Elbit Systems Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' first quarter 2024 results 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. I would now like to hand over the call to David Revere, Elbit Systems' Investor Relations Director. David, please go ahead.

Thank you, operator. Good day, everyone, and welcome to our first quarter 2024 earnings call. On the call with me today are Kuti Mahlis, our president and CEO, and Kobi Kagan, our CFO. Before we begin, I would like to point out that the safe hours 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 of the detailed GAAP financial data as well as the non-GAAP information and their reconciliation in today's press release. Bobby will begin by providing of the financial results, followed by Bootsy, who will talk about some of the significant events during the quarter and beyond. We will then turn the call over to question and answer session. With that, I would like now to turn the call over to Kobi. Kobi, please.

Thank you, David. Hello, everyone, and thank you for joining us today. The financial results of the first quarter of 2024 reflect the significant increase in demand and the opportunities the company has. This demand supported the growth of our order backlog to more than $20 billion. As we mentioned in our previous quarter investment conference, we can see the continuous improvement in our profitability. I will now highlight and discuss some of the key figures and trends in our financial results. First quarter revenues, were $1,554,000,000 compared to $1,394,000,000 in the first quarter of 2023. Our diverse geographic revenue base is important to the long-term sustainability of our business. In the first quarter of 2024, Europe contributed 25 percent, North America 21 percent, Asia Pacific 20 percent, and Israel contributed 29% of revenues. Growth in Israeli revenues reflects the increased demand for a broad range of our solutions following the breakout of the sorts of iron war. The non-GAAP growth margin for the first quarter was 24.7% compared to 26.5% in the first quarter of 2023. gross margin in the first quarter was 24.1 percent of revenues compared to 25.9 percent in the first quarter of 2023. The first quarter non-GAAP operating income was $121.6 million or 7.8 percent of revenues compared with $108.5 million or 7.8 percent of revenues in the first quarter of last year. GAAP operating income for the first quarter was $105.4 million, or 6.8% of revenues, versus $93.9 million, or 6.7% of revenues, in the first quarter of 2023. The operating expense breakdown in the first quarter was as follows. Net R&D expenses were 28%, 98.5 million dollars or 6.3 percent of revenues compared to 110.3 million dollars or 7.9 percent of revenues in the first quarter of 2023. Marketing and selling expenses were 89.1 million dollars or 5.7 percent of revenues versus 80.2 million dollars or 5.8 percent in the first quarter of 2023. G&A expenses were $81.2 million or 5.2% of revenues compared to $77.1 million or 5.5% of revenues in the first quarter of 2023. Financial expenses were $31.2 million in the first quarter compared to $24.2 million in the first quarter of 2023. Financial expenses in the first quarter reflect the high interest rate environment as well as required increase in net working capital. We recorded the tax expense of $11.6 million in the first quarter, compared to $8.7 million in the first quarter of 2023. The effective tax rate in the first quarter of 2024 was 14.6% compared to 12.8% in the first quarter of 2023. Our non-GAAP diluted EPS was $1 and 81 cents for the first quarter of 2024 compared to $1.78 in the first quarter of 2023. GAAP diluted EPS was $1.65 for the first quarter of 2024 compared to $1.40 in the first quarter of 2023. I will now review our business segments first quarter of 2024 financial results And we note that our segmental disclosure of operational income is provided on a gap basis. T4I and cyber revenues increased by 12% year-over-year, mainly due to increase in ready system sales in Israel. ISAR and EW revenues increased by 17% in the first quarter of 2024, mainly due to electronic warfare and electro-optic system sales in Israel. Land revenues increased by 26% in the first quarter of 2024, mainly due to increased ammunition and munition sales in Israel. Aerospace and Albit Systems of America revenues were similar year over year. Our older backlog is March 31st, 2024, was $20.4 billion, a $4.5 billion higher than the backlog at the end of the first quarter of 2023, Almost $2 billion of the increase is from Israel. Out of the new orders of the first quarter, $1.5 billion is from Israel. Approximately 71% of the current backlog is attributable to orders from outside of Israel. Approximately 51% 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 first quarter was a $6.4 million outflow compared to $73 million outflow in the same quarter last year. The cash flows in the three months ended March 31st, 2024 were affected mainly by the increase in inventories and trade receivables offset by the increase in contract liabilities. The Board of Directors has declared a dividend of 50 cents per share. I will now turn the call over to Mr. Maklis, Elbit's CEO. Bootsy, please go ahead.

Thank you, Kobi. I would like to begin by thanking our Elbit employees around the world for their hard work and ongoing commitment to our customers. I wish to thank our employees in Israel that have been working intensively for months and have made it possible for the company to address the IMOD's needs during the war. I also want to send my sincere condolences to the families of our employees that have lost loved ones during this conflict and send our prayers to the injured for a speedy recovery. We, the entire company, hope for quick return of all the hostages that remain held in Gaza. I'm encouraged by our financial results in the first quarter as there has been significant increase in our order backlog. We surpassed 20 billion and approximately 12% in revenue growth. I would like to highlight two main points of major importance to our businesses. The relevance of Elbit Systems' portfolio of advanced technological solutions that have been operationally proven in light of the increasing global defense budget and the high demand by the Israeli MoD positively impacts the revenues and growth of the company. Elbit Systems is continuing to implement its long-term strategy and plans while strengthening its global presence and maintaining its commitment to customers. The company is continuing to implement its transformation plan in order to enable our internal target of several billion dollars revenues, which I believe will be achieved ahead of schedule, and our internal target of around 10% operating margins. Throughout this world of Ironwall, we have accelerated the R&D of some of our solutions that were still in development. Some have already been deployed to the frontlines. We are also upgrading multiple systems and solutions based on lessons learned during the war. We have ramped up our production to support the IDF requirements while maintaining deliveries to our international customers. We increased production capacity at our factories by adding shifts and recruiting several hundred additional employees to support the surge in demand. The last quarter was impacted by massive recruitment, and we are still recruiting new employees, mainly for manufacturing and development projects. I would like to now focus on several successful decisions that we have made as part of our long-term strategy that can explain the financial results in the first quarter. The acquisition of IMI was a remarkable success. The synergy between the capabilities of IMI and LB Systems enabled us to offer an enhanced portfolio, fulfill the potential of the technological and increase our market share. There is a significant international as well as Israeli demand for the product that could not have been deployed without the acquisition of IMI. We plan to continue developing precision ammunition and increasing production. The increasing demand requires us not only to operate 24-7, but to grow. As such, in 2024, we plan to begin the operations at our new ammunition production site in Ramatzbeka, which will operate in parallel with the IMI facility in Ramat Hasharon. A good example of the successful integration of IMI into Elbit system was the announcement on May 21st of our award of a group of contracts in an aggregate amount of approximately $760 million for the supply of ammunition to the Israeli Minister of Defense. The contract will be performed over a period of two years. Since the beginning of this World of Iron War, Elbet system has experienced a material increased demand for our products and solutions from the Israeli Minister of Defense compared to the demand level prior to the war. Subject to further development, which are difficult to predict, the IMOD increased demand for the company product and solutions may continue and could generate material additional orders to the company. In addition, on March 26, we announced that we were awarded an approximately $600 million contract to Supply Systems to Hanwha Defense Australia for the Australian Land for Hanwha Phase III project. This project aimed to deliver advanced protection, fighting capabilities, and sensor suite to the Red Beck infantry fighting vehicle for the Australian Army. The contract will be performed over a period of five years. The decision to invest in manufacturing facilities has proven itself positively impacting our order backlog and revenues, and we hope that our target, as stated in our previous investor conference, would be reached even earlier than expected. In addition to the contract that we had received in Israel and in the Netherlands a few months ago, on May 5th, we announced an initial contract of approximately $27 million to supply Iron Fist Active Protection System to GDOTS for upgrade the U.S. Army Bradley vehicles. The contract will be performed over a period of 24 months and has significant potential. The system provides armed platforms with 360-degree protection from a wide variety of anti-armor threats, such as rocket propellant grenades and up-to-kinetic energy tank rounds in both open terrain and urban environments. This system required years of investment in R&D. There is already a lot of interest in the system, and that is a good example how our advanced solutions maintain our position as a global leader and contribute to the high demand of our product internationally. On the night of April 14th, Iran attacked Israel with hundreds of drones and missiles. On that historic night, Israel, along with its allies, successfully intercepted the majority of the incoming aerial threats with coordinated precision, showcasing the talent of the Israeli Air Force and the strength of our air defense systems. Our role in helping to defend against this attack was twofold. Our simulators help train the aircraft and our strategic command and control centers of the Israeli missile defense system, including the Arrow, aid in the interception of the Iranian aerial threat. Our golden almond and citron tree solutions are the heart and brain of the interception system. The synergy of the two elements led to the successful defense of Israel. 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 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 that they are received. Please stand by while we poll for your questions. The first question is from Pete Skibiski of Alembic Global. Please go ahead.

Yes. Good afternoon, everyone, and let me apologize. I'm out of the office right now and on my cell phone, so hopefully you can hear me okay. But see, certainly quite incredible backlog growth the last couple of quarters. I remember only five years ago it was about $10 billion in backlog. So this will challenge your capacity, that's for sure. But let me ask this, because I'm wondering if there's yet another leg up to come, because the US passed a fairly substantial Israeli security supplemental, multiple billions of dollars. I'm not sure how much has flowed yet, but maybe that's what you can give us insight into. To what extent do you think Elbit has exposure to the U.S. security supplemental for Israel, you know, a third, 50%, 75%, because it is quite substantial? And over what timeframe do you think you would book orders from that funding? Thank you.

Hello, Pete. Good morning. You're right. It's a really remarkable backlog and I'm sure that we'll be able to handle it and to convert it into revenues and profit. Yes, it's true. Israel is going to get an additional fund, an additional package from the U.S. and Elbit is certainly having part of it. I cannot mention exactly the percentage or the numbers, but we have part of this package, and we are working with our IMOD right now to discuss the details, and for sure it will help us to strengthen our position here in Israel as well as in the U.S. Of course, these additional contracts, most of them will be done in our LBIT system of America subsidiary and our U.S. facilities.

Okay, I appreciate that. I guess last question for me then. Can you talk about workforce challenges and supply chain challenges just in terms of your ability to execute on this backlog in a timeframe in which your customers want? I know you said you're working 24-7, but just talk about the challenges you face there.

Yeah, we're working 24-7. In some of the facilities, we're working in three shifts. And in order to meet the growing demand, we have invested quite a lot in inventories, and you can see it in the reports. And this is in order to make sure that we don't suffer from any supply chain challenges or our exposure to supply chain challenges are limited. So we took a strategic decision to increase inventories Of course, it costs us money, but this is one way for us to make sure that we can meet our commitments to our customers. And on top of that, as was mentioned, we are recruiting hundreds or even thousands of employees just to make sure that we have enough workforce And the Israeli MOD allow us, or we are working with the IMOD, to continue the work we do in Ramat Hasharon in parallel to the new facility in Ramat Beka. So we'll have actually two production sites in parallel that will enable us to meet the demand.

Okay. Thank you very much. Appreciate it.

Thank you. The next question. It's from Sheila Kayoglu of Jefferies. Please, go ahead.

Good morning, guys, and thank you for the time. You know, great top line momentum, and I know you don't necessarily want to kind of commit to this 12 percent, and should we continue to think about low double digits growth for this year, just given the sustained level of demand you're seeing out of Israel, and any color you could provide by segment on how we think about the growth trajectory?

Thank you, Sheila, and good morning. This is Toby. As you know, we don't provide guidance, but you see the order of backlog, the increase in backlog, which is 29% year over year, and huge growth also just in the specific quarter. In the end, all the backlog is going to be turned to revenues, so we can... We can predict ongoing revenue growth also for the rest of the year.

Okay. And maybe, you know, can you talk about how much of it is tied to artillery and ammunition? And I know you don't want to put a concrete number around margins for 2024, but curious if you could provide some high-level puts and takes on, like, the mixed impact of that.

Sheila, I can share two points of view. The first one, as you see in our financial results, there is an increase in our sales in Israel. The revenue in Israel increased year-over-year by $200 million, from $250 million to over $450 million. And secondly, We announced just this week, as Brooksie mentioned, a $760 million order from, a group of orders from the Ministry of Defense. So that is, those are the details that we can provide. Okay.

All right. I'll jump back in the queue. Thank you.

But it's very important, Sheila, it's very important to mention The majority of our revenue is coming from the international market, and it will continue to be this way.

And we see the $7 billion, the internal targets that we have, that we saw them coming over 2026. We see that coming sooner than 2026 with this increased backlog.

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

Hi, guys, and congratulations on a great quarter. I have a couple of questions. The first is you had a huge increase in the revenues from Israel, and I wondered, as you got now the $760 million of additional contracts of munitions, what is the gain in productivity gain and gross margin gain you're going to get from getting into full ramp-up and full capacity in the Ramat Beka site compared to Ramat Hasharon?

So, Amri, good afternoon. As we mentioned, we're going to work in parallel, both in Ramat Hasharon and Ramat Beka operational sites. So it's going to double our capacity, and the work there is very intensive and 24-7, and a few shifts every day. We're going to inaugurate the site in Ramat Beka later this year. So it's not going to be fully operational this year, but it's going to be fully operational next year. So we're going to enjoy, of course, a better and modern site that will be working gradually up in capacity during 2025.

And you see the ramp-up is going to be completed in the first half of 2025? Is it a realistic number?

We are going to ramp up production during 2025. I think that the prediction of the first half is a good one.

Okay, gotcha. For the second question for me, I was hoping that you can get some color about the protection systems against drones, specifically counter-drone systems that maybe LBIC is looking to develop and a little bit more color and loitering munition as it's been proliferated in the Middle East and a lot of the enemies of Israel is using loitering munitions and drones. What opportunities is LBIC seeing? Thank you.

Are you talking about ways to defeat drones?

Yeah, both, as the kind of UAS systems, the way to defeat drones, and additional munitions for attacking purposes.

Okay, so let's divide the answers into two. First, we have a very successful solution or system by the name of RIDROM, which can using unique EW capabilities and EO and radar package can detect the threat and can block it or jam it. This system is very successful in several countries. We announced, I think it was half a year ago or maybe even prior to that, a nice contract we won in the Netherlands. for this system. I can tell you that the Dutch forces is only one customer for this system, and we see a lot of potential for that in many countries. It can defeat small drones, quadcopters, and it can detect them and defeat them as well. So this is with regards to that. We have a very attractive solution in our portfolio, and there is a big potential for that these days in many countries. With regard to loitering munition, we have a system by the name of SkyStriker, which this system was delivered to many countries as well. It's also a small UAV which can attack as well. And it's a boring market for that solution, for loitering munition. And we have it in our portfolio with many contractors as well.

Okay, great. Congratulations. Thank you.

Ladies and gentlemen, 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 all participants that a replay of this call will be available in two hours after the conference end. In the U.S., please call 1-888-782-4291. In Israel, please call 03-925-5900. And internationally, please call 972- 3925-5900. A replay of the call will also be available at the company's website at www.elbit-systems.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.

Thank you, Mr. Machlis. This concludes Elbit System Limited first quarter 2024 results conference call. Thank you for your participation. You may now go ahead and disconnect.