Elbit Systems Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to LBEAT Systems' fourth quarter and full year 2020 result conference call. All participants are 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 that is available in the news section of the company's website at www.elbitsystems.com. I would now like to hand over the call to Rami Meyerson, Elbit System Investor Relations Director. Rami, please go ahead.

Thank you, Operator. Good day, everyone, and welcome to our fourth quarter 2020 earnings call. On the call with me today are Butsy Machlis, our President and CEO, and Yossi Gaspar, our Chief Financial Officer. 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. As we do every quarter, we will provide you with both our regular GAAP financial data as well as certain supplemental non-GAAP information. We believe that this non-GAAP information provides additional detail to help understand the performance of the ongoing business. You can find all the detailed GAAP financial data as well as the non-GAAP information and the reconciliation in today's press release. Yossi will begin by providing a discussion of the financial results, followed by Buzi, who will talk about some of the significant events during the quarter and beyond. We will then turn the call over to a question and answer session. With that, I would like now to turn the call over to Yossi. Yossi, please.

Thank you, Rami. Hello, everyone, and thank you for joining us today. The results of the fourth quarter reflect the resilience of LBIT systems, our balanced geographical footprint, and broad portfolio of advanced technological capabilities and solutions. These have helped us sustain demand for our solutions and services in the period of increased uncertainty caused by COVID-19 pandemic. The rollout of COVID-19 vaccines is encouraging. We continue to monitor the situation closely while adhering to instructions of the governments of the various countries in which we operate. Turning now to our results, we are pleased with them and with the performance of our subsidiaries around the world during a year that was heavily impacted by the pandemic. The subsidiaries helped in monitoring and maintaining close contacts with our customers worldwide in this challenging period. Our order backlog and revenues increased year over year in comparison with previous quarter. We maintained profit margins in line with 2019 and improved cash generation due to an increased focus on operations as well as measures we implemented to mitigate the financial impact of COVID-19 pandemic. I will now highlight and discuss some of the key figures and trends in our financial results. First quarter revenue of $1,378,000,000 increased 4.3% year over year. For 2020 as a whole, our revenues were $4.66 billion versus $4.5 billion last year, representing a growth of 3.4%. In terms of annual revenue breakdown across the areas of operation, airborne systems accounted for 35%, of our total annual sales and increased year-over-year mainly due to precision munition and training and simulation. Electro-optics accounted for 10 percent of total sales and increased year-over-year mainly due to the acquisition in 2019 of Elbit Night Vision in the U.S. Land system sales accounted for 27 percent of total annual sales and increased year-over-year mainly as a result of revenues at IMI acquired in 2018. C4ISR at 25% of sales declined year over year, primarily due to lower radio sales to Asia-Pacific. Our diverse geographic revenue base is important to the long-term sustainability of our business. In 2020, North America was the largest, contributing 32% of revenues, Israel was 24%, Asia-Pacific 21%, and Europe 18%. The growth in North America was primarily due to increased airborne system sales and the sales of night vision systems. The growth in Israel was mainly due to land systems. Compared with the fourth quarter last year, we saw strong growth in North America that more than offset lower sales in certain other markets. This reflects the phasing of programs and trends to fluctuate from quarter to quarter. We believe the longer-term trends are more representative of our business. The non-GAAP gross margin for the first quarter was 26.3 percent compared with the first quarter of 2019 of 26.2 percent. For the full year of 2020, non-GAAP gross margin was 26.7 percent compared with 26.9 percent last year. Non-GAAP gross margin in 2020 reflect an unfavorable program mix and cost incurred due to the COVID-19 pandemic. These were largely offset by the cost control measures we implemented to help limit the financial impact of the pandemic. Gap close margin in the fourth quarter of 2020 was 26% of revenues compared with 21.5% in the fourth quarter of 2019. That includes a 55 million charge of reorganization charges related to the acquisition of Elbit Night Vision. GAAP gross margin in 2020 was 25% compared with 25.2% in 2019 for the fourth quarter. GAAP gross profit in 2020 included non-cash expenses of approximately 60 million as a result of the non-cash expenses related to inventory write-offs and asset impairments in our commercial aviation activities due to the impact of COVID-19. And in 2019, GAAP gross profit was impacted by ENV reorganization charges, as mentioned above. The fourth quarter non-GAAP operating income was $113.8 million, or 8.3% of revenues, compared with $125.4 million, or 9.5% of revenues last year. Margin declined year over year due to higher R&D and G&A expenses in the quarter. G&A expenses in the fourth quarter of 2019 benefited from income related to a litigation settlement in the U.S. Non-GAAP operating income in 2020 was 390.1 million or 8.4% of revenues compared with 379.7 million or 8.4% of revenues last year. GAAP operating income was $325.7 million versus $321.6 million last year. I am pleased that we successfully maintained operating profit margins in 2020 at the 2019 levels despite the challenges presented by the COVID-19 pandemic and the additional costs incurred. GAAP operating income for the fourth quarter was $104.6 million versus $63.6 million in the fourth quarter of last year that included the E&V reorganization charges. The operating expense breakdown in 2020 was as follows. Net R&D expenses increased to 7.7% of revenues versus 7.4% in 2019. Our investment in R&D enables us to maintain and build our technological leadership and underpins our long-term prospects. Marketing and selling expenses declined to 6.2% of revenues versus 6.7% last year due to reduced travel and participation in trade exhibitions. G&A expenses were 4.8% of revenues, similar to last year. Financial expenses were $32.5 million in the first quarter compared with $16.4 million in 2019. was mainly due to charges in the shekel dollar exchange rate in the period. Financial expenses in 2020 were 71.3 million compared to 69.1 million last year. The effective tax rate for 2020 was 13.9 compared to 7.9 in 2019. Taxes on income in 2019 were reduced following a settlement with the Israeli tax authorities related to adjustments for prior years. We recorded a tax expense of $1.9 million in the first quarter compared to tax income of $9.1 million in 2019 due to the adjustments for prior years as mentioned above. During the second quarter of 2019, Elbit System raised approximately $185 million through the sale of treasury shares to institutional investors in Israel. This increased our share count by about 3%. to 44.2 million shares, having a slight corresponding impact on our earnings per share relative to last year. Our non-GAAP diluted EPS was $2.38 in the first quarter and $7.20 for 2020 as a whole. GAAP diluted EPS for the quarter was $1.53 and $5.38 for the full year. Our backlog of orders as of December 31, 2020, was approximately $11 billion, $1 billion higher than the backlog at the end of 2019, and $166 million higher than that at the end of the third quarter of 2020. This represents an attractive book-to-bill ratio of 1.21. Approximately 65% of the current backlog is scheduled to be performed during 2021 and 2022, and the rest is scheduled for 2023 and beyond. This breakdown is similar to that of the fourth quarter last year. The order backlog is equivalent to more than two years of revenues and provides good visibility for future revenues. Operating cash flow for the fourth quarter was $172 million inflow compared with $87 million in the same quarter last year. For 2020 as a whole, we reported $278 million operating cash flow inflow versus $53 million outflow in last year. Operating cash flow benefited from customer advances received in the fourth quarter. The phasing of cash flow remains dependent on timing of payments, mainly from the Israeli Ministry of Defense. The Board of Directors declared a dividend of 44 cents per share for the fourth quarter of 2020. I will now turn the call over to Mr. Makris. Putzi, please.

Thank you, Yossi. I am very pleased with the significant volume and value of contracts we announced since reporting our third quarter results in November. These contracts provide an encouraging indication of the sustained demand from our customers. Many of these are strategic and will provide Elbit with strong market positions and multi-year revenue strengths. Our software-defined tactical radios, tactical acquisition system, and tactical computers are important building blocks for the command and control solutions we provide militaries around the world that enable them to conduct multi-domain operations. Multi-domain operations require the ability to connect different capabilities, sensors, and weapons through an integrated and resilient network that Elbit Systems provides to numerous customers around the world. In December, we signed a $338 million contract with the Swiss Department of Defense to provide the Swiss Armed Forces with an army-wide tactical mobile-software-defined radio network solution. The contract followed the selection at the end of 2019, after a rigorous evaluation, which found that our systems provide a better price-performance ratio over the competition. In November, we received a contract from the Spanish MoD to supply ILIN software-defined radios for the combat battalion of the Spanish Army. The new radio network for the battalion level is a first step in the Spanish combat radio network modernization program. Elbit will supply hundreds of radios for both dismounted soldiers and combat vehicles. The selection of the E-Link tactical radio followed competitive technical and field evaluation by the Spanish MOD. Elbit System UK our British subsidiary was awarded a $137 million contract from the UK MOD in January to provide the British Armed Forces with a future target acquisition solution for joint terminal attack controllers and fire support teams under the Dismounted Joint Fire Integration, or DJFI, program. Elbit Systems UK's DJFI solution is a network target acquisition solution that acquires and communicates target information to artillery and close air support for effective engagement of precision and non-precision files. The solution is empowered by AI and will interface with the radio system of the British Army, Royal Air Force, and Royal Marines. In December 2020 and January 2021, will receive three contacts from the Dutch MOD with a cumulative value of $89 million to supply the Royal Netherlands Army with socially defined radios, command and control systems, night vision systems, and tactile computers. We believe that militaries around the world are keen to expand their simulator and training capabilities to provide more realistic training that better prepares a soldier for a wide range of scenarios at a lower cost. In January, we were selected by the Hellenic Ministry of National Defense to establish and operate the International Flight Training Center of the Hellenic Air Force as part of an agreement between the defense ministries of Israel and Greece following an international competitive tender. award is contingent of completion of negotiation with the Hellenic Ministry of National Defense. In January, Elbit System UK was awarded a 166 million US dollar 12-year contract from the UK MOD for the Royal Navy Future Naval Training Program as part of the official consortium led by Capita. Elbit System UK is a provider and integrator of training solutions for the consortium and will develop a new combat system operator trainer in the future submarine school and modernize and manage legacy synthetic training systems across the Royal Navy. In November, we were awarded a 96 million US dollar contract to supply an European country with a Rotary Wing Mission Training Center and support services to train its Air Force, Army, and Navy helicopter pilots and crews. Elbit Systems was a pioneer in unmanned aircraft market and we supply about 80% of the Israeli Defense Forces unmanned aircraft systems or U.S. Elbit Systems U.S. has accumulated decades of operational service and have been selected by more than 30 different customers in five continents. As this technology has matured, we have upgraded our offering and now supply integrated fleets of U.S. and platforms like the Hermes 900 Starliner that will be certified to operate in civilian airspace. In December, the Canadian government selected the Starliner to support maritime environmental protection missions in the Arctic and along the Canadian eastern and western coasts. In March, we were awarded a $300 million five-year contract to provide Hermes 900 unmanned aircraft systems, subsystems, as well as maintenance and support services to a country nation. We are also transitioning our autonomous system technology and experience to the land and naval domains. Our civil unmanned surface vessel, or USV, is operational with the Israeli Navy And in January, we will receive a contract to supply civil USVs to a navy of a country in Asia Pacific. Under the contract, Elbit Systems will provide civil USVs that are specifically configured to perform mine countermeasures missions while facilitating the option to add anti-submarine warfare technologies models. Elbit Systems has a large portfolio of solutions for armed vehicles and tanks including man and unmanned turrets, active protection, target acquisition, fire control, and communication systems. Our Karmel technology demonstrator integrated the latest generation of legacy capabilities in new technologies for combat vehicles. This includes our iron fist active protection system and iron vision that provides the crew with 260-degree vision from inside the vehicle. In general, we announced a 172 million U.S. dollar contract to supply Sabra light tanks to the army of a country in Asia-Pacific. As a prime contractor, Elbit Systems will supply Sabra tanks based on General Dynamics' truck escort platform and on the William Pandur 8x8 platform manufactured by Excalibur Army from the Czech Republic. Both platforms will be equipped with one 105mm turret and a range of LBIT subsystems, including electro-optical sights, fire control system, torch X, battle management systems, and E-LINK software-defined radios. The 30-ton Sabah Light Tank provides a unique combination of powerful fire capacity and high maneuverability. In February, we received a $46 million contract to supply 6x6 armed personnel carrier, or APCs, to the army of a country in Asia-Pacific. The 6x6 wheels were developed by IVECO, Defense Vehicles Incorporation, with the Brazilian Army. As a prime contractor, Elbit Systems will equip the APCs with turrets and range of the company subsystems. We were contracted by BAE Systems Haglund in February to supply Iron Fist Active Protection System and Electro-Optical Commander Sight for the Royal Netherland Army CV-19 Armed Combat Vehicles Modernization Program in a contract worth 82 million US dollars. After a long period of investment, building our portfolio and expanding our global presence in the naval arena, Elbit Systems is well positioned to capitalize on the growing demand in the increasingly contested maritime domain. Navies around the world are increasing their investment in a broad range of capabilities to improve the protection of their vital interests and provide strategic deterrence. On 23 December, our U.S. subsidiary, Elbit Systems of America, signed a definitive agreement with Cerebros Capital Management to acquire Spartan Corporation. Spartan develops and supplies electronic sensors that support undersea warfare for the U.S. Navy and allied military forces. The transaction is conditioned on various clothing conditions, including receipt of U.S. regulatory awards. I would like to take this opportunity to invite all the participants on the call and our shareholders around the world to our investor conference on April 6th. The conference will be virtual due to the COVID-19 pandemic. The conference will focus on the long-term trends of the business, including a discussion on growth engines and innovation. In summary, our backlog continues to provide us with good visibility, and we continue to see significant potential around the world for our leading high-tech technology solutions. And with that, I will be happy to take your questions. Operator?

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press star one. If you wish to cancel your request, please press star two. If you are using speaker equipment, kindly lift the headset before pressing the numbers. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Greg Conard of Jefferies. Please go ahead.

Good morning. Just to start, I mean, if you could talk a little bit about 2021. I mean, you had a very strong booking year. When you think about the mid-single-digit growth target long-term, what type of book-to-bill is required to support it, and has there been any change in either duration or makeup of orders that changed that dynamic when we think about backlog conversion in 2021?

Well, I would say the following. You know that we do not provide guidance. However, the growth in our backlog of more than 10% this year does give us some indication about what can happen in the next year and a half to two years. This backlog is going to be transformed into revenues, no doubt about that. So, yes, in the past we were talking about the mid-single-digit growth However, the strong growth in the backlog may affect that. To what level, I'm not sure we are in a position to give you any guidance on that.

That's helpful. And then, I mean, you called out the strength in airborne on precision munitions and training and simulation and kind of the growth inflected up in Q4. And I know there's been a little bit of headwinds on the aerostructure side. I mean, has that business reset higher? You know, were there kind of one-time items, or how do you kind of think about the momentum as we look at, you know, Q4 growth rate for airborne systems?

Well, the airborne systems in general for military platforms, we feel very comfortable with that, and the growth in the backlog includes also growth in that area as well. There's a small piece of airborne, which is commercial avionics, which does not grow. Actually, in 2020, we did reassess our business lines on this aspect because of the pandemic. But this is less than 5% of our revenues in the airborne part. So the military part is growing very nicely.

And then just last one for me. I mean, in your comments, you talked about the phasing of cash flow largely dependent on Israel. And you had a very strong Q4. But for the year, the receivables were quite a headwind. I mean, is there any way to at least bracket kind of what you're thinking for this year or maybe some of the ranges based on how working capital trends?

Well, as you probably know, and we have spoken about that in the past, cash flow item is a high priority in our management, the way we address it. We put a lot of emphasis on in creating free cash. And yes, the Ministry of Defense here in Israel is lagging behind to some extent. However, we believe that in the future, once things are stabilized here in Israel, their part will also come through. All the other aspects, cash management is a very important part of our focus. in the business management.

Thank you.

The next question is from Pete Skiberski of Alembic Global. Please go ahead.

Thank you, Rami, and good afternoon. Good afternoon. Guys, just to stay kind of top level, obviously, you know, we had the election yesterday and it's still early. I think, you know, a governing coalition has to be formed. But do you have kind of any early indication of where Israeli defense spending may trend, you know, today versus yesterday? And to the earlier questions on cash flow, does this give you any greater clarity on MOD payments.

Yeah, Brad, as you rightly said, we are still waiting for the final results. We, because of the political situation here in Israel, actually there was no five-year planning for, no active five-year planning for the IDF and for the last year or more. And Because of that, they also owe us some money. But I'm quite confident that first they will pay everything they owe us, as Yossi mentioned earlier. And there is no doubt that a five-year planning program for the IDF will be activated. And practically, we are already seeing those signs of a new contract here in Israel as well. So... I'm not concerned at all about new problems here in Israel. We have very good positions to secure new contracts for the company here in Israel in the near future, and I don't see any risk associated with the amount of money they owe us. I'm 100% confident it will be paid soon.

Okay, that's very helpful. Thank you for that. Another thing I wanted to get clarity on, top level, is we talked the last couple of quarters just about the impact of COVID in terms of slowing travel, slowing business development, and the signing of contracts and deliveries. Can you compare the progress you're seeing or not in terms of the ability just to conduct business in a COVID environment from fourth quarter to to maybe extrapolating forward to the first quarter and second quarter. I know it seems like Israel is doing really well with the vaccination, so I'm sure that's helping. But globally, there seems to be some issues out there still. So I was just wondering if you could just characterize the ability to conduct business now versus maybe last quarter.

Peter, I must say that we do not see any significant impact on the COVID on us, on our business. On the contrary, the fact that we have subsidiaries, dozens of subsidiaries around the globe, is a huge strength to the company. Because one of the reasons to make acquisition programs is, of course, military needs, but there is also another reason which is important to understand, which is to support local economies and to create jobs in countries around the globe to deal with... with the economical crisis and the unemployment level of the countries. The fact that we have dozens of contracts around the globe help us to continue the dialogue with our customers continuously and also to get new contracts to support the local defense needs and also to support the local economy requirements. So we see a lot of potential. We don't see any issues with supply chain. We had some issues in the second quarter last year when it just started, but we overcome them quite quickly. And this funnel of new business of the company is very big. Actually, it's the biggest we ever had. So I'm quite optimistic about the future.

That's great. That's great. Okay. Appreciate the color. Let me just ask one last one, and I'll get back in queue on Hermes, which seems to be doing very well. You had the big $300 million contract earlier this year. And then also, I wanted to just understand the deal with Canada for the Hermes. Is that a lease deal? And then also, can you just talk about this arrangement with Korea, KAI? I don't know if that means the potential for kind of current Hermes sales. or development of a new unmanned system. So I just was wondering if you could provide any color there.

With the Koreans, KAI is a corporation in the market of UAVs in the country and around. And we are discussing promoting our current portfolio as well as adaptations for the local needs. And with the Canadian program, of the Starliner, it's a kind of list of the new Starliner platforms we have. It's a combination.

Okay, okay. Okay, that's great.

Maybe I will let Yossi to elaborate a bit more about that.

It's a deal that's combining some elements of lease and sale of services.

Okay. Okay. Understood. Understood. Okay. Last one for me, actually, and I won't get back on, but Yossi, while we have you, you know, I thought you guys did a great job maintaining margin rate in 2020. It seems like in 21, you know, we'll have some additional volume. I don't know how a mix will trend in 2021, but do you have any sense or any color as to how we should be expecting margin rate to trend in 21? Maybe give us a sense of performance and mix and volume, how that all kind of shakes out.

Well, you know that we do not give guidance. However, there are three elements to consider impacting this parameter. One is a negative one, and that is the currency rate here in Israel, which compared to the U.S. dollar is a very strong checker, which does affect our cost of labor. That is the negative part. On the positive part, there are two elements. One is the ongoing continuous improvement in operations, including the operation of a new ERP system that supports improved yields, improved production costs, and so on. And the other element, which is also positive, and that is growth of the company, which not necessarily carries growth in overheads, corresponding overheads. So all these put together, I would say we would be disappointed if we do not see a positive result coming out of all of that. But, yeah, I'm sorry, I do not give you guidance on that.

No, I appreciate the comment very much. Thanks very much, guys. Thank you, Peter.

Peter, I just want to add that we – We announced a reorganization of the company a few months ago, and that's in order to increase efficiency and reduce G&A and get more synergy between the different activities of the company. I'm sure it will help also to the bottom line. Right. Great. Thank you, guys.

The next question is from David Winters and Liz Concor of Wintergreen Advisors.

Please go ahead. Hi, this is Liz Cohen-Auer, and we've been a shareholder for approximately five years and have long admired the company's management, business models, and disclosures, your sense of responsibility and corporate growth through acquisition. which we know does take some time to integrate everything into what's going on. I noticed that Elbit is part of, I think, two indexes in Israel. A question I have has to do with the difference between that experience and a company in the U.S. that could have far lesser quality management, business, finances, operations, and just for being part of an index, they seem to have the stock price bounce along and grow upward. Could you comment for me on the difference between the impact of the index or what it is that distinguishes you as, I believe, a finer company from many others?

Liz, this is Rami. Thank you very much for the question. I think that what needs to be taken into account is the technical issues of being listed on various indices in various geographies and the eligibility of a particular company to be listed. At the moment, we are listed within the indexes of the Tel Aviv Stock Exchange. In the U.S., we are listed on pure indexes. because at the moment we are not eligible to be part of those indices, but I think there is a big focus on the business operations to be a good business, regardless of whether or not we are part of a specific index.

Thank you. I was just curious. The index seems to be a big driver, but my personal preference is certainly for quality businesses at a good price. So I thank you for your work and for your response.

Thank you very much, Liz. Thank you. We have received a question offline from Dina Koshonov from LIDA, and she would like to know what the status of the integration of IMI is.

The integration is going well. We are actually just want to remind all of us that The active protection system, the Iron Fist active protection system of IMI, is very successful under LBIT. Actually, we're integrating it into a full suite of solutions for land forces. We won here in Israel a competition to provide active protection systems for the 8x8 vehicle APC of the IDF, and we won a contract in the Netherlands as well together with sites from LBIT This is just one example. We are integrating the munition activity of IMI with our guidance capabilities at LB to provide guided munition solutions for our customers, and we have a lot of success in many countries to provide new guided munition, including countries in Europe. We are also working hard. to combine the different IT systems into the new ERP system that Yossi mentioned earlier. And we are also working together with the ministry here to shift part of the production activity of IMI from the central part of the country to the south. We are building new facilities there. Actually, we just started the work on the ground just recently, and we are aiming to shift the production activity to the south around 2024, and this will help us to get more profit and to be more efficient. out of the fact that we are investing in new production lines and new technologies. In the past, IMI brought most of their business from the Israeli Moody. About 80% of their business came from Israel and 20% came from export. Today, after we integrated their portfolio into ours and we are working via our subsidiaries around the world and via Elbit Markets a bit marketing activities, I'm happy to say that more than 50% of the new business are coming from the international market and part of it from the US and part of it from European countries and I'm quite convinced that they will reach the 80% export like the rest of the organization quite soon. We continue to improve the profits of the company. Actually, we are exceeding our plans, our original plans. So once again, quite soon, I believe, we will be able to bring the IMI bottom line to the bottom line of the company. So I'm quite pleased with the integration.

Thank you. Operator?

If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by while we poll for more questions. There are no further questions at this time. Before I ask Mr. Machlis... Excuse me. I'm sorry for that. There are no further questions at this time before I ask Mr. Mahlis 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 1-888-782-4291. In Israel, please call 03-925-5900. And internationally, please call 972- A replay of this call will also be available on the company's website at www.elbitsystems.com. Mr. Machlis, would you like to make your concluding statement?

I would like to thank all our employees again for their continued hard work, particularly in these challenging times. To everyone on the call, thank you for joining us today and for your continued support and interest in our company. Yossi and I look forward to speaking to you at our investor conference on April 6th. Have a good day and goodbye.

Thank you. This concludes the Elbit Systems Limited Fourth Quarter and Full Year 2020 Result Conference Call. Thank you for your participation. You may go ahead and disconnect.