Elbit Systems Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' second 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 Revia, Elbit Systems' Investor Relations Director. David, please go ahead.

Thank you, operator. Good day, everyone, and welcome to our second quarter 2024 earnings call. On the call with me today are Bouti Mahlis, our president and CEO, and Kobi Kagan, our CFO. 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 and certain supplemental non-GAAP information. We believe that this non-GAAP information provides additional details to help understand the performance of our business. You can find all the detailed GAAP financial data as well as the non-GAAP information and their reconciliation in today's press release. COPI will begin by providing a discussion of the financial results followed by Pussy, who will talk about some of the significant events during the quarter and beyond. We will then turn the call over to a Q&A 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 second quarter of 2024 yielded positive results, driven by 12% year-over-year increase in revenues, additional growth of our backlog that now exceeds $21 billion and improved profitability. I will now highlight and discuss key figures and trends in our financial results. Second quarter revenues reached $1,626,000,000 compared to $1,454,000,000 in the second quarter of 2023. This reflects 12 percent growth and is the second quarter in a row in which we have experienced low double-digit revenue growth. In the second quarter of 2024, Europe contributed 29 percent of revenues, North America 23 percent of revenues, Asia Pacific 15 percent of revenues, and Israel contributed 27 percent of revenues. It should be noted that our diverse geographic revenue distribution is a very important factor for the long-term sustainability of our business. Israeli revenues grew from $245 million in the second quarter of 2023 to $444 million in the second quarter of 2024. This growth reflects the increased demand for a broad range of our solutions following the breakout of the sorts of Iran war. In addition, we see growth in North America revenues due to the increasing demand for maritime and war priority assistance. The non-GAAP gross margin in the second quarter was 24.4% compared to 26.1% in the second quarter of 2023. GAAP gross margin in the second quarter was 24% of revenues compared to 25.6 percent in the second quarter of 2023. The second quarter non-GAAP operating income was $130.5 million, or 8 percent of revenues, compared with $116.5 million, or 7.9 percent of revenues in the second quarter of last year. GAAP operating income for the second quarter was $116.5 million, or 7.2 percent of revenues compared to $101.6 million, or 7 percent of revenues in the second quarter of 2023. This growth in operating income and expansion in operating margin are the result of increased operating expenses efficiency. The operating expense breakdown in the second quarter was as follows. Net R&D expenses were $116.8 million or 7.2% of revenues compared to $93.4 million or 6.4% of revenues in the second quarter of 2023. This increase was due to additional R&D efforts in our land segment and continuous investment in high-power laser solutions. Marketing and selling expenses were $87.7 million or 5.4% of revenues versus $101.7 million or 7% in the second quarter of 2023. G&A expenses were $68.7 million or 4.2% of revenues compared to $75.4 million or 5.2% of revenues in the second quarter of 2023. Financial expenses were $29.1 million in the second quarter of 2024, compared to $32.1 million in the second quarter of 2023. The financial expense amounts reflect the monitoring policy implemented by central banks in the markets in which LBIT operates, including the Bank of Israel and United States Federal Reserve in response to rising inflation by retaining interest rates at high level. Additionally, a rapidly growing backlog due to the source of iron ore required higher levels of working capital and capital expenditures. We recorded a tax expense of $11.3 million in the second quarter of 2024, compared to $9.2 million in the second quarter of 2023. The effective tax rate in the second quarter of 2024 was 13.2% compared to 13.6% in the second quarter of 2023. Our non-GAAP diluted EPS was $2.08 for the second quarter of 2024 compared to $1.65 in the second quarter of 2023. Gap diluted DPS was $1.76 for the second quarter of 2024 compared to $1.40 in the second quarter of 2023. We can see a 26% increase in both non-gap and gap diluted DPS in the second quarter of 2024 compared to the second quarter of 2023. We remain focused on profitability with the aim of achieving additional growth in the next quarter of 2024. I will now review the second quarter of 2024 year-over-year performance of our business segments. Note that our segmental disclosure is provided on gap basis. Aerospace revenues were almost similar year-over-year with small 1% decrease. C4I and cyber revenues increased by 11% year-over-year, mainly due to radio system sales. ISAR and EW revenues increased by 9% year-over-year, mainly due to electronic warfare and electro-optic system sales in Israel and Asia Pacific. Land revenues increased by 37% year-over-year, mainly due to increased ammunition and munition sales in Israel. Elbit Systems of America revenues increased by 11 percent year-over-year. Our order backlog as of June 30, 2024, reached $21.1 billion, $5 billion higher than our backlog at the end of the second quarter of 2023. Approximately $2.5 billion of this increase came from Israel. In the second quarter of 2024, the company recorded new orders of $2.4 billion, of which $1.1 billion came out from the Israeli market. Approximately 69% of the current backlog is attributable to orders from outside of Israel. Approximately 43% of the current backlog is scheduled to be performed during 2024 and 2025, while the rest is scheduled to be performed during 2026 and after, which demonstrates the potential growth of the company. Operating cash flow for the six months ending 30th of June 2024 was $26 million inflow, compared to $210.7 million outflow for the same period last year. We continue to increase inventories to support the increasing backlog. The board of directors has declared a dividend of 50 cents per share. I will now turn the call over to Mr. Marklis, Elbit CEO. Bootsy, please go ahead.

Thank you, Kobi. I would like to start by expressing our sincere gratitude to all Elbit employees worldwide for their underweighting dedication and commitment to our customers in Israel and abroad. Our workforce deserves special recognition. for their extraordinary efforts over the past several months in meeting the urgent needs of the Israeli MOB during the recent conflict and supporting our international customers. I, along with the entire company, wish for the immediate return of all hostages held captive in Gaza. They are in our hearts and minds and we are waiting for the return home. In line with the previous quarter, we are pleased to report continued growth in our order backlog, which now exceeded $21 billion. Revenue increased by approximately 12 percent, and profitability improved. Two key factors have been instrumental to our success. Elbit Systems' extensive geographical footprint across Europe, North America, Asia, and Israel, and our portfolio of advanced technological solutions proven effective in the context of rising global defense budget. Elbit Systems remain committed to expanding its global presence while fulfilling our customer commitment. Our company continues to implement its transformation plan, aiming to meet our internal target of $7 billion revenues, which I believe will be achieved ahead of schedule, and our internal target of around 10% operating margin. Despite the significant increase in revenues from the Israeli market, the majority of our revenues are generated outside of Israel, and our primary focus remains the international market. While supply chain challenges still exist, our diversified supplier base has mitigated their impact. International revenues accounted for 73% of total revenue in the second quarter. We were pleased to announce several recent international contract awards that enhance our global presence. Last week, for example, we announced a $270 million contract to supply rocket artillery to an international customer over a four-year period. On April 25th, 2024, Elbit America celebrated the delivery of the 3,000 F-35 helmet mounting display system from the company site in Merrimack, New Hampshire. The F-35 Generation III helmet-mounted display system is an advanced helmet-mounted display system. In addition to several contracts within Israel and the Netherlands, for example, we secured an initial $37 million contract in May 2024 to supply Iron Fist active protection system to generalize dynamic ordnance and tactical system for upgrade the U.S. Army Bradley vehicles. This 24-month contract offers significant growth potential. Furthermore, we recently announced a $130 million contract with BAE Systems Haglunds for Argon Fist Active Protection System integration into the CV-90 infantry fighting vehicle as part of a as part of a project for a European country, marking another strategic partnership. The Iron Fist system provides 360-degree protection against a wide range of anti-armor threats, including rocket propellant grenades and kinetic energy tanks around in both open terrain and urban environments. This advanced technology is a result of substantial R&D investment. The system's growing demand underscores Elbit's system leadership position and the market's appetite for innovative solutions. Through the recent conflict, we've significantly increased production to meet the IDF's urgent needs while maintaining deliveries to international customers. Our focus is on expanding production capacity to drive revenue growth beyond the increasing backdrop. A prime example of our capacity expansion is a recent award of $300 million contract with the Israeli Minister of Defense for ammunition supply. This 10-year contract will see the construction of a new manufacturing facility scheduled for completion within two years, combining the new plant facility and the Ramat Beka facility, which is scheduled for completion By the end of this year, our production capabilities will be enhanced and support increased demand for both the Israeli Minister of Defense and international markets. In support of the surge in demand, we are also adding shifts and recruiting hundreds of new employees. On July 29th, Elbit Systems was awarded a contract worth approximately $190 million from the Israeli Minister of Defense for the supply of iron-stained guided mortar munitions. This two-year contract, which has also international potential, will see the delivery of precision-guided mortar munitions launched from a 120-millimeter mortar designed to accurately target and destroy objectives utilizing both immune GPS and laser-guided technology. In July 2024, we participated in the Farnborough Airshow in the UK, which was very successful. During the show, we demonstrated a wide range of solutions to our international customers and met with many strategic business partners. And with that, I will be happy to take your questions. Operator?

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press star one. If you wish to cancel your request, please press star two. If you're using speaker equipment, kindly lift the 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 Pete Skibitsky of Alembic Global. Please go ahead.

Yes, hello. Good afternoon. Nice corner. First of all, comment, just the backlog growth has been very impressive. It looks like backlog has grown about 40% since the end of 2022, which is just incredible, frankly. I would like to make sure I understand the gross margin dynamics a little bit better. Obviously, we've seen your geographic mix of revenue shift to Israel, and it looks like that's, you know, over the last three or four quarters, that's brought some gross margin compression. And I'm just wondering how we should think about the margin dynamics going forward in light of, you know, Bootsy, it sounds like you reiterated that 10% operating margin target. which I think is set for 2026. I'm just wondering, in light of the gross margin compression, how you guys attain that 10% target?

Thank you, Pete. It's Kobi. Actually, we see a $5 billion increase in backlog just over the last year. So that is an incredible increase in our backlog. And of course, With this increase, we also watch the backlog for stability and watch it very carefully. So as you mentioned, we see a lower GPE level, but you see a higher OP level. So with the sales in Israel, we see much lower M&S expenses, and the total result of the OP level is in the same level of the company profitability. So we don't see any issue, and we actually now we believe that we are in a very good position to have the 10% OP profitability non-GAAP in 2026. As well, you can see a different OP profitability between the segments and also GP profitability between the segments. We disclosed in the last annual report the segment profitability, and you see there the OP profitability, which is quite different between the segments, and you see there a decline in the profitability in the U.S., which we see now this year a much favorable outcome in the U.S., which support our prediction of continuous OP profitability expansion. So the management is closely monitoring this issue of profitability, and we are certain that even though the mix this quarter was less favorable in GP terms, we can see the continuous growth in meeting the 10% target, that internal target that we believe in.

Okay, that's very helpful. Yeah, and I didn't know, it looks like, SG&A altogether for this quarter was less than 10% for the first time, I don't know, at least in quite a while. And so that's a trend that we should expect will continue so that you can get to your OP target, it sounds like.

Thank you. You noticed the increased operating expense efficiency that we see very strong in this quarter. A very strong operational efficiency which compensated even more than compensated for the decline in the GDP profitability.

Okay, that makes sense. Just last one for me, I noticed, you know, cash flow did improve this quarter, and really for the first half of 24, it's much better versus the first half of 23. Do you think now, do you expect you can be pre-cash flow positive for 2024 in light of the, you know, the pretty good start to the year?

So we are very positive on this. I cannot give you a certain answer as of the profitability, which we can monitor much closer. It, of course, depends on the continuous payments from the Ministry of Defense in Israel, which paid accurately during the second quarter. So we have a very positive factor payments from the Ministry of Defense in Israel. We cannot guarantee that it's going to continue to the rest of the year. And there are many other different variables and moving parts, especially the fact that we need to be ready with inventories to support the growth of the company, expected growth, and again, some issues with our supply chain. that are still pushing us for additional inventories that we need to keep. So that is, of course, keeping the cash. This is, of course, stressing the cash, but to give you a bottom line, we sure expect a positive pre-cash flow for the annual, for this 2024 year.

It's good to hear from you. We are working very hard on the cash flow. We understand the importance of cash flow. Specifically, because of the current interest rate, and that's an area of focus for the entire company.

Okay, that's great. Very helpful, guys. Thank you.

Thank you, Pete. Looking forward to seeing you.

The next question is from Craig Conrad of Jefferies. Please go ahead.

Good afternoon. Great quarter. Good afternoon. Maybe just sticking to margins for a minute, you called out the higher R&D in the quarter and the 10% margin target. Any thoughts around how mix evolves over the next couple years given some of the development work you talked about and what that means for maybe production mix over the next couple of years to get to that 10% target?

Thank you, Craig, for the question. we can see a shift in the company in terms of moving from a project company to more leaning towards product company. So the ratio between project and product is different now with increased level of products. Products, I mean, for instance, the sonar buoys for our business, the maritime business, or the night vision business that we have in the U.S. or the ammunition that we're supplying here from Israel. The fact that we see more product mix and a ratio of product mix is higher than we have in the past is very supportive in terms of our profitability. The certainty in product is much higher than the certainty in projects. You don't see the same phenomenon that you see in projects We are still a project company, but the fact that the ratio of products is increasing is very supportive in our profitability targets.

And then maybe just transitioning to land, I mean, obviously growth was very impressive in the quarter and has been very impressive the past couple quarters. I mean, how do you think about the runway there? You know, are there any near-term capacity constraints? just given you called out some of the elements of CapEx, and any way to think about the impact of the capacity coming online relative to the overall land business?

So, as you mentioned, land segment was very strong this quarter. We saw 37 percent growth from the same year-over-year, from the same quarter in 2023. And with that, of course, we need additional investments, additional CapEx investment. we are going to inaugurate the new facility in the south of Israel, Ramat Beka, as we call it here, in the end of this year, which actually gives us additional capacity, increasing dramatically our capacity, increasing efficiency as well, with many technologies, robots, cobots, and additional production stream, which is more modern than our old facilities here in the central of Israel. So that is going to give us a lot of capacity, mostly for the land business, but not just for the land. We have investments that we were doing here in Israel and around the world. For instance, we inaugurated a new facility for UAVs here in Israel, in a location in Israel. We are growing our capacity in the factories in the US. For instance, our Charleston facility in the US actually was inaugurated last year And it's a very big investment and facility. We have also a new facility in Germany and also a new facility in the UK. So we keep investing and tightening this all is more than one of the $50 million investment that we concluded with the new ERP system that was actually most of the company's more than 90% of the company is on the new ERP systems. And really, without this ERP system and without this investment, we couldn't support this double-digit growth that we see now in the company.

And then just last one for me, and maybe this is somewhat tied to the last question. You mentioned Charleston, but the Americas really seem to to turn in the quarter. It had been, you know, somewhat weaker the past couple with a nice uptick in Q2. What's driving the U.S. facing business just given, you know, it kind of moved more in line with what we're seeing out of peers domestically? Any particular drivers of that normalization to call out?

Good afternoon, Itbuti. We see a different picture, actually. We see a growth of 10% in the U.S. market. The last quarter, our revenues in the U.S. were approximately $370 million in comparison to the previous quarter last year, which was about $337 million. So it's a 10% growth in the U.S. market, and we have very strong positions in the U.S. market in several domains. We continue to win business. And we are confident that our position in the U.S. will continue to grow.

Thank you. I'll leave it at that. Thank you.

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

Hi, guys, and congrats on the great quarter. Can you hear me?

Yes, we know.

Great. I was wondering, I have a few questions. My first one is about loitering munitions. I was wondering if Elbit is thinking about entering the loitering munitions segment in a much more aggressive way. We see a lot of demand, like companies from AVAV, like O-Violent, and their Switchblade 300 and 600. I was wondering if Elbit, with all its experience in the segment, has any plans in that area. Thanks.

Hi, Amit. Yeah, of course, we believe that loitering munitions is an important market for us. We have very strong positions already in this market. We are one of the first companies to introduce a loitering munitions solution to the market, and we have many customers who are acquiring the SkyStriker system, which is a family of loitering munitions solutions. and these systems are already operational with several customers. But you are fully right. We are planning to continue to invest in this domain. There are many additional opportunities in this domain. One of them is man-on-man teaming, actually combining several UAVs with one operator supporting with AI the way the fighting procedures. And that's a segment that we continue to invest in. We are planning to expand the family even more. And based on the current positions we have in the international market, we believe that it's a good opportunity for us.

Okay, great.

I also want to mention that we are fully vertical here. We do everything from the UAV, from the bird, the platform itself, all the communications, all the electro-optics, through the warhead, everything, the flight control, everything, the command and control, everything is done internally in the company. So we are fully controlling our destiny. We are fully controlling the cost. It's all in our hands. So do you think that... It's actually an expansion of other solutions we are providing for different customers.

So do you think the time to market is going to be quicker if you want to go to a lot of munitions in the next two to three quarters? Is it possible to have a new, maybe much more capacity and maybe new products in the following two to three quarters?

Yes, I just want to mention that we have delivered already thousands of sky-striker systems to many customers. We have several production lines for this and we are ready to support any demand that will come from the market.

Got it. Thank you. And maybe more questions for me. Maybe you can give some color about the UAV integration center or factory, how it's called in Rehoboth. And I don't know if in the boundaries that you can speak of how much capacity it's going to come from there or maybe how much more efficient it's going to be compared to the integration center you have right now.

We see a growing demand for our for UAV solution and the beauty here is not that just the UAV themselves. It's the entire system and there we provide a variety of payloads which include EO payload, EW payload, unique other payloads like SkyEye and many more. We also provide the network, the command and control, everything once again is coming from us. We are fully vertical here and we see We all see the importance of UAVs here in the current conflict we have in Israel, and we see a growing demand for the families of UAVs that we are providing abroad as well. We recently introduced a new member to the family, the Hermes 650, which was introduced just recently to the market. And because of the growing demand that we see and many orders we got, there is a need for a much more modern facility. and we are consolidating several facilities into one. Once again, there's a lot of automation involved, which the new facility, which actually is operational already, will be able to deliver many more solutions to the growing demand we see in the market.

Maybe one more question for me, the last one. I was wondering if Ahuti's situation in the Red Sea has any material effect on the company. Do you think... If so, if you have some problems with the situation, how LBIT is going to mitigate it. Thanks.

As I mentioned in my preview, we see some supply chain issues. However, they are not significant, and we find several ways to overcome them.

Okay. Got it. Thank you, and congrats for recording again.

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.elbitsystems.com. Mr. Mahlis, 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 second quarter 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.