Elbit Systems Ltd.

Q1 2022 Earnings Conference Call

5/24/2022

spk02: Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' first quarter 2022 results conference call. All participants are present in listen-only mode. Following management 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, www.elbitsystems.com. I would now like to hand the call to Rami Meyerson, Albert Systems Investor Relations Director. Rami, please go ahead.
spk06: Thank you, Operator. Good day, everyone, and welcome to our first quarter 2022 earnings call. On the call with me today are Ruti Mahlis, our President and CEO, Kobi Kagana, CFO, and Yossi Gaspar, Senior EVP, Business Management. 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. 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. Corby will begin by providing a discussion of the financial results. followed by Guti, 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 Kobi.
spk01: Kobi, please. Thank you, Rami. Hello, everyone, and thank you for joining us today. It is both an honor and a privilege to present Albit Systems First for the results to you today. I would like to thank Elsie Gaspar for his help in recent months. Yossi has retained responsibility for capital markets and investor relations. I look forward to meeting you, Albit Systems investors and analysts, over the coming weeks and months. The first quarter results reflect a healthy market environment for Albit Systems and sustained demand for our solutions from customers around the world. Revenue growth in the quarter was primarily due to the fulfillment of orders received in previous years and the Spartan acquisition. The Russian invasion of Ukraine in late February and proposed budget increases didn't have a material impact on order intake or revenues in the quarter. Profitability in the quarter includes a sharp increase in expenses related to employee stock price link compensation plans. These plans help align employee compensation with share price performance incentivizing our employees to generate long-term value for all of Elbit Systems' stakeholders. Our gap and non-gap results have always included these expenses. In the first quarter, compensation expenses were significantly larger than normal following the appreciation in the share price after the Russian invasion of Ukraine. Reducing profitability in the quarter is noted in our fourth quarter and full year 2021 results press release published on March 29th, 2022. Assuming a decline in share price volatility, we expect that these stock price link compensation expenses to return to historic levels. I will now highlight and discuss some of the key figures and trends in our financial results. First quarter revenues were $1,353,000,000 and increased by 21% year over year. A major part of the growth was organic in addition to the contribution from Spartan, which was acquired in the second quarter of 2021. In terms of revenue breakdown across our area of operations, airborne system accounted for 37% of total revenues and increased year-over-year mainly due to urban precision-guided munition sales. Land system sales accounted for 22% of total revenues, a similar level of revenues to 2021. C4I ISR at 29% of revenues increased year-over-year primarily due to the acquisition of Spartan and unmanned system sales. Electro-optics accounted for 9% and other sales accounted for 3% of revenues. Our diverse geographic revenue base is important to the long-term sustainability of our business. In the first quarter, North America contributed 27% of our revenues, Asia Pacific 30%, Israel was 21%, and Europe 19%. Asia Pacific revenues increased mainly due to sales of precision-guided munitions and UAS. the growth in European revenues was due primarily to training and simulation sales. The non-GAAP gross margin for the first quarter was 24.6% compared to the first quarter of 2021 at 25.6%. GAAP gross margin in the first quarter was 24.2% of revenues compared to 25.2% in the first quarter of 2021. Gap and non-gap profit in the first quarter include approximately $20 million of expenses related to stock price link compensation plans. The first quarter non-gap operating income was $65.8 million, or 4.9% of revenues, compared with $92.9 million, or 8.3% of revenues last year. Gap operating income for the first quarter was 58.6%, million versus $83.8 million in the first quarter of 2021. Gap and non-gap operating profit in the first quarter included expenses of approximately $35 million related to the stock price link compensation plans. The operating expense breakdown in the first quarter was as follows. Net R&D expenses were 7.4% of revenues versus 7.5 percent in 2021. Marketing and selling expenses increased to 6.4 percent of revenues from 4.6 percent last year due to the Sportman acquisition and the stock price link compensation expense. G&A expenses were 6.2 percent of revenues compared to 5.5 percent last year due to stock price link compensation expenses. Other operating income includes a capital gain of $3.7 million related to the disposal of a non-core business. Financial income was $1.1 million in the first quarter compared to financial expenses of $200,000 in 2021. We recorded a tax expense of $8 million in the first quarter compared to $10.8 million in 2021. The effective tax rate in the first quarter was 13.8% compared to 13.4% in 2021. Our non-GAAP diluted EPS was $1.22 in the first quarter compared with $1.72 last year. The GAAP diluted EPS was $1.19 compared with $1.64 last year. The stock price link compensation expenses in the quarter were equivalent to approximately 72 cents on an EPS basis. Our backlog of orders as of March 31st, 2022 was approximately $13.7 billion, $1.9 billion higher than the backlog at the end of March, 2021. And at the similar level to the backlog at the end of the 2021. Approximately 55% of the current backlog is scheduled to be performed during 2022 and 2023, and the rest is scheduled for 2024 and beyond. The percentage of short-term backlog declined in recent years following the receipt of more long-term contracts, improving our visibility for future revenues. Operating cash flow for the first quarter was $36 million, inflow compared to a $30 million inflow outflow in the same quarter last year. The Board of Directors declared a dividend of $0.50 per share for the first quarter of 2022. I will now turn the call over to Mr. Smahlis, LBIT CEO. Butri, please go ahead.
spk07: Thank you, Kobi, and good luck. Growth in the first quarter reflects a strong demand for solutions from customers around the world. As Kobi mentioned, growth in the quarter does not include the impact of the Russian invasion of Ukraine or the proposed increase in defense spending by NATO countries. In recent months, we have witnessed a noticeable increase in RFPs and incoming inquiries as militaries look to equip themselves with a range of LBIT capabilities. We believe many of these will convert to orders and revenues over time. I expect elevated geopolitical tensions and growing defense budget will support the improved momentum in the businesses over the coming years. I would like to share my perspective on the profitability and compensation expenses in the quarter. 19,000 employees are the company's most important assets. We continue to invest in recruiting, retaining, and motivating a high-quality workforce to realize the long-term potential of LBIT systems. I believe it is important to align employee compensation and incentive to the share price to encourage long-term value creation for all stakeholders. We continue the work on a range of efficiency plans as we have discussed with you in the past as part of our effort to improve profitability and cash generation. Turning to recent geopolitical development, the Russian invasion of Ukraine was a wake-up call for many countries. I expect it to be a turning point for European and global defense spending. Elbit systems has invested in a broad portfolio and global footprint and is well positioned to benefit from faster defense budget growth proposed by government in Europe and in other parts of the world. Elbit Systems has a global footprint of multiple operational subsidiaries that are an integral part of the domestic defense ecosystem in their home countries. They employ hundreds of local employees and support domestic supply chains. I expect that our subsidiaries will benefit from the increase in defense budget in their home countries as governments look to invest the increased funding in supporting the domestic defense industrial base. Our investment in R&D as a percentage of sales is higher than many of our peers to ensure we can provide a portfolio of technological advanced cost-effective solutions to our customers. Elbit Systems has demonstrated that it can leverage the significant operational experience of our engineers. Most of them are veterans with significant military experience. Many of them continue to serve and reserve, often using Elbit's products and systems. This provides a valuable short feedback loop between the field and lab. The Ukraine conflict has highlighted the relevance of our portfolio. I would like to provide a few examples. Elbit system provides a broad range of systems that provide or enable protection of aerial, naval, and ground platforms from a range of threats. We provide electric warfare systems for air platform like the missile warning system for the U.S. Air Force Air National Guard at 16th. In May, we were selected by Airbus to supply J-Music DIRCOM systems for the A330 MLTT aircraft of European Air Force. Our DIRCOM systems defend military and commercial aircraft from ground to air missiles. We also supply shaft and flare for a range of aircraft. The Iron Fist Active Protection System has been selected by Israel, the Netherlands, Australia, and the U.S. to protect armed vehicles from a range of incoming threats. Last year, the UK MOD Navy selected Elbit Systems UK to provide an electric warfare system that will help protect Royal Navy ships. We expect an increase in demand for unmanned systems as a result of the conflict. Elbit Systems has a broad portfolio of unmanned aircraft. The IDF recently unveiled its new exposed and attack companies that will incorporate Elbit Systems drones to identify and designate targets at a battalion level. A few months ago, the Hermes Pylano was the first unmanned aircraft certified for commercial airspace. The conflict highlighted the need for advanced command and control systems that enable combined forces operation by connecting intelligence, maneuvering forces, and logistics across multiple domains. Our C2 systems incorporate intelligence gathered by a range of sensors, utilize AI to identify targets, and connect to the relevant effectors, shortening the center-to-shooter loop and helping our customers to engage targets quickly and efficiently. Our command and control systems are in service with customers including Israel, Sweden, the Netherlands, the UK, and the US. These are just two examples, and I believe there are many other products and systems in the LBIT system portfolio that should benefit from increased demand and as militaries around the world apply the lesson learned from the conflict in Ukraine. I would like to reiterate Elbit Systems' commitment to environmental, social, and governance best practices. At our recent investor day, we highlighted the investment we are making to reduce our environmental footprint. We are also introducing electric vehicles for our employees after a very successful rollout of hybrid vehicles a few years ago. We are rolling out solar fields at our new facility in the south of Israel and PV panels on the roof of buildings around the world. We are also connecting sites to natural gas to reduce emissions. We are investing R&D to develop solutions that will help reduce fuel consumption and emissions. One example of this R&D are our training and simulation systems that help reduce the flying hours required to train a pilot. I am proud to see the involvement of thousands of LBIT Systems employees over the world in activities that benefit their communities. Last week, more than 70 LBIT employees organized, hosted, and monitored a hackathon to develop tools that protect children from violence on social media. I visited the hackathon and was impressed to see how our employees leveraged Elbit's innovative and entrepreneurial culture to develop tools to protect our children online. And with that, I will be happy to take your questions. Operator?
spk02: Thank you. Ladies and gentlemen, at this time, we'll begin the question and answer session. If you have a question, please press star 1. If you wish to cancel your request, please press star 2. If you are using speaker equipment, kindly listen to handset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we pull for your questions. The first question is from Scott Forbes of Jefferies. Please go ahead. Hi.
spk03: How are you kind of seeing demand signals come through as we think about the opportunity stemming from what's happening in Eastern Europe, particularly as we started to get some clarity on NATO budgets? I mean, what do you see as really the largest areas of opportunity? I mean, whether that really be from a product perspective or more geographical?
spk07: It's a combination. And I would say that we see in Europe growing demand – for solutions to protect platforms and to protect sites, which includes the EW solution, DIRCOM system, active protection system, and shaft and flare, and more. We also see growing demand for UAVs, for command and control systems, for intelligence solutions, for cyber protection systems, and also for guided munitions, growing demand for guided munitions in order to fill stocks again in Europe. But this is not just in Europe. We see growing demand also in the U.S., also in the Far East to support the forces to protect themselves against China. And actually, we see growing demand also here in Israel. We have a budget, we have a five-year planning, and we are getting also new programs and contracts here in our country. So altogether, we see growing demand for most of our portfolio, and we see also growing budgets, and interest almost all over the world. And the fact we have such a wide portfolio and so many subsidiaries in the US, of course, in Canada, in the UK, in Germany, in Austria, in Romania, in India, in Australia, and many others, help us to be part of the local supply chain in all of these countries. So the combination of wide portfolio, large footprint is a strong strategy of the company for many years, and we are taking benefit of it now. And we expect to see many more contracts to the company and to continue the momentum we are seeing also in the coming quarters.
spk03: And then just on the U.S. specifically, I mean, you've had a chance to go out and take a more detailed look at the FY23 budget. We got a fit-up this year. What were your initial takeaways, and how do you feel your product portfolio lines up to those priorities being shown in that budget?
spk07: I would say that we see a growing demand for naval activity, and the fact we have Spartan right now as part of the Helbig family helps us a lot. to participate in this effort. Talking about airborne activities, just to remind all of us that we have systems like helmets, like part of the avionics on each and every F-35, F-15, F-18, V-22, F-16, of course, each Apache. We have a major part on the TX, the T-7 of Boeing, So we have a strong position on many urban platforms in the U.S. And we have also many systems to support the ground forces, which includes laser designator, which includes night vision equipment for the soldier, target acquisition solution, guided munition, active protection system, which are all required to support the troops in Europe. So, altogether, I believe that we are well positioned to take advantage of the growing need also in the U.S. market based on our strong position we have in the U.S. under the system of America, which has more than 3,000 employees already.
spk06: Thank you. Thanks, Garth.
spk02: The next question is from Ella Freed of Bank Lumi. Please go ahead.
spk01: Ella?
spk06: Ella?
spk04: Can you hear me?
spk06: Yes, we can hear you.
spk04: Oh, it was a mistake. Okay. Sorry. Okay. So when I was offline, I congratulated you on the growth in this quarter, even though it is not necessarily representative of the year, but we shall hope that it indicates a lot. And I would like to ask you about the timeline that you spoke of. of these opportunities that you spoke of. Because things in the defense industry usually are moving slowly, and there's a feeling that this time some countries are very keen to get their orders as fast as possible. How much of it do you expect, or expect is a stronger word, do you think that will be translated into orders that we will see before the end of this year? Because obviously the next year we'll see a lot of it, but presently there's a feeling that a lot is going on, but how much of it is actually translated into real orders that there are visible in the near quarters.
spk07: Thank you, Hila. First, I want to remind all of us that you can see in the numbers, I believe, an impressive growth in revenues, which is prior to the invention to Ukraine, the invention to Ukraine to place the end of February this year. And what you can see in the numbers is a 21% year-over-year increase in revenue. And if you take out the one-time expense we had for the phantom auction, you can see also growth in the GDP. I'm talking gap numbers for a minute, from $281 million to $347 million number, and OP from 84 to 94. So we see a significant growth in revenues and also a growth in profit. That's before the invention to Ukraine. And with regard to your question, we see a lot of inquiries and we see a growing demand for the system and product we have. And I can tell you that we also see some urgent requirements, which I believe will lead to programs and to contracts in a relatively short period of time. hopefully this year. And of course, we also see growing budgets, which part of it will yield next year as well. But we see that the funnel of opportunities is growing, and I believe that part of it will be seen in our numbers in the coming quarters this year.
spk04: Okay, thank you. And I have also a financial question. The growth margins were a bit more solid in this quarter. And we know that there are lots of pressures that are the currency rate and the supply chains and a lot of inflation and many other reasons. Can we hope to see this level of above 26 throughout the year, or it's still... I know that you are doing your best to do it, but is it something that we can expect, or we have to be careful there?
spk05: Hi, Ella. This is Yossi.
spk04: Hi, Yossi.
spk05: You know Ella from... discussions that we are not providing guidance. However, we are excluding the extraordinary incur of expenses due to the stock price that we discussed earlier. We have improved from previous quarter to this quarter by 0.4% of our gross profit. And We have improved by a significant amount also the operating profit. But the one thing that I wanted to point out is I'm not sure that it was transmitted properly. In view of what Bootsy just mentioned earlier, the increase in the funnel of the marketing opportunities,
spk04: If you look at our results, you will see... I noticed, actually, that it went up, and I thought that it was the opportunity.
spk05: Yes, I see an increase of marketing expenses. Now, this is not just by spending money. These are two things that are related one with another. When you have marketing opportunities growing... then definitely the company is spending the marketing efforts in order to catch these new business. So there is a correlation. And these extraordinary expenses in the marketing, they definitely have affected our operating profit to some extent. We want to catch the business. We want to do everything possible in order to benefit from what's happening in the business environment that we are experiencing now, which is very positive, which is very positive. So maybe we have a little bit of a drag on our operating profit because of this element. But no doubt that increasing our backlog and growing the top line, everything will be shown and will show up in the operating profit and bottom line as well in the future.
spk04: Thank you.
spk07: And I also want to add to two topics which I believe are important. We continue to work on efficiencies, to invest in new facilities. You know that we are building a new facility in the south for IMI. We continue to deploy the new ERP system in the company, which I'm sure will benefit from it in the near future as well. And of course, the currency level, as it is now, is more favorable than it was in the first quarter, which I hope will also help us to create more profit in the future.
spk04: Okay, thank you very much.
spk07: Thank you, Anna.
spk02: 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 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 03925-5900. And internationally, please call 972-3925-5900. A replay of this call will also be available on the company's website, www.elbitsystems.com. Mr. Machlis, would you like to make your concluding statement?
spk07: Thank you. I would like to thank all our employees for their continued hard work and contribution to Elbit's success. 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.
spk02: Thank you. This concludes the Elbit Systems Limited First Quarter 2022 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.
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