Elbit Systems Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' fourth 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 Daniela Finn, Elbit Systems' VP, Investor Relations. Daniela, please go ahead.

Thank you, Anit. Hello, everyone, and welcome to our annual and fourth quarter 2024 earnings call. On the call with me today are Bootsy Machlis, President and CEO, Kobi Kagan, CFO, and myself, Daniela Sen, VP, Investor Relations. Earlier today, we hosted an investor conference at the Tel Aviv Stock Exchange. A recording of the event is available in our investor relations section of our website at www.elbetsystems.com. 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. I'd like to remind all listeners that the conference call today may contain forward-looking statements regarding the company and its subsidiary's business, and actual future results may differ materially from these forward-looking statements. 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 better 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. Kobi will begin by discussing the financial results, followed by Busi, 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'd 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 strong set of financial results for the fourth quarter of 2024 continues to reflect the ongoing demand for our cutting-edge solutions as we present another quarter of double-digit growth in revenues, backlog, operating profit, and non-GAAP EPS. During 2024, we also delivered $320 million of free cash flow, we are very pleased with these results. Diving into the fourth quarter results in detail. Fourth quarter revenues increased by 19% to $1,930,000,000 compared to $1,626,000,000 in the fourth quarter of 2023. Full year 2024 revenues increased by 14% to $6,000,000,000 $828 million compared to $5,975 million in the 2023. In terms of quarterly revenues by segment, aerospace revenues increased by 27% in the fourth quarter of 2024 compared to the fourth quarter of 2023, mainly due to increased UAS sales in Israel and Europe. and increased precision-guided munitions revenue. C4I and cyber revenues increased by 7% year-over-year, mainly due to radio systems and command-and-control system sales. I-STAR and EW revenues increased by 8%, mainly due to electronic warfare and electro-optical system sales in Israel. Land revenue increased by 29%, due to increase in ammunition and munition sales in Israel. Elbit Systems of America revenues increased by 6% mainly due to increase in night vision systems and medical instrumentation sales. Elbit System diverse geographic revenue base as well as its product portfolio help to reduce revenue volatility and support the long-term sustainability of our business. Only recently, the president of the European Commission stated in a letter that Europe needs to be in charge of its own defense. Subsequently, she announced a dedicated budget of 150 billion euros to support this rearmament effort in Europe. For the full year of 2024, Europe contributed 27% of revenues, North America 22% of revenues, Asia Pacific 17% of revenues, and Israel contributed 29% of revenues. As in previous quarter, Israel revenue continued to grow on the back of the swords of iron war. This growth came mainly from the land segment. The non-GAAP gross margin for the fourth quarter was 24.5% compared to the fourth quarter of 2023 at 25.3%. The non-GAAP gross margin for the full year 2024 was 24.5 percent compared to 2023 at 25.7 percent. Gap gross margin in the fourth quarter was 24.1 percent of revenues compared to 23.5 in the fourth quarter of 2023. Gap gross margin for the full year 2024 was 24 percent compared to 2023 at 24.8 percent. Fourth quarter non-GAAP operating income was $157.5 billion or 8.2% of revenues in the fourth quarter of 2024 as compared to $104.8 million or 6.4% of revenues in the fourth quarter of 2023. GAAP operating income for the fourth quarter was $141.4 billion or 7.3% of revenues as compared to $67.6 million or 4.2% of revenues in the fourth quarter of 2023. Full year 2024 non-GAAP operating income was $550 million or 8.1% of revenue as compared to $448 million or 7.5% of revenues in 2023. GAAP operating income for 2020 2024 was $489 million, or 7.2 percent of revenue, as compared to $369 million, or 6.2 percent of revenues in 2020. The operating expense breakdown for the full year was as follows. Net R&D expenses were $466 million, or 6.8 percent of revenues, as compared to $424 million or 7.1 percent of revenues in 2023. The increase is mainly due to investment in expanding our portfolio of precision-guided munition as well as increased investment in high-power laser. Marketing and selling expenses were $375 million or 5.5 percent of revenues in 2024 as compared $359 million or 6% of revenues in 2023. G and A expenses were $311 million or 4.6% of revenues in 2024 as compared to $330 million or 5.5% of revenues in the same period last year. Financial expenses were $151 million in 2024 as compared to $137 million in 2023. The increase in financial expenses net in 2024 is mainly due to factoring expenses related to the extension of the premise evacuation agreements. The effective tax rate in 2024 was 11.4% compared to 10.1% in 2023. The tax expenses in 2024 and 2023 were affected by the tax benefits related to adjustments for peer years following tax settlements in some of the company's subsidiaries in Israel. Our non-GAAP diluted EPS was $2.66 in the fourth quarter of 2024, compared to $1.56 in the fourth quarter of 2023. GAAP diluted EPS was $2 for the fourth quarter of 2024 compared to 67 cents in the fourth quarter of 2023. This is the third consecutive quarter of double-digit EPS growth. Non-GAAP diluted EPS was $8.76 in the full year of 2024 compared to $6.70 in the full year of 2023. Gap diluted EPS was $7.18 for the full year of 2024, compared to $4.82 in 2023. Our backlog of orders as of December 31st, 2024 was $22.6 billion, approximately $4.8 billion higher than the backlog at the end of 2023. Approximately 65 percent of the current backlog was generated from outside of Israel. Approximately 57 percent of the backlog at the end of December is scheduled to be performed during 2025 and in 2026, while the rest is scheduled to be performed during 2027 and beyond, a testimony of the potential of the company's continuing growth trajectory. Net cash flow provided by operating activities in the year ended December 31st, 2024 was $535 million as compared to $114 million in the year ended December 31st, 2023. Operating cash flow in 2024 were affected mainly by the increase in contract liabilities, upset by the increase in inventories and trade receivables. During 2024, we also delivered $320 million of free cash flow. It should be noted that our free cash flow generation is usually back-end loaded. The board of directors has declared a dividend of 60 cents per share. I will now turn the call over to Mr. Maklis, Albert's president and CEO. Bootsy, please go ahead.

Thank you, Kobi. First and foremost, I want to express my deep gratitude and appreciation to our global workforce for their unwavering dedication to our customers worldwide. Their commitment remains exceptional, especially during this period of high demand for our advanced products and solutions. This is the fourth quarter in a row in which we have delivered double-digit year-over-year growth in revenues, operating profits, Our backlog has reached a record of $22.6 billion. Our EPS has reached a record of $8.76 per share. Our free cash flow generation peaked at $320 million. During the quarter, Elbit continued to win meaningful contracts globally and locally, Among these are contracts to supply EW and DIRCOM self-protection suites to a NATO European country, as well as securing the contract to provide Germany's official government aircraft with a DIRCOM self-protection system, advanced communication system to the IMOD, counter-US solutions to NATO European countries, self-protection suites for Israel's F-16I aircraft and Pulse rocket launcher artillery system for Germany's armed forces. We continue to invest in the development of agile, timely solutions to address the over-evolving modern battlefield. A year and a half into the conflict, Elbit remains a key strategic partner for the IDF. Over the past year, the company has demonstrated its ability to scale up production massively and meet customer demands while maintaining a strong presence alongside the IDF, upgrading systems in real time during combat. Numerous new technology capabilities were introduced for the first time, leading the expansion of existing and new contracts as well as significant international interest. Following the Nagel Committee and its subsequent proposal, defense budgets in Israel are expected to remain elevated to the extent that they are approved. The war continues to arm itself, and this is manifested in increasing defense budgets globally and especially in Europe. Only two weeks ago, we witnessed announcement from Germany and from the UK regarding the intention to significantly increase the defense budget in 2025 and beyond. We see a great interest from Europe in our technology and portfolio, and Elbit's presence in some European countries via its subsidiaries is a big advantage. Additionally, we have joint ventures with leading European defense companies, For example, the cooperation with KNDS and the sale of Pulse artillery system in Germany. In the U.S., Elbit is well positioned and prepared for additional opportunities and is aligned with the new administration strategy and objectives of modern battlefield solution alongside lower cost with agile and relevant solutions. ESA core principles revolve around mission focus and agility and addressing warfighter needs. ESA is an important player in the U.S. industrial base, and with successful acquisitions over the years, we are able to roll through these dynamic times. This has been a year of significant investment in increasing our capacity to address the growing demand for our products and solutions as local and global different spending continues to increase. The munition production site in Ramaz Beka is partially operational with additional factories going production gradually as production will increase during 2025 and therefore. By the end of 2025, the site is expected to be operating with dozens of production lines while maintaining production at the Ramata-Sharon site until the end of 2026. Our new ERP system is enhancing our efficiency through real-time data integration, streamlining inventory management and automated workflow, improving demand forecasting, optimizing logistics, and ensuring seamless coordination across procurement, production, and distribution, and operating a one-company operational language. The new UAV site is already fully operational. The integration of AI to optimize internal processes, robotics in manufacturing, and advanced production line management is becoming and growing part of our operations. LBIT is implementing dedicated teams to integrate AI not only into the defense technology solutions, but also across internal company processes, including inventory management, supply chain optimization, project and product management. This year, a strong emphasis has been placed on improving operational efficiency with AI playing an important role in various solutions. As our portfolio of solutions continues to grow in a variety of areas, we continue to see our product development focusing on high-power laser solutions, autonomous systems, active protection systems, pulse artillery, and expanding our guided munition portfolio, electronic warfare solutions for land, air, and maritime, and more. The maritime sector holds immense potential with Elbit's diverse range of relevant products still far from reaching their full market potential. Our new products include increasing use of AI solutions. Elbit systems' strong global presence spanning Europe North America, Asia, and Israel, combined with our agile and innovative capabilities, are driving our continued success as defense budgets continue to grow globally, enabling us to constantly deliver impactful results. On behalf of myself and the entire company, we remain hopeful for the sweet and safe return of our hostages still held in Gaza. They are always in our thoughts, and we eagerly await the day they are returned, reunited with their families. And with that, we'll 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're using speaker equipment, kindly lift a handset before pressing the numbers. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Ellen Page of Jefferies. Please go ahead.

Hi, guys. Thanks for the question and congrats on the quarter. Maybe just on free cash flow, you had a pretty great free cash flow year and I think was mostly driven by a large contract liability inflow. What was that related to?

Hi, Ellen. How are you? Thank you for the question. What we see is over $500 million, $535 million to be precise, of operational cash flow, which is significantly better than previous years. And also, we see expansion in our investment in CapEx to $215 million. And that together created the $320 million. For your question, this is leaning on contract liabilities that we see. Also, with some expansion of inventories and receivables.

The next question is from Lara Jack of the New York Times. Please go ahead.

Hi, lovely to talk to you all today. I'm interested mostly in your export revenues, which I am hoping and I am assuming, but please correct me if I'm wrong. That means your export sales. Just doing a little math here, if your overall year revenues were $6.8 billion and it looks like what 61% of your revenues were exported, that would be $4.84 billion of sales, exported sales from Israel last year. I just wanted to make sure that those numbers sounded right to you. And then also I was curious as to why you think this is, that at a time of Israel fighting at least three, maybe five fronts in 2024, why and how Israel and Elbit was able, mostly Elbit obviously, was able to export so many weapons during this time of war. Thank you.

Okay. Thank you, Laura. I'll answer the first question. Your map is right. Our export revenue is $4.8 billion, while our Israeli revenue is close to $2 billion. Bootsy will answer your second question.

Hello, good afternoon. One of the advantages of the company is that we have dozens of subsidiaries abroad in the U.S., in Europe, as well as in Asia-Pacific. Out of the 22,000 employees we have worldwide, only 14,000 are in Israel. The rest are abroad in our subsidiaries. And it really shows the resilience of the company. On one hand, we are able to support our local customers here in Israel, but via our subsidiaries, we are able to support our international customers and to continue to export from Israel as well as via the subsidiaries to the global defense needs. And the diverse revenue base is one of our big advantages. It creates stability and the fact that we have such a wide portfolio and such a global presence is a major part of our strategy.

Would you say that this is a record high for Elbit exports during this year or is it a number that's kind of come and gone over the years?

No, we are growing year by year, and we see more and more potential for us around the globe, in Europe, in the U.S., as well as in Asia Pacific. We are able to bring to the market very innovative and operational solutions on one hand, and we are able to be local, to be part of the ecosystem of each country. And so this is a record year for us outside of Israel, but we hope and believe that the potential is huge, is big for us, and we expect the export activities to continue. Part of it from Israel, but the majority is done via our subsidiaries globally.

Okay, so just to clarify, that $4.8 billion in revenues exported, that is a record high for Elbit, but you still see potential to grow it in future years, correct?

That's correct.

Thank you.

The next question is a follow-up question from Ellen Page of Jefferies. Please go ahead.

Hi, guys. Sorry about that. Um, I just wanted to ask on the facility in the south of Israel, is that fully operational at this point? And how do we think about capacity for additional ammunition volumes from here? Just given land was such a growth leader in 2024.

So we, we are, uh, Alan, as you know, We are continuing to expand our capacity and growing capacity with investments that we're doing in our premises in the south, Ramat Beka, the new factory, as well as in other premises in Israel and outside of Israel. We just inaugurated the facilities in the U.K. and in Germany. And also in Israel, we're starting working in the Ramat Beka site. So gradually, we're expanding our production to meet the growing demand.

Great. And can you talk about your expectations for growth across regions in the next few years?

We're looking at the markets, as Buzi mentioned. We see a very strong growth in budgets, mostly in Europe. And with the new, the fresh 150 billion euros that were announced just recently from the commissioner, we expect very big growth in Europe, as Buzi mentioned. We are a very good group to meet this demand in dozens of subsidiaries across Europe, and that is a very strong growth trajectory to Albit. Other than that, we see continued growth in Israel, where our backlog increased in 2024 by $3 billion. That means that we expect additional growth in Israel as well. and Asia Pacific, which continues to be very strong with higher demand and higher budget as well.

Great. Thanks. I'll have Bakken to queue.

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 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 03-925-5900. And internationally, please call 972-3925-5900. A replay of this call will also be available on the company's website, www.elbitsystems.com. Mr. Machlis, would you like to make your concluding statement?

I would like to thank our employees again for their hard work and total commitment. 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 fourth quarter 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.