Elbit Systems Ltd.

Good day, everyone, and welcome to our fourth quarter 2023 earnings call. This is Rami Myerson, Elbert Systems VP, Investor Relations. On the call with me today are Buti Machlis, our President and CEO, Kobi Kagana, CFO, and Yossi Gaspar, Senior VP, Business Management. All participants are at present in a listen-only mode. Following the formal presentation, instructions will be given for the question and answer session. As a reminder, this call is being recorded. 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 their only conciliation is 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. Earlier today, we hosted an investor conference at the Tel Aviv Stock Exchange. A presentation of the event is available in the investor relations section of our website at www.elvetsystems.com. Investors and analysts who wish to ask questions related to the topics discussed at the investor conference are welcome to present their questions during the Q&A session of the call. With that, I would like now to return the call over to Kobi. Kobi, please.

Thank you, Rami. Hello, everyone, and thank you for joining us today. The 2023 annual results reflects Elbit's resilience as well as our commitment to supporting the IDF's efforts during the current war and also delivering to our customers around the world. Many of our customers are investing significantly to upgrade and expand their armed forces driven by geopolitical tensions. This demand supported the growth of our order backlog to almost $18 billion, providing good visibility. As part of our operational transformation, we continue to invest to expand capacity and delivering the growing backlog. Our financial performance in 2023 also includes the write-off of $52 million non-cash expenses in the fourth quarter related to the closing of an underperforming subsidiary of Elbit Systems of America, with limited synergies and a discontinued project managed under the subsidiary. Approximately $18 million of the expenses related to the restructuring were recorded in COGS and excluded from non-GAAP results. $34 million of the expenses were recorded in G&A and were not excluded from non-GAAP results. I will now highlight and discuss some of the key figures and trends in our financial results. Both quarter revenues were $1,626,000,000 compared to $1,506,000,000 in the fourth quarter of 2022. For 2023 as a whole, our revenue were approximately $6 billion versus approximately $5.5 billion last year. Our diverse geographic revenue base is important to the long-term sustainability of our business. In 2023, Europe contributed 30 percent, North America 24 percent, Asia Pacific 21 percent, and Israel contributed 20 percent of revenues. The increase in European revenues was broad-based and included growth in UAS, munitions, C4R, and radios, EW, EW in training and simulation sales. Growth in Israeli revenues reflects the increased demand for a broad range of our solutions following the breakout of the Swords of Iron War. Israel contributed 27% of sales in the fourth quarter, compared to 20% of revenues over the whole of 2023. North America revenues were lower, mainly due to lower airborne sales systems. Asia-Pacific revenues declined mainly due to lower sale of precision-guided munitions. The non-GAAP gross margin for the fourth quarter was 25.3% compared to fourth quarter of 2022 at 25.8%. For the full year of 2023, non-GAAP gross margin was 25.7%, compared with 25.5% last year. Gap gross margin in the fourth quarter was 23.5% of revenues compared to 25.3% in the fourth quarter of 2022. Gross profit in the fourth quarter was reduced by approximately $18 million of expenses related to the closing of the subsidiary. GAAP gross margin in 2023 was 24.8% compared with 24.9% in 2022. The fourth quarter non-GAAP operating income was $105 million or 6.4% of revenues compared with $104 million or 6.9% of revenues last year. GAAP operating income for the fourth quarter was $68 million versus $120 million in the fourth quarter of 2022. Operating income in the fourth quarter included $52 million of expenses, as explained above, of which approximately $18 million were excluded from the non-GAAP operating income. Non-GAAP operating income in 2023 was $449 million, or 7.5% of revenues compared with $367 million or 6.7% of revenues last year. GAAP operating income was $369 million versus $368 million last year. The operating expenses breakdown in 2023 was as follows. Net R&D expenses were $424 million or 7.1% of revenues compared to $436 million or 7.9% of revenues in 2022. Marketing and selling expenses were 6% of revenues versus 5.9% last year. G&A expenses were $330 million or 5.5% of revenues compared to $313 million or 5.7% of revenues in 2022 and includes $34 million of expenses related to the write-off. Financial expenses were $46 million in the fourth quarter compared to $27 million in 2022. Financial expenses in 2023 were $138 million compared to $51 million last year reflect mainly the increased interest rate environment and higher debt. Other expenses were $5 million in 2023 compared to $24 million in 2022. The reduction includes the re-evaluation of holdings in affiliated companies and expenses related to non-service costs of pension plans. We recorded a tax benefit of $5 million in the fourth quarter, that was similar to 2022. The effective tax rate in 2023 was 10.1% compared to 8.2% in 2022. Our non-GAAP diluted EPS was $1.56 in the fourth quarter and $6.70 for the full year of 2023, compared to $1.71 in the fourth quarter of 2022 and $6.27 in 2022. GAAP diluted EPS was 67 cents for the fourth quarter of 2023 and $4.82 for the full year compared to 67 cents in the fourth quarter of 2022 and 6.18 cents in 2022. 2023 non-GAAP earnings per share reflects improved operational profitability, partially offset by the $52 million write-off and higher financial expenses as mentioned previously. I will now review the annual financial results of our business segments and will note that our segmented disclosure of operational income is provided on a gap basis. Aerospace revenue increased by 8 percent in 2023 mainly due to training and simulation revenues in Europe and UAS revenues in Asia Pacific and Europe, partially offset by lower sales of precision guided munitions. Aerospace operating income in 2023 was $125 million and 6.7% of segment revenues compared to $107 million and 6.2% in 2022. The increase in operating income was mainly due to increased revenues and positive program mix. C4I and cyber revenues increased by 6% year over year, mainly due to C4I revenues in Asia Pacific. C4I and cyber operating income in 2023 was $51 million and 7% of segment revenues compared to 49 million and 7.2% in 2022. I-Star and EW revenues increased by 13 percent in 2023, mainly due to the electronic and warfare and electro-optic system sales in Europe and countermeasure systems. I-Star and EW operating income in 2023 was $135 million and 11.4 percent of I-Star and EW segment revenues, compared to $49 million and 4.7 percent of segment revenues in 2022. The increase in operating income was mainly due to increased revenue and positive program mix. Land revenues increased by 12% in 2023 compared to 2022, mainly due to increase in artillery and weapon station sales in Europe and ammunition and munition sales in Israel. Land operating income in 2023 was $81 million, and 6.2% of segment revenues compared to $29 million and 2.4% of segment revenues in 2022. The increase in operating income was mainly due to increased revenue, positive program mix, and progress in the operational transformation of IMI. Albit Systems of America revenues were similar year over year. The $5 million operating loss in 2023 compares to an operating profit of $75 million and 5.1% margin in 2022. The operating loss was mainly due to the $52 million write-off discussed previously, as well as negative program mix. Our backlog of orders as of December 31, 2023, was $17.8 billion, $2.7 billion higher than the backlog at the end of 2022. Approximately 60% of the current backlog is scheduled to be performed during 2024 and 2025, and the rest is scheduled for 2026 and beyond. Operating cash flow for the fourth quarter was a $314 million inflow compared to $195 million inflow in the same quarter last year. For 2023, we reported operating cash flow of $114 million versus $240 million in 2022. The Board of Directors has declared a dividend of 50 cents per share. I will now turn the call over to Mr. Maklis, LBCO. Butsi, please go ahead.

Thank you, Koko. I would like to begin by thanking all Elbit employees around the world for their hard work and their ongoing commitment to all of our customers. I also want to send my sincere condolences to the families of our employees that have lost their loved ones during this conflict and our prayers for a speedy return of all the hostages. The financial results of 2023 combined with resilience the company continues to demonstrate, provide me with competence in our ability to realize the potential of our employees and our advanced technological solutions. We finished 2023 with another record backlog and 8% revenue growth that reflects the strong demand for our relevant portfolio of solutions that we have developed over many years, as well as our broad geographical footprint. At the beginning of March, we announced the closing of an unperforming subsidiary with limited synergies to our businesses, as well as the discontinuation of a project managed by the subsidiary. This decision is part of our effort to improve our portfolio management and ensure the relevance and synergies of the different parts of Elbit's portfolio. Kobe discussed the financial impact in his remarks. At our annual investor event today, I presented the core pillars of our strategy that we have discussed with you in the past. The first one is our multi-domestic strategy and global presence. Elbit's revenues are broadly split between the US, Europe, Asia-Pacific, and Israel. We adopted this strategy many years ago to ensure stable growth during periods of different budget increases and cuts and to reduce risks. To deliver this strategy, we invested in building domestic subsidiaries in key markets around the world. These subsidiaries provide engineering, manufacturing, and support to the local defense forces and also exports their solutions to other customers. They employ domestic managers and employees and are fully integrated into the defense industrial ecosystem in the home market, ensuring that defense budgets are spent locally. Elbit System provides cutting-edge, operationally proven technology to our subsidiaries that are then adapted to the specific requirements of each customer. Our multi-domestic presence has also helped us overcoming challenges, including the current war in Israel and the COVID pandemic. Elbit System of America provides a good example of the implementation of our strategy. Over the last 20 years, Elbit System of America has increased sales from approximately $200 million to approximately one and a half billion dollars in 2023, and employs approximately 3,600 people across the U.S. It is fully integrated into the American defense industrial base, supplying a range of advanced solutions as both a prime contractor and a supplier to all branches of the U.S. DOD. In November 2023, SBIC's night vision received a $500 million IDAQ contract to supply quad binocular night vision goggles to the U.S. Marine Corps. This follow-on order highlights our position as a prime contractor to the DOD. The second pillar of our strategy is our portfolio of technological advanced solutions. We provide a range of solutions that help armed forces close the sensor-to-shooter loop rapidly and effectively. We provide a range of sensors that can detect the enemy in day and night, communication solutions that can transfer the information around the battlefield, and a range of effectors to engage quickly and precisely, helping to reduce collateral damage. Our solutions are developed by employees that have served and are familiar with the challenges of the modern battlefield. Most of our solutions have been used operationally, and we strive to improve them regularly. based on our experience accumulated by our end customers. In February, we signed two contracts for $600 million and $300 million to supply armed vehicles solutions to the starting army and European customers. This solution integrates a range of sensors and other systems that will help increase the utility and operational effectiveness of armed vehicles equipped with our solution. The third pillar of our strategy is our significant investment in R&D. Elbit Systems continues to invest more than 70% of revenue to develop a broad range of cutting-edge solutions for our customers. As a percentage of revenue, this is higher than most of our defense peers. By investing our own money in R&D, we retain control of the IP as well as the ability to maximize the synergy that can be generated across the portfolio. The increased digitization of the modern battlefield provides multiple new opportunities to leverage these synergies and incorporating artificial intelligence and machine learning into our solutions. The fourth pillar of our strategy are our 19,000 employees. Most of our employees are veterans that understand the requirements of our customers based on their own experience. Many of them continue to serve in reserve after the regular military service, providing a valuable feedback loop between the battlefield and the laboratory. During the current conflict, more than 50% of our employees in Israel were mobilized into reserve duties for the IDF, and about half of those mobilized are still in uniform. We look forward to the speedy and safe return. Our strategy is working as demonstrated by the acceleration in the growth of both our order backlog and revenues in recent years. This growth reflects a successful combination of our international footprint, portfolio of relevant solutions, sustained investment in R&D, and our high-caliber employees. At our 2023 investor conference, we presented the investors with our making in our operational transformation to support the broader transformation of Elbit's system and help improve performance and our ability to deliver the growing backlog. In 2023, we made further progress in the operational transformation In 2023, we opened four new facilities around the world. In the U.S., we opened a new ground combat vehicle assembly and integration center of excellence in Charleston, South Carolina. And in January, we opened a new production support facility at our Spartan subsidiary in Florida. We also opened new facilities in the U.K. and Germany. In 2023, we also completed the implementation of the new ERP system across the company. In 2024, we plan to begin operation at our new ammunition production plant in Hamas Beka and the new UAV facility in Modin. In these recent years, we increased CAPEX to fund the building of new facilities and the rollout of the new ERP system. We believe these investments will deliver good returns and support growth over the coming year. The one area The improvement has taken longer than expected for the supply chain. The availability and cost of electronic components improved during the year, as expected. However, we have experienced increased delays and destruction to our supply chain following swarms of iron walls. Elbit system supplies a range of solutions to the Israeli-penned forces. It includes the Digital Army Program, the DEP 750 Command and Control Solution, the Chronic Warfare System, UAV, artillery and mortar systems, systems for main battle tanks and armed vehicles, night vision systems, as well as a range of training and simulation solutions from the single scourge to the squadron and battalion level across all domains and more. Our solutions are currently being used extensively by the IDF. Since the 7th of October, we have accelerated the development of some of our solutions that were still in development and were scheduled to be fielded in the medium or longer term. They have already been sent to the field in days or weeks. We did this thanks to the dedication of our employees and our culture of innovation and creativity. We are also upgrading multiple systems and solutions following the lesson learned during the conflict. We have ramped up production to support the IDS requirement and maintain deliveries to our international customers at the same time. We increased production capacity at our factories by adding shifts and recruiting several hundred additional employees to support the search. Before we move to the question and answers, I would like to thank Rami for its contribution to other systems and wishing success in its future endeavors. From the 1st of April, Responsibility for Investor Relations will move to COVID. In summary, we continue to implement the strategy that has built Elbit into a leading global defense company. The current war in Israel has not changed our long-term plans, and the progression of transformation is progressing well. I am encouraged by the resilience we have demonstrated overcoming multiple challenges in recent years. All this increased my confidence in our ability to deliver our potential to all our stakeholders, our customers, our employees, and of course to you, our shareholders. And with that, I would 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 1. If you wish to cancel your request, please press star 2. 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 Pete Skibitsky of Alembic Global. Please go ahead.

Yes, hello, everyone, and good afternoon. Maybe we can start with the very strong backlog growth in the fourth quarter, 7.2%. I think it worked out to be almost 18% for the full year, pretty much all organic, so As you alluded to, Butsy, the demand is pretty strong, unusually strong right now. But I wanted to clarify just a little bit. Are you seeing the greatest strength in order flow from the Israeli MOD right now? Because I know that Israeli revenue almost doubled sequentially into the fourth quarter. So I just was wondering if you could clarify, you know, the fastest regional growth in demand.

Good morning, Pete. This is Kobe. Thank you for your comments and questions. First, as you mentioned, we had 18% organic growth in backlog and $1.1 billion organic growth of backlog just in the fourth quarter, which is above 7%. And as we presented in the last few months, we have a strong intake of international International programs, which we mentioned, for instance, the RADBAC in Australia, the LAND 400, which is a $600 million intake. So while having significant orders, as we mentioned in November, from the Ministry of Defense, we have also very strong demand from the international market.

Okay, very good. Very good. Appreciate that. And then just, you know, if I look at operating margins by segment, which you guys give annually, it looks like you did have operating margin expansion in all of your segments year over year except for ESA, where you took the charge, of course. And so I'm just wondering, given the momentum in some of the other segments, does this give you confidence that, you know, 2023 is perhaps the – you know, the trough margin year for Elbit, and that we'll see expansion in 24 and beyond, just given, you know, you should have better volume and the improvement you've seen in the other segments.

Hi, Pete. It's Bootsy. As I'm sure you remember, our plan was to get to reach a level of revenues between 6.5% to 7%. billion US dollars at 2026 and an operational profit of about 10% that year as well. We are quite confident, I'm quite confident that we'll be able to reach the level of revenues earlier than 2026 and we are still fully committed to reach the OP level of 10%. We are working hard to do that and you can see that we are on track. You can see that quarter by quarter we're improving our operational profit.

Very good, very good. One last one for me. I was just wondering, your margin plan, I know, will rely on the new facility in the south of Israel. I'm just wondering, has the war slowed down construction of that new facility at all, or is it still planned for completion by the end of the year?

No, no, on the contrary. We have accelerated the activity, and we expect to start the activity there or to inaugurate it around the fourth quarter of this year.

Okay, great news. Thanks so much, guys. Appreciate it.

The next question is from Ellen Page of Jefferies. Please go ahead.

Hi, guys. Congrats on the quarter. So just following up on Pete's question about that facility, how do we think about your ability to continue to grow artillery volume from here, just given demand is strong? Do you have capacity for growth prior to Q4, or is it more constrained?

Thank you. Thank you for your question. The answer is yes. We have invested in additional production capacity. We increased the amount of employees. We are working three shifts. And as was mentioned, we opened already last year several new facilities around the globe. And this year, we will open two new facilities, one in Mudein for UAVs here in Israel and another one and the south part of Israel at Ramat Beka, which we are planning to inaugurate around the fourth quarter of this year. So we think that all these investments that were made, not just recently, were made during the last few years, will yield into new capacity for production and will enable us to meet our commitment for the Israeli market as well as for international markets.

Okay, that's helpful. And just on cash, you had a use of cash again this year. How do we think about working capital, or last year, sorry. How do we think about working capital through 2024? And are you expecting to have better inventory management going forward? Or how do we think about that $350 million use? So,

Good morning, Alan. This is Kobi. So in terms of cash, we had to increase working capital to meet the growing demand. As Bootsy mentioned, we have increased revenue of above 8% year-over-year and 8% in Q4. And as we presented in our backlog, our backlog is 17% higher than last year. So we are increasing, we need to increase production to meet our customers' demand. And that requires strong working capital. That requires inventories. And as mentioned, we increased inventories by $350 million. Another specific reason is the issue of maritime transportation, which require us to hold more inventories to be able to supply the demand. So we are looking at that very closely with our new ERP systems. We're monitoring that very, very closely, and we are receiving concise and precise decisions to meet our demand while, of course, the capital and cash expenses are a big issue to be dealt with.

Okay. That's helpful. I'll leave it at that.

Thanks, Ellen. The next question is from Omri Efroni of Oppenheimer. Please go ahead.

Hi, guys, and congrats on the very great quote here. I have maybe to elaborate on the last question about financial expenses. We have pretty high financial expenses, approximately $140 million. million in the for the whole year of 23 um maybe if you can elaborate a little bit more about working capital and how should i think about it is it tied up more of one segment maybe the ever statesman the land division and what about the guarantees are you thinking about um a way to lower the price of credit of interest and i say on the guarantees and how they want to think about it thank you hi free

So as discussed previously in our conference, we have $138 million of financial expenses during the year. Part of the expenses are a backlog of more than $4 billion of financial guarantees, which we are required to hand to our customers, mainly when we receive down payments. And we are working with the banks, of course, of reducing this cost as much as possible. But we always prefer to issue a guarantee, which costs us around half a percent, and receive down payment other than use credit, which costs us at market rates more than 6%.

Okay, great. Thanks for the comment. We're happy if you can give a little bit of explanation about the UAV segment. Now, Elvid is taking his new facility, is opening a new facility in Modiin. Maybe you can talk about it more of how much capacity is going to be added to the aerospace and especially the tactical UAVs and the large strategic UAVs that you can sell to especially the UAVs. Thanks.

We received recently many orders for UAVs in many countries, and they are all embedded in the airborne segment. The airborne segment is not just for UAVs, it's our entire airborne portfolio, which includes the training and simulation, avionics, helmets, and some more activities. But talking specifically on UAVs, we see a growing demand for UAVs here in Israel, but also around the world. We have, as you know, a family of UAVs, from small tactical UAVs to male UAVs. The uniqueness of our solution is not just the UAV itself. It's our ability to provide operational solutions for our customers based on our different sensors and effectors, which are all linked Actually, what we are able to do, our unique offering is not just a simple UAV, it is a full integrated package which helps several operational scenarios which are required in the market. And there we bring the entire synergy of the company. In order to meet the backlog of UAVs we got recently in many countries, we took a decision to invest in a new facility for U of V in Medin. And this facility will be inaugurated around June, July this year.

Great. Maybe a lesson for me, if I may. Coming to the first quarter of 2024, the facility in Ramat Beka is going to come online. How should I think about the ramp-ups in the capacity and the production in the facility? Is it going to be a quick one? Or is it supposed to be as long as six months, three months, 12 months? Thank you.

We will start production in the new facility in the last quarter. And we will gradually increase capacity and increase production. It will take us probably around nine months. to get into full production capacity in that facility. And we have invested quite a lot in this new facility. It includes a lot of automation, new robots, new technologies for production, and in order to ensure good quality, improved yield, and good productivity for the new program. The level of orders we got recently is requiring this new facility and the investment we made during the last two years will certainly help us to deliver all these goods and our commitment to our customers thank you very much guys and congrats again thank you thank you the next question is from atink oskan of wooden company please go ahead

Thank you and congratulations for a strong backlog growth at the end of the year. I have three questions today. The first one is if you could provide an update on how we should look at investment needs going forward, given that the Ramat Beka investment will be mostly completed in 2024. I know that you have been spending around $180-200 million per annum But demand is there, and are we going to see new investments from Elbit, let's say, in 2025? My second question is kind of related to that. Given the emerging needs for multi-domain warfare across the globe and what we see in Gaza, Red Sea, or Ukraine, and given Elbit's capabilities, wide range of capabilities, In which segment do you see the strongest growth? Not regions, which segment? For instance, I noticed that there is this emerging kamikaze drone and loitering munition threats, and there appears to be no remedy, soft kill or hard kill, when these come in swarm. So is there a solution for that? Do you have a specific solution for this that you could basically teach to global militaries? That's the second one. And the third one is I've seen some articles in Israeli press that the MOU with Itochi in Japan has been canceled. But, you know, Japan is probably going to be the third largest military defender. They are boosting their defense budget. So what is your strategy there to basically penetrate this important market? Thank you.

Thank you, Atinjan. Good morning. As you know, we're not providing guidance, but with the inauguration of the Ramat Beka facility and the fully going live of the ERP, the new ERP system, which required a lot of CapEx investment in recent years, we might expect a reduction in CapEx investment in the coming years. So I think that gives my view of how we are going to address CapEx in recent years.

Should I take it as a reduction in absolute levels or as a percentage of revenues?

Again, you should take it as a non-guidance remark of a small reduction in CapEx in the coming years.

Understood. Thank you.

With regard to the second question, I don't think that there is one area which I can identify as a growth engine for the company. Actually, there are different growth engines in each division, in each segment, and each one of them has its own uniqueness and its own capabilities, and that's the beauty of our portfolio, that we are not dependent just on one segment or just on one growth engine. With regard to just to answer your question about swarms and UAVs, of course, we have solutions for that, which are based on casual countermeasures, based on hard kit solution, and based on energy weapon solutions as well, which we are developing for many customers around the globe. With regard to Japan, we, of course, respect the decision. Japan is an important market, and we know that the budgets are increasing in this market. We have collaboration in this place, and we have opportunities in Japan that will continue to work in this market.

Thank you, gentlemen.

Thank you, Ating.

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 039255-900. And internationally, please call 9723-9255-900. A replay of this call will also be available on the company's website, www.elbetsystems.com. Mr. Machlis, would you like to make your concluding statement?

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.