Elbit Systems Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' third quarter 2034 result conference call. All participants are at present in listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded.

I would now like to hand over the call to Daniela Finn, Elbit Systems' VP, Investor Relations. Daniela, please go ahead.

Thank you, Daniel. Hello, everyone, and welcome to our third quarter 2024 earnings call. On the call with me today are Bootsy Machlis, President and CEO, Coby Kagan, CFO, and myself, Daniela Finn, VP, Investor Relations. 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 usual, we will provide you with both GAAP financial data as well as certain supplemental non-GAAP information. We believe that this non-GAAP information provides additional transparency to help understand the performance of the ongoing business. You can find all the detailed GAAP financial data as well as the non-GAAP information and the reconciliation in today's press release. Kobe will begin by discussing the financial results followed by Buzi, who will elaborate on the main events during the quarter and beyond. We will then turn the call over to a Q&A session. With that, I would like to now turn the call over to Kobi. Kobi, please go ahead.

Thank you, Daniela. Hello, everyone, and thank you for joining us today. The financial results of the third quarter of 2024 continue to reflect the ongoing strong demand for our technology and solutions, and the progress in the implementation of our operational improvement plans. In fact, this is the third consecutive quarter where we recorded double-digit revenue growth. Turning now to the results of the third quarter. Third quarter revenue increased by 14% to $1,718,000,000. compared to $1,502,000,000 in the third quarter of 2023. In terms of quarterly revenue by segment, aerospace revenues increased by 7% in the third quarter of 2024 compared to the third quarter of 2023, mainly due to increased UAS sales in Israel. C4I and cyber revenues increased by 13% year over year, mainly due to radio system and command and control system sales. ISTAR and EW revenues increased by 13%, mainly due to electronic warfare and electro-optical system sales. Land revenues increased by 24% due to the increase in ammunition and munition sales in Israel. Elbit Systems of America revenues increased by 17%, mainly due to increasing night vision systems and medical instrumentation sales. Elbit System diverse geographic revenue base helps to reduce revenue volatility and support the long-term sustainability of our business. In the third quarter of 2024, Europe contributed 25 percent of revenues. North America contributed 23 percent of revenues. Asia Pacific, 18 percent of revenues. and Israel contributed 29% of revenues. Israel revenues continued to grow on the back of the prolonged conflict in the region, mainly in the land segment. The non-GAAP gross margin for the third quarter was 24.4% compared to the third quarter of 2023 at 24.9%. GAAP gross margin in the third quarter was 24% of revenues compared to 24.5% in the third quarter of 2023. Third quarter non-GAAP operating income was $140.7 million or 8.2% of revenues in the third quarter of 2024 as compared to $120 million or 8% of revenues in the third quarter of 2023. GAAP operating income for the third quarter was $125.8 million or 7.3% of revenues as compared to $106 million or 7.1% of revenues in the third quarter of 2023. The operating expense breakdown in the third quarter was as follows. Net R&D expenses were $119.9 million or 7% of revenues in the third quarter of 2024 as compared to $103.3 million or 6.9% of revenues in the third quarter of 2023. This increase was mainly due to additional R&D efforts in our land segment and continuous investment in our high power laser solutions. Marketing and selling expenses worth $91.3 million or 5.3% of revenues in the third quarter of 2024 as compared to $86 million or 5.7% of revenues in the third quarter of 2023. G&A expenses were $75.7 million or 4.4% of revenues in the third quarter of 2024 as compared to $78.8 million or 4.8% of revenues in the same period last year. Financial expenses were $45 million in the third quarter of 2024 as compared to $35.7 million in the third quarter of 2023. The increase in financial expenses is due to the elevated interest rates in both the U.S. and Israel. Additionally, the rapidly growing backlog due to the Sword of Iron War required higher levels of working capital expenditure. We recorded a tax expense of $12.8 million in the third quarter of 2024, compared to $10 million in the third quarter of 2023. The effective tax rate in the third quarter of 2024 was 14.6%, similar to the rate in the third quarter of 2023. Our non-GAAP diluted EPS was $2.21 in the third quarter of 2024, compared to $1.71 in the third quarter of 2023. Gap diluted EPS was $1.77 for the third quarter of 2024 compared to $1.36 in the third quarter of 2023. This is the second consecutive quarter of double digit EPS growth. Our backlog of orders as of September 30th, 2024 was $22.1 billion. approximately $5.5 billion higher than the backlog at the end of the third quarter of 2023. In the third quarter of 2024, the company recorded new orders of $2.7 billion, of which $1.4 billion came from the Israeli market. Approximately 66% of the current backlog was generated from outside of Israel. Approximately 37% of the current backlog is scheduled to be performed during the remainder of 2024 and in 2025, while the rest is scheduled to be performed during 2026 and beyond, which demonstrates the potential of the continuous growth of the company. Operating cash flow for the nine months ending September 30th, 2024, was $83 million inflow, compared to $200 million outflow for the same period last year. The Board of Directors has declared a dividend of 50 cents per share. I will now turn the call over to Mr. Maklis, Orbitz, President and CEO. Butzi, please go ahead.

Thank you, Kobi. As in the past year, I would like to express my ongoing gratitude and appreciation for our global workforce who continue to demonstrate their ongoing remarkable commitment to our customers worldwide during these times of elevated demand for cutting-edge products and solutions. In order to meet the continued increased demand of our solution, we expanded production facilities' increased inventory level in order to address the growing backlog and supply chain challenges and continue to recruit employees. This is the second consecutive quarter, we are proud to report over 25% increase in our EPS year-over-year, and the third consecutive quarter in which we report double-digit revenue growth. In addition, we recorded a record backlog of $22.1 billion. All these are clear testament of our product and technological superiority. These accomplishments, among others, have continued to the advancement of our internal revenue target to reach over $7 billion by 2025, and our internal target of 2026 non-GAAP operating margin of around 10%. We continue to receive significant orders, which I will discuss in detail. Yesterday, we announced that Elbit System was awarded contracts worth of total amount of approximately $360, $335 million to supply a defense system to an European customer. The contracts include the supply of Pulse precise and universal launching system, rocket launcher and rockets, as well as Hermes 900 UAV equipped with advanced payloads. These are two of our flagship business lines which are in high demand globally. These contracts follow a number of success we announced during the quarter. Our extensive R&D effort in the past years resulted in a contract to supply high-power laser for the Iron Beam air defense system. This breakthrough technological solution provides a robust defense against a variety of threats. We are extremely proud of this development and believe it will be a meaningful technology in the modern battlefield. We will continue to win new contracts to supply our Iron Fist Active Protection System solution. The latest contract is for the U.S. Army Bradley's ISV. This solution is aimed at enhancing the self-defense capabilities of the Iran platforms against modern battlefield threats. It is characterized by high performance and low volume, low weight, and power requirements. The system provides armed platforms with 360-degree protection from a wide variety of anti-armor threats, such as anti-tank rockets, anti-tank guided missiles, UAS, and loitering threats, in both open terrain and complex urban environments. Finally, Elbit Systems was awarded, as a partner of the Israeli Defense Ministry, the three 2024 Israel Defense Prize for three separate innovative defense technological systems. These include a prize for the role of the Citron Tree and Golden Almond Battle Management System in the David Sling Air Defense developed by Alistra and Elbit subsidiary. Elbit system was also recognized for its role in developing technology for the IDF's Namer Heavy Armed Personnel Carrier as well as for a very classified system. Our ongoing success has been driven by two key factors, Elbit Systems' extensive geographical presence across Europe, North America, Asia, and Israel, and our wide portfolio of advanced technological solutions, which have proven highly effective in increasing global defense budgets. On behalf of myself and the entire company, we continue to deeply wish for the immediate release of all hostages held captive in Gaza. They are constantly in our heart and mind, and we eagerly await for their safe return home. And with that, I will be happy to take your questions. Operator? Thank you. Ladies and gentlemen,

If you have a question, please press star 1. Using speaker equipment, kindly lift the handset before pressing the numbers. Questions will be pulled in the order they are received.

First question is from Ellen State.

Hi guys, thanks for the question and congrats on the quarter. I just wanted to ask about the iron beam contract that you received in the quarter. I think that's one of the first like near term high powered laser contracts that you've received unless I'm mistaken. And I just wanted to talk, wondered if you could talk about that opportunity over the next three to five years and how you think about that program contributing to revenue.

Thank you, Elam. We in Elbit, we believe that energy weapons are a growth engine for the company. And we invest in technologies in several domains. One of them is high power lasers. There are great advantages for high power lasers. Actually, based on such systems, you can defeat several threats in a very economical way. We hope to deploy next year, together with IMOD, the first land high-power laser together with Rafael, the iron bin system. However, in parallel, we continue when we see a lot of potential for these systems abroad as well. In parallel, we continue to develop the airborne solution. The airborne solution, which we lead in Elbit, has great potential, activating high-power lasers from the air will enable us to reach long distances and to increase effectiveness of the system. We are a world leader in such technologies, and we see a growing potential for high-power lasers in general and for additional energy weapons as well.

Thanks. That's helpful. kind of an offset. European sales were down 13% year-over-year. I think it was a tough comp, but just given a potential change in the funding environment as it relates to U.S. supplementals in that region, how are you thinking about the opportunity in that region going forward and the demand environment in Europe over the next few years?

Hi, Ellen. This is Kobi. So we experienced this quarter a 17 percent increase in our elder systems of America sales year over year. And this is because of our position in the market. And as we mentioned, higher night vision sales, higher medical instrumentation sales, and those are the principal issues. So our position in the U.S., we believe that we're positioned to additional growth in the future. As to the European market, the European market is, we believe, will experience higher demand as the push for higher defense expenditure will come. And, of course, the threat that this market is experiencing. And just yesterday, announcement of $335 million of European market wind of two of our high-runner systems, both the pools, and the UAS, the 900th male, experiencing this potential for the company for additional growth in the future.

Thank you. I'll leave it there.

Thank you very much.

Next question. Hello, Fred.

Hello, it's Ella. I can't hear you very well.

Hello, Ella, it's Bucci. Good afternoon. We hear you very well here.

Great. Okay, thank you. First, I would like to congratulate you on the results and on the exceptional growth. And I would like to discuss a bit further your growth targets. First, the growth of 2025. We actually don't hear so much about your plans beyond 2025. I know that it will be... depending very much on the political and geopolitical environment, but still I'm sure you have some assumptions. Do you see the growth beyond 25, 26 as steady or you have other milestones that are leading you to some more growth jumps?

Hello, Ella. Good afternoon. As you can see from our backlog, the company will continue to grow in the coming years, and we expect two-digit growth in the coming quarters. In order to deliver the volume of the backlog we have, we see growing demand all over the world for our solutions. We see it in Europe, we see it in the U.S., we see it in the Far East, and of course in Israel. Therefore, I expect the company to continue to grow in the future as well. It's difficult for me right now, and our backlog, by the way, covers not just 2025, it covers also the year after 2025. We have a nice coverage also for 2026 and beyond. It's difficult for me to predict what would be exactly the numbers in the far future, but I'm quite confident that the company will continue to grow also in the future based on the demand we see right now in the markets.

I would like to go... Yes?

I just want to say that you know that our internal goal was to reach $7 billion by 2026. We are almost there already. So it's quite obvious that next year we will be above $7 billion. And as I said, we expect to grow further in 2025 and 2026. And actually the main bottleneck right now in order to convert the backlog to revenues and to profit is execution, is our ability to produce the stuff. In order to meet this, we are enhancing our capabilities. We are going to inaugurate quite soon a new facility for UAVs. We are going to activate the production line in Ramat Beka together with the production line in Ramat Asharon, the current one that we have in Ramat Asharon. And we are expanding quite a lot our production lines for communication for other stuff. So there is a growing demand. The backlog is also quite high, and I expect the company to continue to grow in the coming years.

Well, if I can interpret what you said, it actually means that even beyond 2026, you expect not only these numbers to be sustainable, but you expect steady growth. You don't know of which phase, but you expect the steady growth to continue.

I think that, in general, the answer is yes. And I didn't mention, of course, acquisitions. As you know, acquisition is part of our strategy. We know how to merge companies into Elbit, and we are looking intensively for additional acquisitions for the company. We are looking for new technologies, which we missed in our portfolio. And we are also looking for new positions in the international market.

Thank you.

What we just mentioned was organic growth.

Thank you. The following question actually refers to your internal and external target, which is the 10% non-GAAP operational income. And the question is we are now in a quite positive environment in terms of a conversion and you still have I'm not sure that optimal, but quite positive value of the hedge given the time that passed. So does it mean that most of the improvement will be through operational income and we should less expect dramatic improvement in a gross margin.

So, hi, Alex Colby. As you know, we are providing now segments, profitability and revenues data. And if you go and look and compare the profitability for our land segment between 23 and 22, we will provide next quarter also profitability for 2024. Numbers, and if you compare the same one for Elbit System America, you see that in both segments, as we mentioned, we are expecting, and our internal goals are to have increased profitability expansion on the basis in land, of course, increased activity in the land. You saw previous quarter, 37% growth in revenue. This quarter, 24%. growth in revenue in the land segment. It means a lot of operational efficiency in the land segment, and also huge improvement in Albit Systems of America. We took many actions in Albit Systems of America to improve profitability. So we are very happy with the increased 17% year-over-year sales In our systems of America, for us, it's a huge success, and we're very happy with this expansion in revenues, which will lead also for expansion in the profitability margins. So those are the two places that we expect increased profitability and increased efficiencies, and the other three segments keep coming. rather flat in the profitability numbers while expanding revenue as well.

Okay, thank you very much for taking my question.

I would like to say that we are starting to see results to the investment we made in the new ERP system which has cost us a lot in the past but right now the entire company is on one platform and it's a very good way to reduce costs and to be more efficient, and we are very happy that we have this system operational already today. And we continue to evaluate our portfolio all the time, and we look for activities which are less energetic or with low GP, and we are looking for a way to digest them. That's something we do regularly, and we continue in parallel of looking for new acquisitions We are looking into the portfolio all the time to look for elements which are less relevant for us, like we did two years ago with Ashot Ashkelon.

Thank you. If I may, another question on this topic. You mentioned a few times that you are going and you're actually starting to see the improvement brought by improvement of the contracts. Some of them CPI linked and other improvements. And of course, lesser inflation in the United States. So when do you think this impact will be at its peak, the strongest?

Thank you, Ela. So we experienced fixed price contracts without escalation closes mostly in Albert systems of America. We flashed all the fixed price contracts with the old prices which were relatively lower profitability in night vision completely. In Spartan, the Sonobuiz business, we expect to flash those contracts next year. So most of the fixed price contracts with lower profitability which happened because of the price index escalation in the U.S., are behind us. So this is part of the improvement in LB systems of America.

Okay, thank you very much for taking my questions.

Thank you, Alain.

Thank you, Alain.

Next question is from Guy Moine of Analyst. Please go ahead.

Hi, can you hear me? Sure. Thank you for the question. Congratulations on the good results. I have a question about the CapEx. In the past, maybe two or three years, it was just a little bit under $200 million a year before acquisitions of other companies. With the recent increase in the backlog and the scale of the operation, do you think you're going to need more CapEx in the coming years?

Hi, guys. As we mentioned, we had a very big, as Bootsy mentioned before, we had a very big investment in the ERP system, which was around $160 million across several years. And we actually inaugurated the system. The system is fully operational now. across the company, also in our system for commercial. So this is behind us. So what we see currently is additional investments in the Romance Backup Facility, which will wind down during next year. So we estimate the same level of CapEx investment in 2025 with this year. with the winding down of the Romat Deca investment and the concluding of the investment in the ERP system.

Okay, thank you. And just to make sure, are you still with the target of 10% operating profit in the medium term, maybe 2026 and beyond?

So as we mentioned, those are the internal goals. We expect to reach the 10% non-GAAP operational profitability in 2026. And as to our EPS, we expect our internal goals is to reach $9 next year and $12 in 2026. So actually, it's doubling the EPS from 2023 to 2026. Okay, thank you very much. Thank you, guys.

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 vote for more questions. The next question is from David Fingold of Dynamic Funds. Please go ahead.

Good morning.

Hi, David.

Good morning. Good afternoon to you. Sorry. The laser contract, is that for both the airborne and the land-based version?

No, no. The laser contract you got... Hi, David. Good morning. The laser contract we got is a production contract for... The ground system.

OK, so it's only for the ground system when I guess is where in Raphael's the systems integrator.

That's right, the system integrator. The order is splitted and they got half of it. We got half of it from the MOD. And this is that the production order of the majority of the development was concluded in parallel. We help it continue. to develop the urban version of the system as a prime contractor.

Okay, and that is, is that research and development, or is there, or there's a development contract?

Part of it is a development contract, and part of it is our own R&D.

Okay. Do you disclose the size of the development contract?

No, no, we cannot.

Okay. Anyway, thank you.

Thank you, David. Thank you, David.

The next question is from Stanley Bogan of Bernstein. Please go ahead.

Yes. What is the significance of the decline in sales in Europe, considering what's going on now in the Ukraine?

Hi, Stanley. Thank you for the question. So as you see, we have increased, we almost doubled the sales in Israel. And while we still win contracts in Europe, we keep mostly the production without production limitations and capacity. We keep the same sales in Europe. Mostly, if you look at three quarters, there is not a significant decline, a small decline in the three quarters revenue. And while our backlog in Europe is increasing, So we hope with increased production capacity that we're working on, and as Buki mentioned, our efforts to double the production of ammunition sites, which was put for this quarter, to be in a position where we can ship quicker and fulfill our backlog in Europe and other places around the world. So we see the increased backlog in Europe. and of course we need to supply on this battle.

Thank you.

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- Mr. Machlis, would you like to make your closing statement? Thank you. First, I would like to welcome Daniela. Good luck, Daniela.

I'd like to thank our employees again for their hard work and dedication 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 third quarter 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.