Elbit Systems Q3 2023 Earnings Call Transcript

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November 28, 2023

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems Third Quarter 2023 Results 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.

Operator

You should have all received by now the company's press release that is available in the News section of the company's website, www.elbitsystems.com. I would now like to hand over the call to Rami Mayerson, Elbit Systems' VP, Investor Relations. Rami, Please go

Speaker 1

ahead. Thank you, Yoni. Good day, everyone, and welcome to our Q3 2023 earnings call. On the call with me today are Busy Masres, our President and CEO Robbie Cagan, our CFO and Yossi Gaspar, Senior EVP, Business Management. 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.

Speaker 1

As we do every quarter, we will provide you with both our regular GAAP financial data as as well as certain supplemental non GAAP information. We believe that this non GAAP information provides additional detail 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. Kobi will begin by Providing discussion of the financial results, followed by Busi, who will talk about some of the main events during the quarter and beyond. We will then turn the call over to a question and answer session.

Speaker 1

With that, I would like now to turn

Speaker 2

the call over to Kobi. Kobi, please. Thank you, Rami. Hello, everyone, and thank you for joining us today. The financial results of the Q3 of 2023 reflect the sustained demand for our solutions And progress in the implementation of our operational improvement plans.

Speaker 2

Bhutze will discuss the implications of the war in Israel In his remarks, the extent of the impact of the war on our financial results will depend on future developments That are difficult to predict, including the duration and scope of the war. We continue to monitor the situation closely. Turning now to results of the 3rd quarter. 3rd quarter revenues increased by 11% to $1,502,000,000 compared to $1,349,000,000 in the Q3 of 2022. In terms of quarterly revenues by segment, Aerospace revenues increased by 24% in the Q3 of 2023 Compared to the Q3 of 2022, mainly due to training and simulation sales in Europe and UAS Sales in Asia Pacific.

Speaker 2

C4I and Cyber revenues increased by 9% year over year, mainly due to radio system sales In Europe, Istar and EW revenues were similar to the revenues in the Q3 of 2022. Land revenues increased by 7% mainly due to artillery and weapon station sales in Europe. Elbit Systems of America revenues declined 2% in the 3rd quarter due to lower precision guided munitions sales. Elbit Systems diverse geographic revenue base helps to reduce revenue volatility and support the long term sustainability of our business. In the Q3, Europe was our largest market, contributing 33% of group revenues.

Speaker 2

North America was 24%, Asia Pacific 21%, and Israel contributed 15% of our revenues. European revenues increased due to growth in sales of radio systems, artillery, Weapons Station and Training and Simulation Solutions. Asia Pacific revenues increased mainly due to growth in UAS sales. Israel revenues declined mainly due to lower ammunition sales in the quarter. The non GAAP gross margin for the 3rd quarter was 24.9% compared to the Q3 of 2022 At 25%.

Speaker 2

GAAP gross margin in the 3rd quarter was 24.5% of revenues Compared to 24.2 percent in the Q3 of 2022. GAAP and non GAAP gross profit in the Q3 of 2022 included approximately $30,000,000 of expenses related to stock price linked compensation plans. 3rd quarter non GAAP operating income was $117,000,000 or 7.8 percent of revenues Compared to $84,300,000 or 6.3 percent of revenues last year. GAAP operating income for the 3rd quarter was $106,100,000 or 7.1 percent of revenues versus $73,400,000 or 5.4 percent of revenues in the Q3 of 2022. GAAP and non GAAP operating profit in the Q3 of 2022 included expenses of approximately $22,000,000 related The operating expense breakdown in the 3rd quarter Was as follows.

Speaker 2

Net R and D expenses were 6.9% of revenues versus 8.4% in 2022. The year on year reduction in R and D expenses in the Q3 reflects the phasing of projects. Marketing and selling expenses were 5.7 percent of revenues versus 5.1% last The positive inflection in global defense budget growth has created multiple opportunities. The increase in marketing and sales spend will help to realize the potential created by these opportunities. G and A expenses were 4.8% of revenues compared to 5.9% last year.

Speaker 2

Other operating income in the Q3 of 2022 of $9,400,000 included a capital gain Related to the sale of a building in Israel. Financial expenses were $36,000,000 in the 3rd quarter Compared to $16,000,000 in 2022. Financial expenses in the Q3 were higher as a result Of the significant increase in interest rates and higher debt. We recorded the tax expense of $10,000,000 In the Q3 compared to $8,000,000 in 2022. The effective tax rate in the 3rd quarter was 15% compared to 13% in 2022.

Speaker 2

Our non GAAP diluted EPS was 1 point $0.65 in the 3rd quarter compared with $1.40 in 2022. GAAP diluted EPS was 1 point $0.36 for the 3rd quarter compared with $1.26 in 2022. Our backlog of orders as of September 30, 2023 was $16,600,000,000 $1,900,000,000 higher than the backlog at the end of the Q3 of 2022. Approximately 39% of the current backlog is scheduled to be performed during the remainder of 2023 2024 And the rest is scheduled for 2025 and beyond. Operating cash flow in the 3rd quarter was an $11,000,000 in So compared to the $178,000,000 inflow in the same quarter last year.

Speaker 2

The Board of Directors Has declared a dividend of $0.50 per share. I will now turn the call over to Mr. Machlis, LV's CEO. Butsi, please go ahead.

Speaker 3

Thank you, Corby. I would like to begin by thanking all Elbit's employees and their families around the world for their hard work and dedication In these challenging times, since October 7, I have visited Elbit's operation around Israel and our employees deployed In the field supporting the idea. I am proud of their commitment to all our Customers around the world and their dedication provides me with confidence that Elbit Systems will be able to overcome the challenges we face I also want to send my sincere condolences to the families of our employees that have lost The financial results in the Q3 include double digit revenue growth, Record backlog of $16,600,000,000 and improved profitability. Combined with the significant contract from customers around the world we received in recent months reflects the strong demand for our solutions. They also increased confidence in our ability to overcome the short term challenges and deliver I would like to discuss the impact of the war so far in Israel That presents both challenges and opportunities.

Speaker 3

Elbit Systems is Israeli's largest defense company and we a range of solutions to the Israeli Defense Forces. This includes the digital arming program or DAPT 750 Command and Control Solution, Electronic warfare systems, UAVs, artillery and motors, systems For main battle tanks and arms vehicles, night vision systems as well as a range of training and simulation solutions for the Single soldier to the squadron and battalion level across all domains and more. Our solutions are currently being used extensively by the IDF. We have also accelerated the development of some of our solutions that were still In development and we're scheduled to be fielded in the medium or longer term. They have already been sent to the field in days of weeks.

Speaker 3

We did this thanks to the dedication of our employees and our culture of innovation and creativity. We have ramped up production to support the IDF and maintain deliveries to our international customers at the same time. We have increased production capacity at our factories by adding shifts and we have rapidly recruited Several 100 additional temporary employees to support the search. We have implemented all of this At the same time, as approximately 15% of our Israeli workforce of 14,000 employees We pray for a safe and speedy return I would like to share Some of my initial observations and lessons learned from the regular meeting we conduct with the end users in the IDS Discuss some of the relevant contracts received in recent months that demonstrate that our international businesses remain solid and continue to grow. The conflict has highlighted the importance of multi domain warfare that connects all Operating in the air, on the ground and the tree and enables the transfer of information between them to close the sensor to shooter cycle rapidly and Elbit Systems is a market leading supplier of a range of solutions across the center of the shooter cycle That is made up of 3 major elements, the sensors that collect information, the infrastructure That enables the transfer of information and the effect of the engage spread based on information on the information gathered.

Speaker 3

Some examples of our capabilities include our Istar and EWE divisions provide a range Advanced sensors that operate across the electromagnetic spectrum. These sensors collect valuable And actionable mission critical intelligence and can identify, exploit and gain LME activity and capabilities. The division also provides advanced targeting target acquisition and laser targeting solutions. In August, we were awarded A $55,000,000 contract to supply multilayer redrawn counter unmanned aerial system to the Netherlands. The redrawn system It's comprised of advanced radar, signal sensors, an electro optical sensor, attack capabilities and the command and control system to protect against the We continue to see healthy demand for our night vision solutions from customers around the world, including Today's announcement from the U.

Speaker 3

S. DoD for a large night vision global contract for ESA's night vision business. The information collected by these sensors that are installed on a range of manned and unmanned platforms is distributed around the By Elbit Systems C4R and Cyber Defense Communication and Command and Control Solutions that create real time multi domain Network warfare environment from headquarters to the front line. The current generation of the digital army program that we Supply to the IVF, the TorchX DEP750 enables advanced digital capabilities in the battlefields from the IVF operating on thousands of our EDINX advanced software defined radios that enable the flow of data. DAP 750 connects the forces Across multi domains, enabling the rapid and effective transfer of information, including voice, video and text around the battlefield to be used by decision makers at all levels of the command chain.

Speaker 3

In October, Elbitistan Sweden was awarded $170,000,000 continued contract to become the integration partner for the Swedish on the digitization program LSS Mark. This contract is an important validation of our command and control and military liquidization capabilities. Elbit Systems land provide a range of factors to the IDS including Precision guided munition launch or relay from platforms on the ground, in the air and at sea. We also supply a range of artillery, tank or motor munition. These factors enable engagement of the threats identified In October, we received a $135,000,000 contract, 2U contract from Customers to establish an artillery ammunition factory.

Speaker 3

The contract reflects the strong demand for munitions from countries around the world and the Decade of Elbit experience producing ready for artillery motors and tank munitions. In September, we were awarded 2 contracts On the European country, worth approximately $200,000,000 to supply a C4A solution to an artillery battalion And Hostile Fire Counter Attack Solution. This solution provides a good example of Elbit's comprehensive center of the shooter capabilities that help Accelerate the cycle to identify and engage the enemy quickly and effectively with limited collateral damage. We initiated and we are implementing our operational improvement plan to support our transformation Into a larger, more profitable company. The war in Israel has not changed our long term plans.

Speaker 3

It also increases the focus on the portfolio and should help us identify capability or technology gap By the progress in the Q3 as well as the resilience we have demonstrated overcoming multiple challenges in recent years, I'm confident in our ability to overcome the current challenges and deliver on our potential to all our stakeholders, Our customers, our employees and of course to you, our shareholders. Before I conclude, I would like to thank our customers And partners from around the world for the numerous expressions of support over the last 2 months. And with that, I would be happy to take your questions.

Operator

Thank you. Ladies and gentlemen, At this time, we will begin the question and answer session. The first question is from Pete Skibitski of Olympic Global. Please go ahead.

Speaker 4

Thank you. Gentlemen, good afternoon. And I hope you and your families are safe and you're all doing reasonably well during what I'm sure is a very difficult time To start out, yes, maybe to start with Kobi. Kobi, can you talk more about The Q3 gross margin in particular, I know last year you had the stock comp expense that impacted gross margin. This year, I think you expected second half margins to be better.

Speaker 4

So maybe you could just walk us through what impacted the 3rd quarter gross And if you expect Q4 to see a higher gross margin?

Speaker 2

Yes. Thank you, Keith. I'll talk about I think there are 4 layers here to the answer. The first one is that we are still in the implementation phase of our operational improvement, our plan to support our transformation. And that plan includes the ERP effort in multiple investments that are still going on, and we will see the continuation of the improvement of our profitability at GP and OP level.

Speaker 2

The second part is, of course, project mix that you have each quarter. The third issue is that it's more we think that it's more relevant to look at 3 quarters and not just on one specific And if you look at the 3rd at the 3 quarters from the beginning of 2023, You see that if we deduct the stock price linked compensation plans, We keep the same GP level and even a bit better. And the last issue is that So when we are discussing prices of products and systems, of course, there are a variety. We are very diverse And that creates, of course, different environment of prices that we can get from the market. So we think that we are on plan.

Speaker 2

We see with the GP, we see an improvement significant improvement on operational expenses level, so we keep the trend of improved profitability altogether.

Speaker 4

Okay. And just to follow-up financially, do you expect to be free cash flow positive in the 4th quarter?

Speaker 2

As Bhutto discussed previously, and as we disclosed, we are Expecting the government of Israel, the Ministry of Defense to pay fully their due payments In the all of our receivables on the Q4. So certainly, we are expecting a positive Q4 Cash flow wise, and we are sure expecting to be fully paid from the government of Israel. Okay.

Speaker 4

Okay. And then maybe one last one for me and I'll get back in queue for Budsey. Budsey, I don't know if you have had a chance to Examine this potential supplemental funding request for Israel that's passed through the U. S. House of Representatives.

Speaker 4

It's about $14,500,000,000 And I don't know a lot of the line items, but I have heard there's funding for iron beam, for instance, in there Amongst other items. So I'm just wondering, I guess, have you had a chance to gain some view of what's in there? And Would you expect that to be meaningful to Elbit if that passes?

Speaker 3

Yes. We have An intimate dialogue with our government, with IMOD on our share in this package and certainly I will not go into all the details right now, but I can tell you that we expect to get part of it. As you know, we have Albit Systems of America, Which produce different systems and products to the IDS using SMS funds. So it's a big opportunity for us And we expect to enjoy from this decade as well.

Speaker 4

Okay. Yes, I mean, your backlog, I guess, Year to date, backlog is up 9.5% and that is really before, of course, this potential supplemental impact and any increased Israel, IMOD funding, so it sounds like maybe all the extra capacity that you've been building It was good foresight, I guess, is the way to say it to build all that extra capacity. So Thanks, guys. I'll get back in queue.

Speaker 1

Thank you. Thank you very much. Thanks.

Operator

The next question is from Ella Fried of Banque Lumi. Please go ahead.

Speaker 5

Good afternoon. Thank you for taking the questions. First, I would like to congratulate you on the growth on the revenue in this quarter. And mostly on the way the company is functioning in this time and I think as citizens, we are all very Impressed by it and it was good to hear and how you cope with the reality I have a few questions. The first question is About the focus that you mentioned on the portfolio that you are evaluating Maybe from the M and A perspective, potential either buying or selling of Capabilities which makes a lot of sense when the company is growing at this pace.

Speaker 5

Could you give some more details about this process?

Speaker 3

It's It's an ongoing process that we have in the company to explore the portfolio we have To make sure that we have the right portfolio to add more capabilities based on M and A opportunities and to get out Some businesses which are less relevant in the course that this war focus us even more. And so we see many opportunities for the company In the near future and in the medium future And not just in Israel, also in many other places. And we have to understand we have a process And this process is taking place. We made very good acquisitions in the U. S.

Speaker 3

Few years back and was very happy to hear Today, as I mentioned earlier that Elbit Systems Night Vision were awarded a very nice contract In the U. S. To provide night vision equipment to the forces. That's a very good example for an acquisition we made. So we continue to look for opportunities to make additional acquisition And maybe to cut out from some of the businesses we have, which are less relevant, IMI is another very good example.

Speaker 3

As you all remember, we acquired IMI in 2018 and today it's a complete different company And we combined all many elements from LVT into the land division. IMI is just one of them. We combined the artillery piece And we combined Orion's Refuses Center of Excellence into that division as well And guidance capabilities, which came from another part of the organization. So together we have a very vertical organization which provides many types of guided munitions, not just to Israel, also to many other customers and we see good So that's another example of very good acquisition we made in the past. So we continue to explore the portfolio, we continue to look for And we adjust the company accordingly.

Speaker 5

Okay. Are you mainly looking outside And Israel or it's you seem to have bought everything that is interesting locally.

Speaker 3

When we are talking about acquisition, we usually look for 2 elements. 1 is new technologies, which we still miss. Rocaro, which we acquired from BAE, is a very good example for that. It was a relatively small acquisition, but this acquisition brought us Technology we didn't have, which is elected to a new GPS technology. So this is one type This is one type of acquisition.

Speaker 3

We are looking for another one, new provisions In the markets like the acquisition we made of LifeVision in the U. S, which brought us into new technology as well as to new markets which we didn't have before. So this is with regard to acquisitions, but we are also continuously looking also to make Sure that we have the right portfolio. The company has grown a lot recently and we need to also to look inside and to see whether we have some capabilities which

Speaker 5

Okay. Well, and I have another question, which is more, I think, related to Kobi. Is the high percentage Of people who are mobilization among the workforce is going to have Positive impact on the profitability of the quarter from where you can see it now.

Speaker 2

First, Ella, hi Ella. First, thank you for your kind words in the beginning. We really appreciate your kind words. Regarding the mobilization, we have currently 15% of our workforce In Israel, which is approximately 2,000 employees, which we are very proud of serving our country in these difficult times. And of course, that level creates some kind of a disruption, Which Bussie addressed in the previous remarks as we are hiring temporary employees, Even referred to some retired employees that came back very happily to support their efforts.

Speaker 2

So I'm we don't think this is of course, it's not a financial contribution. And if you miss, we Of course, we didn't decide who are the 2,000 employees that were mobilized. So part of those are From the production, part of engineering, so we don't

Speaker 5

Overall, it is not contributing financially.

Speaker 2

It would not be a contribution. Of course, it's not a contribution. We try to support this mobilization By actually recruiting hundreds of employees, but of course, this Would not be supportive or financially positive events in this quarter.

Speaker 5

Okay. Thank you very much for answering my questions.

Speaker 3

Thank

Operator

you. The next question is from Shahar Cohen of Yossi Capital. Please go ahead.

Speaker 1

Yes. Hi, guys.

Speaker 6

Did you get any more clarity about Long term projects within Israeli. And B, Sales that are going to Israel Defense Forces are registered within the Israeli segment or those can be if it goes through the American So we just go to the U. S. In your report and see if you can Speak about the potential of Syed. In other markets, given the successful implementation And proven battlefield results we see we have, that's really great.

Speaker 3

Hi, Shahar, it's Boutsi. And of course, we are The IDS is a very important customer of us and we support we have to support the forces and we get the orders From Zai Modis and we have fixed exceptional orders from Zai Modis and With regard to Pete Sayad, I would just say that we have already several international customers And to the system, derivatives of the systems are being used in Europe As well as in North America and to the back of my knowledge, we have The most comprehensive solution which is available right now in the market and we see a lot of potential for that And this system includes radios, networks, applications, training packages and hardware and many more. So certainly there is a lot of interest For this solution, we are world leader with that and we have already many customers just A month and a half ago, we reported a nice win in Sweden to be the partner for The digitization after we won the radio in this country, and we expect to get additional

Speaker 2

Okay. One last question, this is Shahpar. Regarding geographical distribution, When we have SMS sales, we geographically, it's being recorded under Israel.

Speaker 6

Got you. One follow-up question. Have you seen or what's the most practical Yet exciting thing and tangible that you can say about the interest of Order of non Israeli customer with platform solutions you made which basically Being deployed now in Israel, have you seen any, I would say, inflection point in some of the solution? And if yes, which of your solution experienced Inflection point in demand outside the fiscal as a result of the Gaza war.

Speaker 3

I think it's Too early to speak about the results of the war and about second half of the war. We are not still there. We are We are very much involved in supporting the process and of course when this war will be over, we will be In a better position to learn from it and to understand and to learn more and When we have the data, we will share it with our customers around the world. I can tell you that we have Our solutions and systems are heavily used by the forces That to the best of my understanding, the operators Recognize the importance of the solutions that we are providing And after the war, we will understand we We'll be able to and this is related to all domains. It is related to C4I, it is related to munitions, it is related To optics, to radars, to UAVs, to training system, AW solution and many others.

Speaker 3

Processes in the company and the wind pollution quickly to the field. So At the end of the war, I think we will be able to sit together with our customer to understand what else needs to be done and we will share this data with our

Speaker 1

And one last if

Speaker 6

I may squeeze. The margin of your the rash order you get currently from Israel, are there below at On par or above your usual margins? I'm talking about gross margin.

Speaker 2

We don't see any different level of Margins in the rush orders, so it's so we don't see any difference there.

Speaker 6

All right. Thanks. Thank

Operator

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 2 hours after the conference ends. In the U. S, please call 1-eight eighty eight-seven eighty two-four thousand two hundred and ninety one.

Operator

In Israel, please call 3,925, 5,900. And internationally, please call 9,723-9255 9,000. 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?

Speaker 3

I would 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.

Operator

Thank you. This concludes the Elbit Systems Ltd. 3rd quarter 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.

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