Elbit Systems Ltd's (Nasdaq: ESLT; TASE: ESLT) pavilion at the 2011 Association of the US Army (AUSA) annual exposition in Washington DC last week was thronged with soldiers and officers in battle dress looking at the company's wares, which it described as "Elbit's solutions for the US Army". There were also military attaches in dress uniforms stopping to get explanations, especially about the Hermes 450 and Skylark unmanned aerial vehicles (UAV), which were one of the exposition's star attractions.
Elbit Systems president and CEO Joseph Ackerman was swallowed by the conference rooms to meet with groups of visitors in civvies. In an interview with "Globes" between meetings, he said that business was booming at the pavilion, reflecting the company's growth.
Ackerman is not happy about the direction of Elbit Systems' share price, but he believes that it will conform to the company's performance. The future looks rosy, at least from his perspective. The cut in the US Army budget is actually a great opportunity for the company, he says. While the deterioration in Israel's relations with Turkey hurts him as an Israeli citizen, the company's business there is unaffected. He says that it's business as usual with Turkey.
"Globes": How has the deterioration in relations with Turkey affected Elbit Systems?
Ackerman: "It's had no effect. As a citizen, I think that Israel should develop friendly relations with a large number of countries, just as I strive to maximize the number of Elbit's partnerships with foreign companies. My heart is pained by every country that declares that it's not our friend. I don’t know the calculations that led to the deterioration, and I cannot say who is to blame. But the deterioration in relations has not affected Elbit so far.
"We have an air reconnaissance project with Turkey, which I don’t think will be affected. As far as we're concerned, the Turks know how to separate business and politics. Our people go to Turkey for work, and they come to us. My concern is focused on the future: I don’t expect new projects anytime soon."
Does military cooperation with a country, which has said that it will send warships to the Mediterranean and is perceived as hostile to Israel, harm Israel's security?
"Such concerns always exist. That's why Israel set up a meticulous screening system for transactions with other countries. This system is supposed to decide what is permitted and with whom. To date, we haven’t found that this deal has caused any leak of information or endangered Israel.
"What will happen in the future? I hope nothing. But we mustn’t forget: it's impossible to have a defense industry without exports. For our part, I can say that we are very careful. It's a fact that we didn’t get into trouble with the Americans over arms sales to China. We knew in advance which way the wind was blowing."
"There's risk and opportunity in every crisis"
You said at a capital market conference in March that Elbit has identified the "right niches" in the defense market, and that the company would resume growth in 2011. Six months later, have your remarks met the test of reality?
"I think that this can be seen at our pavilion here. A long time ago, we saw that armies would stop buying platforms because of expected defense budget cuts, and procure electronic systems, command and control systems, and UAVs, instead. In principle, Elbit, like Israel's defense industries, has never been in the platforms market. Small countries don’t do that. But we were ready for this trend and we focused on the R&D and production of electronic systems. And of course, if you're not buying new platforms, you're upgrading old ones. We prepared for this by acquiring M7 Aerospace of San Antonio, which is engaged in renovating plans and upgrading armored vehicles' electronics systems."
Does this mean that Elbit isn't worried about the expected US defense budget cut and the withdrawal of US forces from Iraq and Afghanistan?
"There's risk and opportunity in every crisis. Like every company, we're aware of the cut in the Pentagon's budget and the withdrawal from Iraq and Afghanistan. But the withdrawals open new opportunities for us. Thousands of platforms used by the US Army will be returned to the US and will need upgrades. After the Vietnam War, the US left behind thousands of tanks and planes. Today, we live in a different era. The Americans won't leave equipment behind in Iraq. As I said, M7 is waiting for them."
What about the cut in the Pentagon's budget?
"No matter how much the Americans cut, the US military budget will be around $500 billion. A drop from $700 billion to $500 billion isn't great, but do you know how much $500 billion is? We won't have a problem. We're a small and flexible company."
"I manage a company, not a share "
Is Elbit Systems growing, as you claimed in March?
"Despite the market crisis and budget cuts, our orders backlog has grown over the last five quarters. The growth rate isn't high, but it's still growth. As far as we're concerned, the bottom line is that we haven’t cut our R&D budget. In fact, our investment in R&D is double the global average. We invest 9% of our annual turnover in R&D, about $250 million in 2010.
"We have 40 companies around the world, and all but one of them is fully-owned. We didn’t buy them with shares, but for cash from the balance sheet, which means that we didn’t dilute the share. We distribute generous dividends and we never held a secondary offering."
Are you satisfied with the performance of Elbit Systems' share?
"I manage a company, not a share. We do everything transparently, and I always tell the analysts what we're doing. I only say that I'm dissatisfied by the growth rate in the share, but it will rise in the long term. It will reflect the company's growth at the right time. I always tell my friends and neighbors, 'If you want a quick short-term profit, don’t buy this share.'"
How have UAVs contributed to your bottom line?
"The US accounts for 75% of the global UAV market. We, and all other Israeli defense companies, have no foothold in the US UAV market. I don’t know why. They simply don’t import UAVs. What's left is the remaining 25% of the global market, where Elbit is the leader. Israel is the world's second biggest UAV market, and Elbit makes 80% of the IDF's UAVs.
"In Europe, we're part of the British Army's Watchkeeper Program with Thales, the biggest UAV project on the continent. In Afghanistan, our Hermes 450 UAV serves with the British Army. Altogether, Elbit's UAVs have accumulated 300,000 hours in the air in all arenas, including Israel. There are few companies that can claim such an achievement."
Published by Globes [online], Israel business news - www.globes-online.com - on October 17, 2011
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