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 Khagan, our CFO. Before we begin, I would like to point out that the Safe Harbor Statement and the company's 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. Kobi will begin by providing a discussion of the financial results, followed by Bouti, 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% -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 ,000,000 compared to ,000,000 in the second quarter of 2023. This reflects 12% growth and is the second quarter in a row in which we have experienced low double digits revenue growth. In the second quarter of 2024, Europe contributed 29% of revenues, North America 23% of revenues, Asia Pacific 15% of revenues, and Israel contributed 27% 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 fast solutions following the breakout of the sorts of iron 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 .4% compared to .1% in the second quarter of 2023. GAAP gross margin in the second quarter was 24% of revenues compared to .6% in the second quarter of 2023. The second quarter non-GAAP operating income was $130.5 million or 8% of revenues compared with $116.5 million or .9% of revenues in the second quarter of last year. GAAP operating income for the second quarter was $116.5 million or .2% of revenues compared with $116.5 million or .7% 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 .2% of revenues compared to $93.4 million or .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 .4% of revenues versus $101.7 million or 7% in the second quarter of 2023. G&A expenses were $68.7 million or .2% of revenues compared to $75.4 million or .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 amount reflects the enduring tax and monetary policy implemented by central banks in the markets in which Elbit operates, including the Bank of Israel and the United States Federal Reserve in response to rising inflation by retaining interest rates at high levels. 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 .2% compared to .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. GAAP diluted EPS 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-GAAP and GAAP diluted EPS 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 -over-year performance of our business segments. Note that our segmental disclosure is provided on a GAAP basis. Aerospace revenues were almost similar -over-year with small 1% decrease. C4I and cyber revenues increased by 11% -over-year mainly due to radio system sales. ISAR and EW revenues increased by 9% -over-year mainly due to electronic warfare and electro-optic system sales in Israel and the Asia Pacific. Land revenues increased by 37% -over-year mainly due to increased ammunition and ammunition sales in Israel. Alba systems of American revenues increased by 11% -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 $0.50 per share. I will now turn the call over to Mr. Matlis, Albert's CEO. Bootsy, please go ahead.

Thank you, Kobe. I would like to start by expressing our sincere gratitude to all Alba employees worldwide for their underweighing 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 MUD 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 their return home. In line with the previous quarter, we are pleased to report continued growth in our We have a $21 billion revenue increase by approximately 12 percent and profitability improved. Two key factors have been instrumental to our success. The Alba system 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. Alba 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, which I believe will be achieved ahead of schedule and our internal target of around 10 percent 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 international markets. While supply chain challenges still exist, our diversified supplier base has mitigated their impact. International revenues accounted for 73 percent of total revenue in the second quarter. We were pleased to announce several recent international contacts 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 25, 2024, Elbit America celebrated the delivery of the 3,000 F-35 helmet-mounted display system from the company site in Mary McNameg Hampshire. The F-35 Generation 3 helmet-mounted display system is an advanced helmet-mounted display system. In addition to several contracts winning Israel and the Netherlands, for example, we secured an initial $37 million contract in May 2024 to supply Iron Fist active protection system to generate 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 System Hugglands for Iron Fist active protection system integration into the CV-90 Infantry Fighting Vehicle as part of a project for European countries 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 in both open terrain and urban environments. This advanced technology is a result of substantial R&D investments. The system growing demand underscores helmet system leadership position and the market appetite for innovative solutions. Through the recent conflict, we significantly increased production to meet the IDF urgent needs while maintaining deliveries to international customers. Our focus is on expanding production capacity to drive revenue growth beyond the increasing backlog. 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, helmet systems were awarded a contract worth approximately $190 million from the Israeli Minister of Defense for the supply of iron-steam 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 Air Show 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 Skibitzky of Alembic Global. Please go ahead.

Yes, hello. Good afternoon. Nice corner. First of all, a comment. 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, Butzi, 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, you know, how you guys attain that 10% target?

Thank you, Pete. It's Kobe. 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 GP 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 can we believe that we are in a very good position to have the 10% OP profitability 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's 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 US, which we see now this year, a much favorable outcome in the US, which supports our prediction of the continuous OP profitability expansion. So the management is closely monitoring this issue of profitability. And we are certain that even though the mixed disclosure was less favorable in GP terms, we can see the continuous growth in meeting the 10% internal target that we believe in.

Okay, that's very helpful. Yeah, and I didn't know it. It looks like SG&A altogether for this quarter was less than 10% for the first time, 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 GP profitability.

Okay, that makes sense. Just last one for me. I noticed cash flow did improve this quarter and really for the first half of 2024, it's much better versus the first half of 2023. Do you think now do you expect you can be pre-cash flow positive for 2024 in light of 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 of 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 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 the supply with with with our supply chain that 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 but to give you a bottom line, we sure expect the positive pre-cash flow for the for the annual for the point in 24 years. We

are it's good to hear from you. We are working very hard. We understand the importance of cash flow specifically when you because of the current interest rate. And that's an area of focus for the entire company.

That's great. Very helpful, guys. Thank you.

Thank you, Pete. Looking forward to see you.

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

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

So thank you, Craig, for the question. We can see 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 projects and product is different now with increased level of products. Products, I mean, for instance, the sonar voice in for our business, the maritime business or the night vision business that we have in the US or the ammunition, ammunition that we're supplying here from Israel. The fact that we see more product mix and a ratio of product makes is higher than we have in the past. It's very supportive in terms of our profitability. The certainty in the certainty in the product is much higher than the certainty in projects. You don't 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 product 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? Are there any near term capacity constraints just given you called out some of the elements of capex and in any way to think about the impact of the capacity coming online relative to the overall land business?

So, so as you mentioned, land segment was very strong this quarter. We saw 37 percent growth from the same year of year from the same quarter in the twenty twenty three. 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. I'm not there. I'm not back as he called 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, carbo and additional additional production stream. Which is which is more modern than our old facilities here in the central Israel. So that is going to give us a lot of capacity for 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 are going to inaugurate the new facility for UAVs here in Israel in the location in Israel. We are growing the capacity in the factories in the US, for instance, our Charleston facility in the US is actually was inaugurated last year. And it's a very big investment and facility and facility. We have also a new facility in Germany and also a new facility in in the UK. So so we keep investing and tightening tightening this all is is a more than one of the 50 million investment dollars investment that we concluded with the new ERP system that was actually most of the company. More than 90 percent 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 somewhat weaker. The past couple with a nice uptick in Q2. What's what's driving the the US facing business just given kind of moved more in line with what we're seeing out of peers domestically. Any particular drivers of that normalization to call out?

I would have to know it would be we see a different picture. Actually, we see a growth of 10 percent in the US market. The last the last quarter, our revenues in the US were approximately three hundred seventy million dollars in comparison to the previous quarter last year, which was about three hundred and thirty seven million dollars. So it's a 10 percent growth in the US market and we believe we have very strong positions in the US market in several domains. We continue to win business and we are confident that our position in the US will continue to continue to grow.

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

The next question is from a meet a phony of Oppenheimer. Please go ahead.

Hi, guys, and congrats on the great quarter. Can Harry. Great. I was wondering, I have a few questions. My first one is about loitering munitions. I was wondering if Albert is thinking about entering the loitering munitions segment in a much more aggressive way. We see a lot of demand like companies from AV, AV, like environment and their switchblade three hundred and six hundred. I was wondering if Albert we've always experienced in the segment. How did any plans in the area?

Thanks.

Hi, I

mean, yeah, of course, we we we believe that loitering munitions is an important market for us. We have great positions already in this market. We were one of the first companies to introduce a loitering munitions solution to the market. And we have many customers who are acquiring the sky striker system, which is a family of loitering munitions solutions. And these systems are already operational in several customers. But you are fully right. We need to we are planning to continue to invest in this domain. There are many additional opportunities in this domain. One of them is men and men 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 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 are we believe that it's a good opportunity for us.

OK, great. I

also want to mention that we are fully vertical here. We do everything from the UAV from the bird platform itself, all the communications, all the electro optics, all the warheads, everything. Everything is a flight control, everything is a 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 it's an expansion of our of other solutions that are providing for different customers?

So do you think the time to market is going to be quicker if you want to go to load ammunition 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 strider systems to many customers. We have several products in line 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 factory, how it's called in the world. And I don't know if in the boundaries that you can speak of how much capacity is going to come from there or maybe how much more efficient is going to be compared to the UAV. How do you compare to the integration center you have right now?

We see a growing demand for our for the solution. And the beauty here is not that just the UAVs themselves, it's the entire system. And there we provide a variety of payloads which include which include the EO payload, the W 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. They 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 family 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 others we got, there is a need for a much more modern facility. And we are consolidating several facilities into one. Once again, there is a lot of automation and robots, 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 the Hortiz situation in the Red Sea has any material effect on the company? And if so, if you have some problems with the situation, how LBD is going to mitigate it?

Thanks. As I mentioned in my preview, we see some stoplighting issues, however, they are not significant and we find several ways to overcome them.

Okay, got it. Thank you and congrats on recording again.

Thank you. Thank you. If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. Please stand by while we pull 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 -782-4291. In Israel, please call 039255-900. And internationally, please call -39255-900. A replay of this call will also be available on the company's website, .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 Second Quarter 2024 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.