Elbit Systems Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' first quarter 2023 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 that is available in the new section of the company's website, www.elbitsystems.com. I would now like to hand over the call to Rami Meyerson, Elbit Systems Investor Relations Director. Rami, please go ahead.

Thank you, Yoni. Good day, everyone, and welcome to our first quarter 2023 earnings call. On the call with me today are Boti Machlis, our President and CEO, Kobi Kagan, our 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 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. Kobi will begin by providing a discussion of the financial results, followed by Buti, 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 Corby. Corby, please.

Thank you, Rami. Hello, everyone, and thank you for joining us today. The financial results of the first quarter of 2023 reflect the sustained demand for our leading technological solutions that supported the growth in the order backlog to $15.8 billion, up 15% relative to the first quarter of 2022. I'm encouraged that our operational activities and the cost base are gradually returning to normal following the supply chain and labor challenges in 2022. We continue to invest in the operational transformation to realize the potential presented by the large funnel of opportunities around the world, and we are on track to deliver and improve performance. We started to report segment information in five segments from the year ended December 31st, 2022. In our press releases for the first, second, and third quarter, we will provide revenues by segment, and we report revenues and operating income of each segment in our annual report. Revenues by segment in our press releases for the first, second, and third quarter replace revenues by areas of operation, that were previously provided. The five reportable segments are aerospace, C4I and cyber, ISOR and EW, land and Albit Systems of America or ESA. I will now discuss some of the key figures and trends in our financial results. I would note that the sale of Ashot Ashkelon to FIMI Opportunity Funds was completed at the end of the second quarter of 2022. in our results in the first quarter of 2023 do not include a contribution from Ashot Ashkelon. First quarter revenues were $1,393,000,000 compared to $1,353,000,000 in the first quarter of 2022. In terms of quarterly revenue by segment, aerospace revenues decreased by 10%, in the first quarter of 2023 compared to the first quarter of 2022, mainly due to lower airborne precision guided munition sales, partially offset by growth of training and simulation sales. C4I and cyber revenues increased by 19% year over year, mainly due to growth in command and control system sales. ISTAR and EW revenues increased by 17%, mainly due to electronic warfare system sales. Land revenues increased by 8%, mainly due to armored vehicle upgrade sales. Elbit Systems of America's revenues in the first quarter were similar to the first quarter of 2022. Our diverse geographic revenue base is important to the long-term sustainability of our business. In the first quarter, Europe contributed 27%, North America 24%, Asia-Pacific 24%, and Israel contributed 18% of revenues. European revenues increased mainly due to the growth in UAS munitions and training and simulation sales. Asia-Pacific revenues declined mainly due to lower precision guided munition sales. Latin America sales increased due to C4I sales. The non-GAAP gross margin for the first quarter was 26.4% compared to the first quarter of 2022 at 24.6%. Gap gross margin in the first quarter was 25.9% of revenues compared to 24.2% in the first quarter of 2022. Gap and non-gap gross margin in the first quarter of 2022 included approximately $20 million of expenses related to stock price link compensation plans. First quarter non-GAAP operating income was $105 million or 7.5% of revenues compared with $66 million or 4.9% of revenues last year. GAAP operating income for the first quarter was $94 million or 6.7% of revenues versus $59 million or 4.3% of revenues in the first quarter of 2022. The operating expense breakdown in the first quarter was as follows. Net R&D expenses were 7.9% of revenues versus 7.4% in 2022. Marketing and selling expenses were 5.8% of revenues versus 6.4% last year. G&A expenses were 5.5% of revenues compared to 6.2% last year. GAAP and non-GAAP operating profit in the first quarter of 2022 included expenses of approximately $35 million related to the stock price link compensation plans, which in the first quarter of 2023 were not material. Financial expenses were $24 million in the first quarter compared to financial income of $1 million in 2022. Financial expenses in first quarter reflect the higher interest rate environment. Financial expenses in the first quarter of 2022 included gains from changes in fair value of financial assets and exchange rate differences. We recorded a tax expense of $9 million in the first quarter compared to tax expense of $8 million in 2022. The effective tax rate in the first quarter was 12.8% compared to 13.8% in 2022. Our non-GAAP diluted EPS was $1.70 in the first quarter compared with $1.22 in 2022. GAAP diluted EPS was $1.40 for the first quarter compared with $1.19 in 2022. Our backlog of orders as of March 31st, 2023 was $15.8 billion, $2.1 billion higher than the backlog at the end of the first quarter of 2022. Approximately 54% of the current backlog is scheduled to be performed during 2023 and 2024, and the rest is scheduled for 2025 and beyond. Operating cash flow for the first quarter was $73 million outflow, compared to $35 million inflow in the same quarter last year. The Board of Directors has declared a dividend of 50 cents per share, I will now turn the call over to Mr. Mahlis Elbit, CEO. Butzi, please go ahead.

Thank you, Kobi. I'm encouraged by the financial results in the first quarter, the strong demand and large funnel of opportunities and a series of significant contracts booked since the end of the first quarter. Over the last three years, we have experienced the challenges of COVID-19, supply chain disruptions, and changes in the labor market. Elbit Systems has demonstrated its resilience through this period and the remarkable ability of our employees to deliver and support our customers during a very volatile period. There is still work to do to complete the operational transformation represented at our investor day in March. I believe The first quarter results provide confidence that we are on track to deliver the transformation. Elbit system is benefiting from the healthy demand for artillery solutions from countries and militaries around the world that have started to implement the lesson learned from the Russia-Ukraine conflict, including the critical importance of effective indirect fire support. We also continue to receive orders from legacy customers. Elbit Systems has developed a comprehensive portfolio of systems and solutions for artillery forces. The portfolio includes hobbiters, mortars, and rocket launchers, munitions, fire control and command and control systems, target designators, UAVs, and training systems. We provide these to our customers as tailored solutions or as standalone systems. A few weeks ago, on May 18, we announced a US$305 million five-year contract to supply 20 precise and universal launching systems or Pulse rocket artillery systems, as well as rockets and missiles of various ranges to the Royal Netherlands Army. The Pulse system can launch both free-flying rockets and precision-guided rockets and missiles with ranges of up to 300 kilometers. The Pulse Launcher can be mounted on a broad range of wheeled and truck platforms, providing a significant reduction in maintenance and training costs. The Dutch contract follows rocket artillery contracts from two European countries we received during the first quarter. In 2022, German defense company KMW signed a cooperation agreement with Elbit System Land and Elbit System Deutschland to develop the Euroforce, the next generation of European long-range rocket artillery system. This agreement will enable both companies to address the growing potential in the European market for this solution. In April, we were awarded a 102 million eight-year contract to supply a battalion of Atmos 155mm truck-mounted howitzer to an international customer. The Atmos is a combat-proven wheeled howitzer designed for rapid deployment and operation, enabling provision of fire support for a broad range of missions. In May, the Rheinmetall LB team conducted a live fire demonstration of an automated 155mm wheeled self-propelled howitzer in southern Israel. This demonstration was part of the cooperation agreement we signed with Rheinmetall in 2022 to develop, market, and manufacture a European automated wheeled self-propelled hobbit zone. The solution combines and leverages the technological capabilities of both companies and will provide a mature and relevant solution for NATO armies that are planning to recapitalize and expand their artillery forces. Elbit system provides a broad portfolio of market leading for war fighters in all domains, in the air, on the ground, and at sea, from a single soldier to large formation and headquarters. Our simulation solutions provide more realistic training that better prepares soldiers for a wide range of scenarios at lower costs. In May, Our British subsidiary, Elbit System UK, was awarded a US$71 million contract by the UK MOD to provide, maintain, and operate the Ground Maneuvering Synthetic Training System, or GMFP, for the nuclear army's boxer arms vehicles and Challenger 3 tanks. The contract will be delivered over three years, with an additional nine-year period of operation and maintenance service at the UK facility. A few weeks ago, we marked a significant milestone for our Hellenic International Flight Training Centre contract with the arrival of the first two M346 aircraft at the International Pilot Training Centre in Kalamata. The M346 aircraft are equipped with LBIT Systems integrated virtual avionics that simulate combat and flight scenarios to enhance the pilot training experience. The Hellenic Flight School contract is on track and delivering as planned. At our recent investor day, we discussed the investment we are making to upgrade and expand our manufacturing footprint as part of the transformation of our company and enable our internal target of revenues of 6.5 or 7 billion U.S. dollars and operating margins around 10% in the future. In May, we opened our new manufacturing facility in North Charleston, South Carolina. The new facility will employ hundreds of people and assemble large vehicular systems for the United States military and allied nation, including the mission command platforms for the U.S. Army, Army's CPI-2 program and the Sigma-Hovitz system for the Israeli Defense Forces. Construction of our new ammunition production site in Ramat Deca is on track and should be up and running from 2024. The new state-of-the-art facility should benefit from the growing demand for munitions. Last week, thousands of Israeli employees volunteered during which means they're doing good at to volunteer, contribute, and give back to their local communities. During this year, our employees contributed more than 3,000 hours volunteering on dozens of projects around the country with Holocaust survivors, the elderly, as well as youngsters that need a helping hand. I am proud to see the involvement of thousands of LGBT students and employees around the world that volunteer to participate in activities that benefit our communities. And with that, I will be happy to take your questions.

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 handset 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 Shira Kayagulu of Jefferies. Please go ahead.

Good morning, guys, and thank you for the time. You know, just wanted to ask a little bit deeper into the segments, if you don't mind, aerospace sales to start with. Maybe we're down 10% year over year, I believe. Is this the precision guided munitions headwind related to a single program? And how do we think about sort of that return to growth there?

Ashira, good afternoon here. The answer to the question is a reduction in airborne precision guided munitions sales. that we had at the first quarter of 2022, and due to program mix, we didn't have that substantial amount of urban precision guided ammunition cells in the first quarter of 2023. This is the main explanation for this decline.

I want to add that If you remember, last time we discussed the different segments, we mentioned also the importance of looking on the entire corporation. Because there are many synergies between the divisions. One quarter, one division is doing better than the other. There is also a mix of projects which are also impacting the results. So I would like to... to remind this remark again and to make sure you see the overall integrated picture. I think that reflects better the performance of the corporation.

Okay. No, that's helpful, Kolor. And then maybe if you could just go to land for a second. You're partnered with BAE on OMSB on that program. Maybe if you could just provide us an update on timing on that program and how you're thinking about the opportunity and next steps in this sort of armored vehicle upgrade.

This opportunity is, as you know, it's a tender. And we are participating in that tender in one of the teams with our solution. And we are waiting for the decisions, actually. We expect decisions during this year about the first phase of the project. And that's more or less the status.

You got it. Okay. All right. Thank you very much.

The next question is from Atinj Uskan of Wooden Company. Please go ahead.

Thank you and good afternoon all. I have a couple of questions. The first one is, in your previous investor call, you mentioned that following Aldo's transformation over the past couple of years, you are now in a position with infrastructure to support annual revenues of six to seven billion with improved profitability. And you also mentioned that You think you will hit tempers and operating margin targets soon. Can you elaborate or provide some more granularity? When do you expect to basically hit these levels both on top line and operating margin levels? Is it some kind of midterm guidance or do you think it's going to be achievable in 2023, 2024? That's my first question. And my second question is, given that you'll be completing most of your CapEx upcycle with the new ammunition plant in Negev operational next year and South Carolina plant already behind us and the one ERP investment is already completed, where do you see your CapEx budget, annual CapEx budget or annual CapEx over revenue strength going forward? Thank you.

Hi, this is Yossi. Regarding your first question, I think the best indicator to look at is our backlog of orders. We are close to 16 billion backlog of orders growing, very nice double digit year over year. Our revenues have grown year over year, probably in the mid single digits, as you can see so far. And we, as we explained in the past, we are making every effort to close the gap between the growth of the backlog and the growth of the revenues, of course, by increasing the revenues. If you look at our press release today, you see that of the $15.8 billion of backlog, about 54% are planned to be transformed in revenues in the next seven quarters. That means this year and next year. Just by making a simple calculation, you will see that we probably will be in the six plus billion dollar next year and getting closer to the seven number maybe a year or two years after that. So this is the range of the top line growth driven by the backlog of orders that we already have. So it's no speculation. It's just a simple calculation of the backlog transformation into revenue. In parallel, as Buzzi in our investors meeting explained, we have initiated all the efforts to build the operational capability to do that. actually to manufacture and deliver to our customers and in the various places in the world, the various facilities. And this is underway. Some of them are completed. Some of them will be completed during 2023 and 2024. So all of this will enable us to perform. And, of course, by growing the top line and by keeping the overhead rates and the GNA under control, we expect to return to the level of operating profit that we used to be several years ago. So this is the first question. I believe the second question, I will turn it over to Kobi to respond.

Thank you, Yossi. And hi, Athens. As Yossi explained, we are currently in the process of building our infrastructure to support the transformation of backlog to revenues. This is involved with CapEx investments. In terms of specifics, the South Carolina facility is almost finished. We actually started working there. and most of the investment there is done. The one ERP investment is also in process of conclusion. We hope that the last big division will go live at the 1st of July this year. And we are still in the cycle of CAPEX investments in the Ramat Beka, Negev Desert, south of Israel, ammunition plant, to actually have all the facilities that will be relocated from the Ramat Hasharon facility to the Negev facility. So we are expecting the modest decline in CAPEX investments due to the conclusion mainly of the ERP system, but we still invest heavily in our production capacity in order to having the backlog transformed to revenue.

OK, crystal clear. And if I may follow up just with a very short question regarding the aerospace segment. I do remember that you guys have now additional capacity put into operation in your production line for drones in Israel. Is it possible to basically tell us what's the waiting line if a client comes and orders you, I don't know, a dozen of drones right now? Just to give you an example from your unlisted peer in Turkey, Baykar has now a three-year waiting line for drones. I'm just trying to have an idea whether you have the same kind of bottleneck. Thank you.

Hello, good afternoon. It's Bouti. We are expanding our production facility, our production capabilities for UAVs. We are building a new facility right now near the city of Moudin, which is not far away from Jerusalem in Israel. And this is on top of the facilities we already have. And this facility should go live by the end of this year, which will enable us to meet the growing demand for UAVs that we are seeing all around the globe, and to enable us also to deliver UAVs to our customers in a relatively short period of time.

Okay, that's good enough for me. Thank you very much for the detailed answer.

Thank you.

Thank you.

The next question is from Ella Freed of Bank Lumi. Please go ahead.

Good afternoon, and thank you for taking my question. I have actually a few. The first question is, what was the reason for inventories going up? I mean, it could be future growth, rising prices of raw materials, supply delays, or it means investment in long-term projects.

Hi, Hela, good afternoon.

Good afternoon.

As we indicated back in our investor event, we are planning this year, the 23 years, to have each quarter, we are building each quarter to transform the backlog to revenues with increased sales quarter after quarter in 23. That means that in order to be able to fulfill this backlog for 23 years, We needed, of course, to buy raw materials, to invest more in WIP, and we were doing that in the first quarter. This is according to our plan, to have those inventories ready to be transformed into revenues in 2023 and some of that in 2024. So that is just a way for us to build... the additional revenues, the increased revenues that we're expecting in the coming quarters.

Okay, so we should be looking at it as a positive indicator. Okay, I have a couple of more questions. In two weeks, you are going to Paris, in two and a half weeks, you are going to Paris to Le Bourget air show. And you obviously will return with even more orders and with even more massive backlog. And it's just a follow-up to all these questions that were asked. How do you plan to cope with even more massive backlog in the short-medium term? I mean, it seems that you will be really getting lots of... orders and and attempt to order and I mean will you be taking more distant orders like the the American leading companies or Other or are implementing any other strategy more?

I don't know if you have the possibility for more outsourcing Thank You Ella the booty and we are right we see a growing demand for our product and systems and we see a very big funnel ahead of us and And that's exactly, and we took it into account, and that's exactly why we took a decision to invest to enhance our facilities in Israel as well as abroad. Just to remind all of us, we expand our Yoknan facility here in the north part of Israel to support more land system revenues. We expand our radio facility in the north part of the country in order to support growth and revenues. of the C4I and communication equipment division. And the same we did also at the Hobart in order to support more revenues coming from our ISTAR division. We mentioned already the new UAV facility we are building these days and we are going to inaugurate by the end of this year. And that's on top of the Ramat Beka investment which we started to build three years back and will go live next year. That's only in Israel. Abroad, new facility in the UK, in South Carolina, new facility in Bristol, UK, which we are going to inaugurate very soon, a new facility which was inaugurated already in Ulm, Germany, to deliver more equipment to our European countries, to European customers. So we... took into account the growing demand. We have mature products. We are local in our markets via the dozens of subsidiaries we have all over Europe and all around the globe. And we will be able to take more orders from the growing demand that we see and to convert it in relatively short period of time into revenues and to profits. And because of that, we felt confident to mention the $6.5 to $7 billion revenues that we will be able to achieve with a level of 10% OP.

Well, it sounds like lots of work. I have another follow-up question. Does it mean that we should be looking again at your pipeline? I mean, this also calls for some kind of, I don't know, M&A or any kind of new acquisitions in the pipeline that will help all this workload?

Yes. First, the answer is yes. But this is not just to handle the workload. There are two main reasons for Albit to do M&A. One is to expand our market position. And because of that, for example, we took a decision to acquire Spartan in the U.S. in order to build a stronger position in the U.S. Navy. And because of that, we took another decision to acquire Night Vision in the U.S. as well to improve our position in the U.S. Army. These are just two examples. So one reason is to look for new markets and new market positions. The other reason And when I'm talking about new market and new market position, this is mainly in the U.S. and Europe. And the other type of M&A we are looking at is new technologies. And another example for that is the acquisition of Wacar, which we acquired a few years back in Jordan, which brought us new technology to the company. So we have proved already in the past that we know how to do M&A in a good way. We know how to create synergies between them and the new companies that we are acquiring to the current portfolio of Elbit. And we know how to manage it. And so we certainly look for more opportunities to expand the company in these two aspects. On the same time, I would like to mention that we are all the time reviewing our portfolio. And we are making sure that what we have in our portfolio fits the strategy of the company today. Because of that, A year ago, we took a decision to divest Ashot Ashkelon, which was a great company. But we took a decision to divest it, not because it was not a good company. The reason for that was because it was not synergetic to the LB portfolio. So we took a decision to divest it, and we were happy that Femi took a decision to acquire it from us. And it was a good deal for us in terms of that. So we continue this process as well. In parallel of looking for new M&A, we are checking our portfolio at the time, making sure that the current portfolio which we have fits the current strategy of the company.

So can you shed a bit more light in both directions or we have to wait?

I have nothing special to report right now, but I can tell you that we are We are walking both directions constantly.

Okay, so it sounds interesting. And thank you for taking so many questions. I think maybe somebody wants to follow me.

Thank you, Ella. 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?

Thank you. I would like to thank all our employees for their continued hard work and contribution to Elbit Systems' 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.

Thank you. This concludes the Elbit Systems LTD first quarter 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.