus $5.3 million or 10.6% of pre-tax income in the first quarter of last year. For the first quarter, non-GAAP net income was $54.9 million or a net margin of 6.7% versus $51.7 million or a net margin of 6.9% last year. Non-GAAP diluted earnings per share were $1.28 compared with $1.21 last year, an increase of 6%. On a GAAP basis, first quarter consolidated net income was $49.6 million or a net margin of 6.1% versus $45.6 million or a net margin of 6.1% as last year. GAAP diluted earnings per share were $1.16 compared with $1.07 last year. Our backlog of orders as of March 31, 2018 was $8.046 billion, $979 million higher than the backlog at the end of the first quarter of 2017, this represents an increase of 13.9% in the backlog. To provide some further color on the growth of the backlog, the short-term portion of the backlog due to the remainder of this year and 2019 grew by 7.3%, over that at the same time last year. These numbers provide potential for future revenue growth. Approximately 60% of the current backlog is scheduled to be performed during 2018 and 2019, and 40% of the current backlog is scheduled for 2020 and beyond. The ratio as at the same quarter at the end of last year was 64% and 36% respectively. Operating cash flow for the quarter was a negative $147.9 million compared with a negative cash flow of $51.3 million in the same quarter last year. The cash flow reduction reflects an increase in receivables, partially due to longer payment terms to some customers. We do not believe that there is an increased risk within our receivables. The Board of Directors declared a dividend of $0.44 per share for the first quarter of 2018. That ends my summary, and now I shall turn it over to Mr. Machlis, Elbit's CEO. Butzi, please.

Thank you, Joseph. As Joseph mentioned, we are pleased with our continued growth in the first quarter of 2018. In particular, the highlight is definitely the strong growth in backlog increasing by 14% in a one year period which on an organic basis is the highest growth rate we have seen in many years. While the long-term portion of the backlog has been growing strongly for a number of quarters now, even the short-term portion over the next seven quarters grew by over 7% versus the same time last year which gives me confidence in our growth in the coming two years. The backlog is a metric that I believe is a strong indicator for the health of our businesses, moreover it continues to provide us with either improving revenue visibility into our business. Our long-term growth and development is built on both investing in our businesses and growing on an organic basis, as well as acquiring and adding synergistic businesses to our overall organization. In April, we completed the acquisition of an Arizona based company, Universal Avionics for approximately $120 million. They develop commercial avionics systems for the retrofit and forward fit market including flight management systems, displays, communication systems, complete cockpit solutions and additional advanced commercial avionics systems. We see these products as complimentary to our existing commercial avionics systems, our enhanced flight vision system, and our commercial head up display product lines. We believe that the newly combined portfolio creates synergies that will strengthen our competitive position in the commercial avionics market. Furthermore, in recent months, there have been some coverage in the Israeli press, as well as Israeli government statement with regards to the privatization of Israeli Military Industries or IMR and the potential sell to Elbit. While this has been a long process, we have been in discussion with the Israeli government which recently made progress. We believe IMI brings Elbit access to new markets and products and we can leverage our existing business platform. There are many synergies which we can realize once the two companies are combined and while it may take time, Elbit has proven numerous times that we are highly adept at making acquisitions work. We will update you if and when this acquisition moves ahead. In terms of our organic growth, we have been working hard to capitalize on the increased opportunities and positive momentum we are seeing in many of our end markets. As a strong growth in the backlog demonstrated, we have been successful at winning new contract with existing, as well as new customers diversified geographically around the world. I will now be happy to take your questions. Operator, please.

[Operator Instructions] First question is from Michael Klahr of Citibank. Please go ahead.

My first question is on the adoption of Accounting Standards 606. What impact did that have on working capital? You've provided some numbers in the statement, is it about $6 million impact from working capital, is that right? That is my first question. My second question is if you could give us some numbers around the Universal Avionics acquisition in terms of revenues or earnings? And my third question is, you mainly spoke about IMR in your comments, when -- what's the timeline on that [indiscernible] of the proceedings; can you give us any color on timeline, is it expected this year? Thank you.

I'll answer the working capital question, Michael. Essentially, you are right, although we have not completed all the calculations and all the adaptation of the 605 compared to 606 but as you have seen in our press release, the numbers adapt to essentially the numbers that you quoted. Regarding Universal, we acquired the company in early April that I believe April 10th or 11th. Universal will be consolidated in our financial results in the second quarter. We expect to have some increase in revenues because of that compared to the $3.5 billion that we have for the full year, we don't expect that to be a very material number but it's definitely a positive add to us. In general, the profitability of the company is in the same line like what we experienced in Elbit with minor changes, so there might be some transition numbers as always when we acquire a business, but in general it's accretive acquisition to the company.

With regards to IMI, the process is progressing and I believe that this process could be concluded soon. I certainly believe it will happen this year.

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

I will follow Michael on the 606 revenue recognition standard. I wonder whether you could provide us maybe not with the exact numbers but with either the range or foreseeable pace of the impact in the following quarters but some kind of anchor in order to separate the organic growth and the impact of the standard before consolidation of Universal in this quarter and the end of -- probably in consolidation of IMI. So in order to follow the growth and then to analyze it, it would be great if you could give us some kind of signs.

I'm sorry but we cannot provide exact numbers on this item, there are still work and will definitely be concluded yearly numbers when we have our financial statements of 2018 with comparable numbers for the full year in both standards. However, having said that we did see this quarter significantly I would say to some extent extraordinary growth in revenues; a part of that as I said was regular organic growth and I would say in comparison with a growth that we had years ago in the first quarter, we definitely exceeded that organic part. The other part is regarding the 606 revenue recognition standard which will go on for the following quarters. So actually looking at the growth in our backlog, I would say the meaning of the 606 will diminish more and more over the coming quarters as we take the backlog and transform it into revenues. So bottom line is that part of that comes from the revenue recognition standard but this thing I would say -- I am sorry, I cannot give you exact numbers.

And once the backlog itself impacted by this adoption of the standard or it's not affected?

No, it's not affected.

In the following quarter, will you consolidate the backlog of Universal already?

Yes. Second quarter numbers would consolidate all the financial performance of Universal including their backlog. I would just warn that in the business -- in the commercial area, the business is -- has a different kind of backlog ratio to revenues as you know that from the defense business that we are operating in; it's a more quicker turnaround backlog than in our defense business. So the numbers -- we do not expect to have them a huge impact.

Thank you very much. And I'm certainly looking forward to seeing the numbers.

The next question is from [indiscernible]. Please go ahead.

I wanted to ask -- there was this agreement with the Obama administration that said that all the military aid has to go to American companies. I wanted to ask if that affects you?

I just want to remind all of us that we are active in the U.S. market via a company we have in the U.S., Elbit Systems of America, our U.S. activities are strong and important part of our revenues and backlog and this company, Elbit Systems of America, most of it's activities are for the U.S. market and -- but they do also some FMS activities for the Israeli market. So the answer is no, I don't see any effect on Elbit; on the contrary I believe that we are really well prepared for this transition.

In the previous call you mentioned the headwinds, I assume that was related to the currency that was -- the dollar that was low at that time; now that the dollar strengthened somewhat, is it fair to say that the headwinds have gone away?

I would say the following: the first quarter of this year, we definitely were impacted negatively by the strong shekel compared with the first quarter of last year the shekel was stronger by about 6%, 7% and including our hedging, close to 9%. However, we were able -- as you have seen in our results to overcome that and due to operational efficiencies and other activities that we did in the company, we were able to reach essentially the same profit rate like last year. So following the first quarter we have seen some strengthening of the U.S. dollar versus the Israeli shekel. It did reach about 3.6 shekels to the dollar as you know, and that has helped us in doing some hedging activity. Looking forward we expect that this will help us in the future quarters and compared to the first quarter, we expect to have less of hedging, less of friction from that point of view with the shekel but still we are -- we have the challenge of 3.5, 3.6 range -- shekel to the dollar.

At the current rate, that's the rate that you're comfortable with or…

I'm not happy with the current rate but it is better -- much better than what -- than the one that we had in the first quarter.

With regard to the growth in the backlog is there -- you didn't announce that many large contract; so is it many small contracts or there is something larger?

We did not change our policy of reporting for the market. So coming from that point of view, we had many medium sized and smaller contracts on one hand and also follow-on contracts on the other hand. We did report one major one with Australia, command control systems but other than that we had many, many medium sized and smaller ones which definitely give us a very good feeling that if there is any risk in any contract, it is spread over many of those; so we feel very confident with what we have in the backlog.

I see the share in affiliates increase to $3.1 million, is that representative -- what is the source of the increase spend?

What did increase -- I didn't get you?

The profit from share in affiliates.

That one, yes, it was. First of all, I wouldn't give a lot of weight for quarterly numbers in our business. You have to look at overall yearly performance, however, yes, we did see improvement in our partnerships, in the performance of them. One of them is in Israel, but we did contribute very nicely to our performance -- that one is the UK; and then we have quite a lot of those. Overall, most of them did much better than last year.

So is this representative of the current quarter?

We hope so. We are not sure, we do not give guidance as you know but we hope so.

We have a follow-up question from Michael Klahr of Citibank. Please go ahead.

Can you comment on working capital; I think it was $130 million outflow in first quarter last year, $230 million outflow this year; is there something specific driving that at a particular geography or segment if you could give us some comments about it?

If you look at our financial statements, you will see -- in this quarter you will see two things. One is an ongoing continuation of our general policy that we use our strong balance sheet to win contracts, to provide our customers with the required payment terms as in compliance with their budgets. This drives definitely to a higher level -- the working capital. And of course, it helps us with positions in the strategic markets. This is -- this part is essentially a continuation of what has happened over the last two to three years, it looks like a very good strategy and helps us grow the backlog as we position in the market. These customers are grade A customers with very, very low risk, with a long-term working relationship with the Company, and we are very confident that we are going to collect that money in due time and according to the contracts. So that's one aspect of that. The other aspect is; you have seen this quarter specifically growth actually in the payment to our suppliers which reduced the line of payables compared to what we had before and that is due to preparation -- acceptance of deliveries from our suppliers and accordingly growth in inventory in preparation of future deliveries from our company to our customers. So these two combined have driven some growth in the working capital.

You mentioned about changes -- your first point about change of terms with customers to use your balance sheet to win contracts and is that where -- you are now at terms that you're comfortable with or where we see that as terms of business, at least on the cash flow side continues at superior rate?

I think we are in a very well balanced point in our -- in running the business. I would not expect a significant growth in that area, expect as related to the adoption of the 606 standard which as you know revenues are recognized upon the input metal as cost is incurred while there might be some [indiscernible] from the time cost is incurred until the payment -- the deliveries are made and payment is received. So here we might see some increase in the future working capital. I would not expect any extraordinary growth.

The next question is from Dan Stolper of Stifel. Please go ahead.

Can you comment on any developments that were the virtual wall in the United States?

The program is progressing, part of the system is ready -- the system is already approaching us in several areas along the border on Arizona and from what we understand, this solution is successful, the system is successful and the customer is satisfied and we look forward to get additional activities around this program.

Can you tell how much interest there is from the Trump administration to try to use this instead of a physical wall?

It's difficult for me to answer this question. I believe that a possible solution might be a combination of a physical wall with a virtual one.

[Operator Instructions] Please stand by while we poll for more questions. 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 two hours after the conference ends. In the U.S., please call 1-888-326-9310. In Israel, please call 03-925-5904, and internationally please call 972-3925-5904. A replay of the call will also be available at the Company's website at www.elbitsystems.com. Mr. Machlis, would you like to make your concluding statement?

Thank you. 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.

Thank you. This concludes the Elbit Systems' first quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.