Elbit Systems Annual Report 2022 Earnings Call Transcript

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Provided by Quartr
May 1, 2023

There are 8 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the conference call to discuss Elbit Systems 2022 Annual Report. 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

I would now like to hand over the call to Rami Meyerson, Elbit Systems' Investor Relations Director. Rami, please go ahead.

Speaker 1

Thank you, Yoni. Good day, everyone, and welcome to the call today Thank you, sir, Anjeski Gassar, CNA EV Senior Business Management. Before we begin, I would like to point out that the Safe Harbor statements in the company's annual report on Form 20F File on 1 May 2023 also refers to the confidence of this conference call.

Speaker 2

As we do on

Speaker 1

our regular quarterly conference call, You can find all the detailed GAAP financial data as well as the non GAAP information And the reconciliation in the annual report. On this call, we will only discuss our financial results as of 31 December 2022. We plan to report Q1 2022 results towards the end of May. We reported earnings for 2022 on 28 March 2023 in our 2022 annual results press release. There are no changes to the financial information we disclosed in our 2022 annual report.

Speaker 1

However, we would like to highlight our segment financial information included in the annual report, which we will report on before. Christy will begin with a presentation of Elbit Systems' 5 segments, Followed by Kobi, who will provide information on the financial results of the segments. We will then turn the call over to a question and answer session. With that, I would like now to turn the call over to Bhutto. Bhutto, David?

Speaker 3

Thank you, Roni. The annual report that was filed today includes new information On the segmental reporting structure that Elbit has adopted and plan to disclose going forward, I would like to provide some background on our decision to update our deployment. At our Investor Conference on 28th March, We presented the transformation that Elbit is implementing from a company with revenues of around 3,500,000,000 A few years ago, the company needs infrastructure in place to support annual revenues of $6,000,000,000 to $7,000,000,000 With improved profitability and cash generation, this followed the strong growth in our backlog to a record level of more than $15,000,000,000 approximately 2.8x our 2022 revenues. As part of our regular processes and the operational transformation that also include changes to our internal reporting As well as correspondence with our regulator, we decided to adapt the way we disclose our operations to the market. This is also an opportunity to provide additional transparency to investors and Analysis.

Speaker 3

Elbit Systems imports segment information in 5 segments, Beginning with the year ended December 31, 2022, the 2022 financial information we reported These segments are organized by a combination of the nature of products and services offered Together with the geography based segment, Elbit Systems of America or ESA, reflecting the way Management manages the company. The U. S. Is the largest market and we believe this structure is suitable To maximize the significant potential, the size and portable segment are aerospace, which provides products and systems for airborne platforms, unmanned AR solutions, precision guided emission or PGM C4I and Cyber provide C4I systems, data links and radio communication systems and equipment, Spinal Intelligence, Autonomous and Homeland Security Solutions. Istar and EW provide a wide range of electro optics Embedded Systems as well as a range of electronic warfare and feeding systems, then provide Land based systems for armed, armored and other military vehicles, artillery and motor systems, munitions for land, in 3 applications, including PGM, arms, vehicle and other platforms through mobility and protection systems.

Speaker 3

Elbit Systems of America or ESA provides products and systems solutions Principally to the U. S. Military, foreign military service, home security, medical implementation and commercial aviation Customers, management encourages the segment to cooperate on a range of common projects performed by the company. It is common for this segment to provide the product to the same customer either through joint projects All by marketing and offering combined and integrated solutions containing a variety of capabilities, products and technologies Of the company's portfolio from various businesses or subsidiaries all tailored to satisfy The customer or project specific requirements, management also remain focused on the consolidated results As an important measure of performance, particularly given the high level of cooperation among the segments. I will now hand over the call to Kobi to discuss the financial results of its financials for 2022.

Speaker 3

Call me, please.

Speaker 2

Thank you, Rufe. Hello, everyone, and thank you for joining us today. I would like to reiterate Rami's comments that there are no changes to the consolidated financial results we reported on the 28th March in the annual report filed today. I will start my review with some of the highlights of our consolidated 2022 financial results And we'll then elaborate on the financial information of each segment. Our consolidated revenues increased but 4% to $5,500,000,000 in 2022 from $5,300,000,000 in 2021.

Speaker 2

GAAP Operating income was $368,000,000 versus $419,000,000 in 2021. Non GAAP operating income in 2022 was $357,000,000 or 6.5 percent of revenues compared with $451,000,000 or 8.5 percent of revenues in 2021. As a reminder, GAAP and non GAAP operating income in 2022 included expenses of approximately $62,000,000 related to stock price liencompensation plans. I will now review the financial results of each segment As we note that our segmented disclosure of operational income is provided on a GAAP basis. Aerospace revenue increased by 9% to $1,730,000,000 in 2022 from $1,580,000,000 in 2021, mainly due to training and simulation and URO sales.

Speaker 2

Aerospace operating income in 2022 was $106,800,000 6.2 percent of Aerospace segment revenues compared to $129,200,000 8.2 percent of segment revenues in 2021. The $22,500,000 decrease in operating income was mainly due to increased employee compensation expenses A negative thermal mix. P4 and fiber revenues increased by 8% to $678,000,000 in 2022 from $625,000,000 in 2021, mainly due to growth in radio, enable, command and control system sales. C4I and Cyber operating income in 2022 was $49,000,000 and 7.2 percent of C4I and Cyber segment revenues compared to $44,400,000 7.1 percent of segment revenues in 2021. The $4,600,000 increase in operating income was mainly due to the increase in revenues, partially offset by increased employee compensation expenses.

Speaker 2

IStar and EW revenue increased by 2% to $1,050,000,000 in 2022 from 1.03000000000 1,000,000 in 2021, mainly due to armored vehicles, night vision and target acquisition system sales. IStar and EW operating income in 2022 was $49,100,000 and 4.7 percent of 5 Star and EW segment revenues compared to $66,000,000 6.4 percent of segment revenues in 2021. The $16,900,000 decrease in operating income was mainly due to increased employee compensation expenses and negative program mix. Land revenues increased 5 percent to $1,170,000,000 in 2022 from 1,1200,000,000 dollars in 2021, mainly due to airborne precision munition sales. Land operating income in 2022 was $28,600,000 2.4 percent of land segment revenues compared to $35,600,000 and 3.2% of segment revenues in 2021.

Speaker 2

The $7,000,000 decrease in operating income was mainly due to increased employee compensation expenses. ESA revenues decreased by 2% to $1,460,000,000 in 'twenty two from $1,490,000,000 in 2021, mainly due to lower medical instrumentation and military avionics sales, partially offset by growth of night vision sales and one additional quarter of Spartan sales compared to 2021. ESA operating income in 2022 was $75,000,000 5.1 percent of ESA segment revenues compared to $124,300,000 and 8.3% of segment revenues in 2021. The $49,300,000 decrease in operating income was mainly due to the decrease in COVID-nineteen medical instrumentation sales, the split in 2021, supply chain disruptions and negative program mix. Other operating income was $68,900,000 in 2022 compared to $14,700,000 in 2021 and included capital gains related to the phase of building and investment by Going forward, we plan to continue to report revenue and operating income of each segment in our annual report.

Speaker 2

In our press release for the 1st, 2nd and third quarter, we will provide revenues by segment, which reflect the way we manage Our business revenues by segment in our press releases for the first, second and third quarter will replace Revenues by areas of operation that were previously provided. The revenue split by geographical revenues and areas of operation We're also disclosed in our annual report. The areas of operations are a capability or platform based classification that crossed over the different segments. An example of this are our EW systems provided to the U. S.

Speaker 2

And customers Through our ESA segment for installation on the U. S. Air National Guard at 16 aircraft. These are included in the airborne systems area of operation and they are reported as inter segment sales by the ISAR and EW segment and as third party sales by the ESA segment. And with that, we will be happy to take your questions.

Operator

The first question is from Pete Skibitski of Alembic Global. Please go ahead.

Speaker 4

Hey, good afternoon, guys.

Speaker 3

Good afternoon, Jason. Hi, Jason.

Speaker 4

Guys, do you expect any Cost savings or any revenue synergies from this new alignment? Betsy, maybe you could give us more color on How you think things could change as a result of this?

Speaker 3

As you know, we The company in a different structure recently and just So now we combined the UAV division with the elbow division and we combined EW and The electro optic activity together under another division and it's part of the transformation we are performing in the company in order To gain more synergies, to reduce overheads and to be more effective and proactive to the market. And as I said, this is part of the transformation process. The company It's activating right now in order to reach the revenue level of $6,000,000,000 to $7,000,000,000 in the coming years and to improve profitability and cash generation.

Speaker 4

That's great. Very helpful. And then you might have touched on this at the beginning, but In terms of the segment heads and their annual incentive compensation, how are you guys incenting them? Is it sales growth, Margin growth, anything else or I wasn't sure about that.

Speaker 1

Hi, Pete. This is Yossi. How are you?

Speaker 4

Good. How are you?

Speaker 1

Good. Thanks. Regarding the incentive program, We have for each individual starting from the highest level, executive level and down to our program managers and the role defined goals that vary From function to function that includes, for example, cash generation, that include profitability, that include revenues, new business, quality criteria and so on. Every year, we define the major highlights that are important for the company. And accordingly, we assign for each function The goals and we measure them, of course, quarterly and we compensate them by year end usually which is advanced by New Year.

Speaker 4

Okay. Okay. Very helpful. Thank you for that. And just last one for me.

Speaker 4

Question about the U. S. Segment. I think you guys mentioned it was a 5.1% operating margin in 2022, which 5.1% I would say is below U. S.

Speaker 4

Peers. And I know you guys have built ESA up over decades, kind of one piece at a time, small pieces initially To get a foothold, but so my question is, do you guys expect to consider maybe some portfolio reshaping, maybe some portfolio Pruning in the U. S, because I imagine there are some big margin differences among the businesses in ESA for you. I mentioned there's Some lower margin businesses and some much higher margin businesses. And it strikes me that maybe there's an opportunity there longer term.

Speaker 3

I think we see all our activities in the U. S. As core activities. We always adapt here and there And some of the activities, but in general, we all the activities we have in the U. S.

Speaker 3

Are core to the company in the U. S. It's very important that the largest market for Elbit today and we see it's a strategic market for us. It's true that in 2022, The NARs, the OPA or the profit was impacted by stock price mix compensation expenses As well as lower medical infra instrumentation sales and by supply chain disruptions And the increase of the 2020 components. I also want to remind all of us That we went live with the new ERP system in the U.

Speaker 3

S, which was not a moving Task as well. But all of it and of course, project mix as usual. So all of it is most of it is behind us, and I Our numbers in the U. S. To improve.

Speaker 4

Okay. Thanks so much for the color guys.

Speaker 2

Appreciate it. Thanks, Steve.

Operator

The next question is from Ellen Page of Jefferies. Please go ahead.

Speaker 5

Hi, guys. Good morning.

Speaker 2

Hi, good morning.

Speaker 6

Just following Pete's question on margins.

Speaker 5

If you look across the segments, you're in kind of the mid to high single digit range across segments. Where do

Speaker 6

you see the most opportunity for margin expansion? You used to talk about a 10% total company target long term, Just as we think about margin improvement across

Speaker 5

the businesses to get there.

Speaker 3

I would expect all segments to grow To the neighborhood of 10%, that's a strategic goal. We have played to the management And I think that we are there for growth into this direction. And the beauty of Elbit is The wide portfolio we have on one hand and the vertical spread on the other hand. And the combination of these 2 creates stability. So altogether, I don't altogether, I think the company will reach a 10% plateau.

Speaker 4

And as

Speaker 3

I mentioned in the conference, which was held a month ago, 2022 was the year of transformation. We are investing $130,000,000 in new facilities in Israel as well as in the U. S, in Germany, in the UK In order to convert the backlog to revenues and to profits, since we are going to conclude Implementation of new ERP system mid this year and after that, we will all operate on one We are pleased based on one standard system, which will help us also We created to be more effective and more efficient, and we reorganized the company recently in order to be more

Speaker 2

It will be more relevant to

Speaker 3

the market and more effective as well. But this is true for all the segments.

Speaker 5

Okay. And

Speaker 6

is there any kind of normalized Profitability to think about for the Aerospace segment, it looks like it was pretty depressed a couple of years ago and I just want to understand like in 2020. And I just want to understand where

Speaker 5

it was like in the previous decade.

Speaker 2

We have on 2020 Alan, hi, it's Kobi. We have on 2020 one time write off Related to COVID-nineteen, which was around $50,000,000 on that segment, And we disclosed it in our disclosure. There is the non cash items are being disclosed by segment. So you can go and you can look and see The numbers are there in our news exclusion.

Speaker 5

Helpful. Okay. I'll hop back in the queue.

Speaker 3

Thanks, Andrew.

Operator

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

Speaker 5

Good afternoon to me and good morning to all the people on the other side. And I would like to first to I'd say that it's very I think very positive for the company and for the market. This sector Information is really enlightening. And I have a question, maybe you already partly answered, but still Maybe you could add something. I see that most of the sectors that were The good test this year was about 2% higher, really dramatically higher Profit in the previous year, in 2021.

Speaker 5

So is it mostly You mentioned lots of factors, but is it mostly the supply chain across the board? I mean, if you Should one factor that really hurt, I don't know, I should say, ISA and

Speaker 3

There are several reasons for that. In 2022, we had Stock price mix compensation expenses, which affected the 'twenty two numbers and And actually, if you convert it to percentage, it's about 1.2% of the profit, which was helped by these expenses. On top of that, supply chain disruption and price increases of electronic components also Affected us all over the company. So these two factors are common to the oil segments and they all affected us. And both of them will be Less relevant or almost non relevant in 2023.

Speaker 3

I also want to remind you that at the end of the conference, We have invested 100 of 1,000,000 of dollars in new facilities in order to support the transformation The company is going through. This took place in 2021 in a small number, in 2022, a big number, And it will continue also in 2023 to in order to enable us to convert the new business with the other backlog we have Into revenue and profit. I also want to say that The exchange rate in 20 'twenty three is much more favorable than it used to be in 2022, and we see less pressure in the label market. So I do not expect to invest So much in the bonus of the anniversary in 2022.

Speaker 5

Okay. And thank you. And I don't know if you are related to current update, But the same trend that you showed us With the 1st annual report, are there any I mean, are there any changes, I mean, for better or worse, if you could mention, if you can mention?

Speaker 3

The answer is very simple is no. We do not see any effect on our businesses. We see a lot of potential I had the first in Europe as well as in the Far East and in the U. S. And also here in Israel.

Speaker 3

So I do not see any impact on Elbit.

Speaker 1

And now we report our results In a few weeks, Tom mentioned we will refer to the current environment. So that is closed only until the end of December 2020.

Speaker 5

Okay. Thank you very much. Thank you for this conversation.

Speaker 1

Thank you,

Operator

The next question is from Shahar Karmi of Sogut. Please go ahead.

Speaker 7

Hi, thank you for taking my question. Just a quick one for me, please. With regard to ESA, is the fact that you now present it separately means that At one point in the future, that subsidiary might go to an IPA. Is it something that you even consider? Thanks.

Speaker 3

Hello, Shahar. Good afternoon, good afternoon. The answer is no. With the synergy between all the businesses, All the segments are crucial to the success of the company. And as you can see, there are many productions between them.

Speaker 3

So we see Elbit Systems of America as an integrated part of Elbit and it will continue to be this way. So we do not consider any idea.

Speaker 7

Okay. Thank you.

Speaker 1

Thanks, Jacob.

Operator

There are no further questions at this time. Before I ask Mr. Machlis to go ahead with his closing statement, I would

Speaker 1

like to remind participants

Operator

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. In Israel, please call 3,925, 5,900. And internationally, please call 9,723-925-5900.

Operator

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 everyone of the call. Thank you for joining us

Operator

Thank you. This concludes the Elbit Systems Ltd. 2022 Annual Report Conference Call. Thank you for your participation. You may go ahead and disconnect.

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Elbit Systems Annual Report 2022
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