Elbit Systems Ltd.

Welcome to Elbit Systems' first quarter 2025 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 the call over to Ms. Daniella Finn, Elbit Systems' Vice President of Investor Relations. Daniella, please go ahead.

Thank you, Nathan. Good day, everyone, and welcome to our first quarter 2025 earnings call. On the call with me today are Butzi Mutlis, President and CEO of Elder Systems, and Kobi Kagan, CFO. Before we begin, I would like to point out that the safe harbor statement in the company's patch release issued earlier today also refers to the content 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 details to help understand the performance of the ongoing business. You can find the detailed GAAP financial data as well as the non-GAAP information and the reconsolidation in today's press week. We will begin by providing a discussion of the financial results. Followed by Goodzi, who will talk about some of the significant developments during the quarter and beyond. We will then turn the call over to question and answer 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 strong set of results published earlier today continues the trend we've seen over the past few quarters of strong revenue growth and margin expansion. This quarter is the fourth consecutive quarter in which we publish double-digit growth for revenues, backlog, operating income, net income, and DPS. We are very pleased with these results. We continue to make a concerted effort to improve our free cash flow, and I am happy to announce that in this quarter we presented strong pre-cash flow totaling $161 million. I will now highlight and discuss some of the key figures and trends in our financial results. First quarter revenues were $1,896,000,000 compared to $1,554,000,000 in the first quarter of 2024. In the first quarter of 2025, Europe contributed 24%, North America 21%, Asia Pacific 18%, and Israel contributed 32% of revenues. Demand continues to be robust in all key geographies. Gap gross margin in the first quarter was 24% of revenues compared to 24.1% in the first quarter of 2024. The non-GAAP gross margin for the first quarter was 24.3% compared to 24.7% in the first quarter of 2024. The first quarter GAAP operating income for the first quarter was $149.7 million or 7.9% of revenues versus $105.4 million or 6.8% of revenues in the first quarter of 2024. Non-GAAP operating income was $165.1 million or 8.7% of revenues compared with $121.6 million or 7.8% of revenues in the first quarter of last year. The operating expense breakdown in the first quarter was as follows. Net R&D expenses were $114.3 million or 6.1% of revenues compared to $98.5 million or 6.3% of revenues in the first quarter of 2024. Marketing and selling expenses were $100.9 million or 5.3% of revenues versus $89.1 million or 5.7% in the first quarter of 2024. G&A expenses were $89.4 million or 4.7% of revenues compared to $81.2 million or 5.2% of revenues in the first quarter of 2024. Financial expenses were $39 million in the first quarter compared to $31.2 million in the first quarter of 2024. The increase in financial expenses in the first quarter of 2025 was mainly due to the hedging transaction and the net effect of changes in the exchange rates of different currencies in which the company operates. We recorded a tax expense of $16.1 million in the first quarter compared to $11.6 million in the first quarter of 2024. The effective tax rate in the first quarter of 2025 was 13.9% compared to 14.6% in the first quarter of 2024. Gap diluted EPS was $2.35 for the first quarter of 2025 compared to $1.65 in the first quarter of 2024. Our non-gap diluted DPS was $2.57 for the first quarter of 2025, compared to $1.81 in the first quarter of 2024. Portally segment revenue for the first quarter of 2025. Aerospace revenue increased by 20% year over year, mainly due to increase in precision guided munition sales in Israel and Asia Pacific. C4I and cyber revenues increased by 12% year-over-year, mainly due to increase in radio systems and command and control system sales in Israel and in Europe. R-Star and EW revenue increased by 4% in the first quarter of 2025, mainly due to electro-optic system sales. Land revenue increased by 48% in the first quarter of 2025, mainly due to increased ammunition and munition sales in Israel and in Europe. Albi Systems of America revenues increased by 18% due to the increase in warfighter systems and medical information sales. Our order backlog as of March 31, 2025 was $23.1 billion, $2.7 billion higher than the backlog at the end of the first quarter of 2024. Approximately 66% of the current backlog is attributable to orders from outside of Israel. Approximately 51% of the current backlog is scheduled to be performed during the remainder of 2025 and during 2026, and the rest is scheduled for 2027 and beyond. Net cash provided by operating activities at the end of the first quarter 2025 was $184 million as compared to $6 million cash used in the first quarter of 2024. Operating cash flow during the quarter were affected mainly by the increase in net income and an increase in contract liabilities. which were offset by the increase in inventories and trade receivables. During the first quarter of 2025, we also delivered $161 million of free cash flow. The Board of Directors has declared a dividend of $0.60 per share. I will now turn the call over to Mr. Maklis, Albis CEO. Buzi, please go ahead. Thank you, Kobi.

around the world for their hard work and ongoing support and commitment to our customers. These results would not have been achieved without our ongoing commitment and dedication. During Q1 2025, we have seen a dynamic trend of strong growth continue This is the fourth quarter in a row in which we have delivered double-digit year-over-year growth in revenues, operating profit, net profit, and backlog. Our backlog has reached a record of $23.1 billion, up 40% from last year. For the period of the last four quarters, our gap EPS is almost 8%, and the non-gap EPS is at $9.5. The ongoing conflicts in Ukraine and locally here in the Middle East continue to dominate the geographical agenda. These are evident in governments' decision-making around the world to increase defense budgets, coupled with ongoing rhetoric by President Trump for NATO allies for NATO allies to increase defense spending is propelling this super cycle we are seeing in defense spend, where we continue to see strong demand for Elbit's product and advanced technological solutions as evident in our growing backlog and sales. Last week, the NATO Secretary General presented a proposal for a plan to further increase defense spending in Europe to gradually reach 5 percent of GDP by 2032, which is expected to be presented at the next NATO summit at the end of June. We believe our growth geographical exposure to Israel, U.S., Europe, and Asia-Pacific is unique. During the quarter and beyond, we continued to receive orders for our solutions in artillery, ammunition, electronic warfare, radio system, and self-protection solutions, among others. For example, we want a contract totaling approximately $100 million to provide joint national digital fire command centers for European countries. contract totaling 80 million dollars to supply the imod with advanced airborne self-protection suits for the f-16i fleet designed to further secure the safety of the f-16i aircraft enabling it to operate safely in hostile environment another self-protection solution was one this time a maritime ew self-protection solution for a free NATO European country. LBH, the Cyber Mark IV countermeasure dispensing system, is an advanced maritime electronic warfare solution designed to effectively counter complex missile attack scenarios. An additional contract secured to a NATO European country was to supply our region counter UAS solution. This multi-sensor and multi-mission system drones simultaneously. During the quarter, we continued winning contracts for our advanced rocket munition launcher Pulse, precise and universal launching system. This time, together with KNDS, it was Germany who selected our Pulse solution, which has now been selected by multiple European countries, including Germany, the Netherlands, and Denmark, among others. testimony of its effectiveness in enhancing defense capabilities in modern battlefields. Additionally, we won a $130 million contract to yet another European NATO country during the quarter. The scalable pull system enables a variety of range to be used, starting from 35 kilometers up to a range of 300 kilometers. These agile and scalable features of This advanced and versatile artillery rocket system, coupled with a couple of launching one range of rocket types from a single platform, has been a key win by our customers versus our solution. In February, we showcased our latest development in air defense technology at the Air on India show. Elbit's innovative portfolio featured solutions including unmanned aerial systems, directed infant countermeasure technology, electronic warfare capabilities, precise guided munitions, and our helmet-mounted displays, among others. I am pleased to say that there was a strong interest in our product displays. We continue to see a growing amount of interest in the Iron Beam system, the high-power laser solution, which is expected to be operational by the end of 2025. The laser component of the iron bin solution developed by Elbit is intended to provide a robust defense against a variety of incoming threats. The $200 million contract announced back in October 2024 positioned Elbit as an Israeli laser center and a global leader in high-power laser technologies. both for land and urban solutions. We shall continue to update you on development in this area. And with that, I will be happy to answer your questions. Operator?

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press star 1. If you wish to cancel your request, please press star 2. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be told in the order that they are received. Before that, I would like to hand the call over back to Miss Daniela Finn for a few questions that were pre-sent and pre-recorded. Daniela, please go ahead.

Thank you very much, Nathan. And a couple of questions from . Thank you very much for your questions today. The first question is, is there an expectation of a slowdown in activity in Israel due to a possible decline in the intensity of the conflict in Gaza or a ceasefire imposed by the U.S.? How is the company preparing for such a scenario?

Thank you. First, I would like to say that I'm praying for the end of the current war we have in Israel and for the relief of the hostages from Gaza. The investment in defense is, I believe, will continue in the future, in the near-term future, and the main reason for that is these investments are helping to create an advantage for Israel in our arena and to create and so there is also a need to build more inventories and to treat the equipment which is coming back from the field. So I really believe that this investment will continue. The same we see in Europe. Countries are preparing themselves to invest more in defense. In all, they are not very concerned from Russia, mainly in North Europe. So I do not see any slowdown in defense investment in the coming few years, not in Israel and neither in Europe.

Thank you. And the second question from Chen. Is an improvement in the gross profit rate expected in the coming year? or will the profitability target be achieved while relying on operating leverage?

Thank you, Han. With the high demand we are witnessing and the expedited growth of our backlog, we can be more selective in the bookings we take. Additionally, on top of that, we will see continuous operational ARPEX leverage, as you mentioned.

Thank you. And the next question is, what is the expectation for CAPEX for the rest of the year?

We see the same level of CAPEX investment. There might be a small increase in CAPEX investment to around the neighborhood of $250 million. as we recorded $215 million in 2020.

Thanks, Cody.

I would like to add more flavor to the first question with regards to investment here in Israel and Europe. The main reason for investment is not just to support the current conflict we have. It's also to create deterrence against our enemies here in our region and also in Europe. And because of that, I really believe that that's the main reason for the investment. Not the current conflicts which are happening right now here as well as in Europe, but to create deterrents which can avoid war in the future.

Thank you for that. And a final question from Chen is, what is the status of Iron Beam? Will it be operational by the end of the year? I'm slightly off on that, but Ruth, if you'd like to elaborate slightly on that.

Yeah, the Iron Beam, the land solution, should be operational by the end of this year. We are working hard in order to make it happen and there is a lot of progress. In parallel, we continue to invest in the airborne solution. We believe that bringing the airborne solution to the arena will create a great, will be a huge change in the way countries are fighting, mainly against swarms, Hundreds of engineers and physicians are working in order to develop the system, and there is a lot of progress there as well.

Thank you, Bouti. Operator, we can take the following questions now. Thank you.

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

Hi, guys. Congrats on the recorder. I have three questions. I hope you don't mind. The first is about the land division. The operating margin was pretty high. It got 9%. And I know that most of the equipment is going into Israel. I was wondering if you have any more upside when Israeli stockpiles are full and everybody will be able to sell to other countries. That's the first question. The second question is about the Iron Beam. I was wondering if you have any internal price target and sell target, sorry, for the system, and if so, if the system is going to be sold only to Israel or you can sell it into the United States. And the third question is about the pictures you put on slide seven. I see here the soldier lethality program, aka the IVAS in the United States. I was wondering if you have any information targets or any more color you can give on the IVAS development reality soldier enhancement, and maybe some more color in the maritime sensing in future products that might be much more important next year.

So let's do it one by one. If I'm not mistaken, the first question was with regard to the land revenues, right?

Yes.

So first, I would like to say that the land division is not selling just ammunition. They are selling full-tank solutions, which includes the artillery system, howitzers, mortars, command and control system, fire control system, electro-optics, and of course, munition and guided munition as well, all combined. What happened after the acquisition of IMI is that actually we combined all the elements which are related to land solutions into one division. Now, if I understood you correctly, you have asked me about what will happen after the demand in Israel will increase, is it right? Will decrease, is it right?

Yeah, if you have any more upside into the operating leverage, operating margin in the land division.

And also you asked about the demand outside of Israel. Yeah, I suppose it's continued to be pretty strong, my main question.

when you start selling outside of Israel mainly to Europe in much higher numbers if the operating margin is going to be enhanced?

First, we continue to improve our numbers in the land division and we see a big changer and today they are contributing quite a lot to our profits and of course as quantities are going up, we have more opportunities to increase the bottom line. And we see a lot of growing demand, mainly in Europe, not just in Israel. So I truly believe that there is a lot of potential for more revenues and more profit in this domain. Okay, so this was with regard to the first question. The second question was around Iron Bin, right?

Yes.

So the question was, what are the prices of the system? I'm not really sure I understood the question.

The targets of revenue for the system are Israel or the United States.

Usually we don't give this information publicly. I can tell you that there is a huge... There is a huge interest around this system, around the laser solution and other type of energy weapons. We deal not just with laser systems. We deal with many types of, several types of energy weapons in Israel as well as abroad. With regards to numbers, these numbers, usually we don't show this data. Okay.

And regarding the third question, about soldier's vitality and maritime safety?

Yes, we are very happy with the acquisition of Night Vision, which took place a few years back. This company is growing and improving, and they are providing, as you know, Night Vision equipment for the Army, for the Marines, as well as for other international customers. Now, based on the Elbit portfolio, we are able to... combine a full turnkey solution for infantry soldiers. This is also a lesson learned from the current conflict we have here in our region. And we are tailoring a unique solution for infantry soldiers, for future infantry soldiers, and we are offering it to our different customers in the U.S. as well as abroad. I'm very happy to say that we just announced a $112 million contract with the U.S. Marine Corps. And we see a lot of potential in this specific domain. It's a growing segment in our portfolio.

Yes. Okay, thank you very much.

Thank you. Thank you, Omri. The next question is from Connor Wartles of Jefferies. Please go ahead.

Hi guys, good morning. Congrats on such an excellent quarter. Maybe to stick with the top line, Q1 was off to a great start with 22% growth, well on track for the double-digit target for the year. Curious what played out better than expected for the quarter and how we should think about the drivers for the remainder of the year, particularly as we think about the momentum we saw on land and aerospace.

Hi Conor, how are you? Thank you for the question. We had a very good start for 2025, as you mentioned. It was on plan. It's not something that we didn't plan. We see very big growth in the land backlog, and that was demonstrated with 48% expansion in revenues year over year with the land division. And we see also in the other segments, All of the segments grew from one digit to two digits, most of them two digits growth in this quarter. So it was on plan and it's on track in the company's growth.

Got it. That's very helpful. And maybe one more for you, Kobe. Free cash flow generation in the quarter was very strong again. Continuing on that momentum we saw from Q4 of last year, I had nearly 140% conversion on your adjusted net income. Curious how we should be thinking about the opportunity for the full year and maybe what's driven this step change in your cash conversion of the last few quarters.

Thank you, Conor, for pointing this out. We have three major ingredients in the free cash flow generation this quarter. First, increased net income. That is plain vanilla. Just increase the net income and the That will translate to better cash conversion. Secondly, we had very strong contract liabilities, down payments in this quarter, which was additional $170 million of contract liabilities in this quarter. And thirdly, there was a one-time off, $57 million of grant that we received from the Israeli Land Authority, the ILA, which was part of the contract of the evacuation of the facility in Ramat Hasharon going to Ramat Beka in the end of 2026. Those are the three ingredients in the performance that we had in the first quarter of the free cash flow.

Okay, great. I'll leave it there. Thanks so much.

Thanks, Donna.

If there are any additional questions, please press star 1. If you wish to contribute 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 poll will be available in two hours after the conference ends. In the US, please call 1-888-782-4291. In Israel, please call 03-925-5900. And internationally, please call 972-3925-5900. A replay of the call will also be available at the company's website at www.elbit-systems.com. Mr. Mahlis, would you like to make your concluding statement?

I would like to thank 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' first quarter 2025 results conference call. Thank you for your participation. You may now go ahead and disconnect.