Elbit Systems Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 28, 2024

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' Q1 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.

Operator

I would now like to hand over the call to David Revere, Elwood Systems' Investor Relations Director. David, please go ahead.

Speaker 1

Thank you, operator. Good day, everyone, and welcome to our Q1 2024 earnings call. On the call with me today are Utsi Mahlidis, our President and CEO and Kobi Pagan, our CFO. Before we begin, I would like to point out that Safe Harbor statement in the company's press release issued earlier today also refers to the contents of this conference call. As we do every quarter, we will provide you with both our regular GAAP financial data as well as certain supplemental non GAAP information.

Speaker 1

We believe that this non GAAP information provides additional details to help understand the performance of the ongoing business. You can find all of the detailed GAAP financial data as well as the non GAAP information and the reconciliation in today's press release. Bobby will begin by providing a discussion of the financial results, followed by Tootsie, who will talk about some of the significant events during the quarter and beyond. We will then turn the call over to the question and answer session. With that, I would like now to turn the call over to Kobi.

Speaker 1

Kobi, please?

Speaker 2

Thank you, David. Hello, everyone, and thank you for joining us today. The financial results of the Q1 of 2024 reflect the significant increase in demand and opportunities the company has. This demand supported the growth of our order backlog to more than $20,000,000,000 As we mentioned in our previous quarter investment conference, we can see the continuous improvement in our profitability. I will now highlight and discuss some of the key figures and trends in our financial results.

Speaker 2

First quarter revenues were $1,554,000,000 compared to $1,394,000,000 in the Q1 of 2023. Our diverse geographic revenue base is important to the long term sustainability of our business. In the Q1 of 2024, Europe contributed 25%, North America 21%, Asia Pacific 20% and Israel contributed 29% of revenues. Growth in Israeli revenues reflects the increased demand for a broad range of our solutions following the breakout of the source of iron ore. The non GAAP gross margin for the Q1 was 24.7% compared to 26.5% in the Q1 of 2023.

Speaker 2

GAAP gross margin in the Q1 was 24.1 percent of revenues compared to 25.9% in the Q1 of 2020 3. The 1st quarter non GAAP operating income was $121,600,000 or 7.8 percent of revenues compared with $108,500,000 or 7.8 percent of revenues in the Q1 of last year. GAAP operating income for the Q1 was $105,400,000 or 6.8 percent of revenues versus $93,900,000 or 6.7 percent of revenues in the Q1 of 2023. The operating expense breakdown in the Q1 was as follows. Net R and D expenses were $98,500,000 or 6.3 percent of revenues compared to $110,300,000 or 7.9 percent of revenues in the Q1 of 2023.

Speaker 2

Marketing and selling expenses were $89,100,000 or 5.7 percent of revenues versus $80,200,000 or 5.8 percent in the Q1 of 2023. G and A expenses were $81,200,000 or 5.2 percent of revenues compared to $77,100,000 or 5.5 percent of revenues in the Q1 of 2023. Financial expenses were $31,200,000 in the Q1 compared to $24,200,000 in the Q1 of 2023. Financial expenses in the Q1 reflect the high interest rate environment as well as required increase in net working capital. We recorded a tax expense of $11,600,000 in the Q1 compared to $8,700,000 in the Q1 of 2023.

Speaker 2

The effective tax rate in the Q1 of 2024 was 14.6% compared to 12.8% in the Q1 of 2023. Our non GAAP diluted EPS was 1 point $8.1 for the Q1 of 2024 compared to $1.78 in the Q1 of 2023. GAAP diluted EPS was $1.65 for the Q1 of 2024 compared to $1.40 in the Q1 of 2023. I will now review our business segment's Q1 of 2024 financial results and will note that our segmented disclosure of operational income is provided on a GAAP basis. T4I and Cyber revenues increased by 12% year over year, mainly due to increase in radio system sales in Israel.

Speaker 2

IStar and EW revenues increased by 17% in the Q1 of 2024 mainly due to electronic warfare and electro optic system sales in Israel. Land revenues increased by 26% in the Q1 of 2024 mainly due to increased ammunition and munition sales in Israel. Aerospace and Albit Systems of America revenues were similar year over year. Our older backlog as March 31, 2024 was $20,400,000,000 a $4,500,000,000 higher than the backlog at the end of the Q1 of 2023, almost $2,000,000,000 of the increase is from Israel. Out of the new orders of the Q1, dollars 1,500,000,000 is from Israel.

Speaker 2

Approximately 71% of the current backlog is attributable to orders from outside of Israel. Approximately 51% of the current backlog is scheduled to be performed during 2024 2025 and the rest is scheduled for 2026 and beyond. Operating cash flow for the Q1 was a $6,400,000 outflow compared to $73,000,000 outflow in the same quarter last year. The cash flows in the 3 months ended March 31, 2024 were affected mainly by the increase in inventories and trade receivables, offset by the increase in contract liabilities. The Board of Directors has declared a dividend of $0.50 per share.

Speaker 2

I will now turn the call over to Mr. Machlis, Erbit's CEO. Bootsie, please go ahead.

Speaker 3

Thank you, Corby. I would like to begin by thanking our Elbit employees around the world for their hard work and ongoing commitment to our customers. I wish to thank our employees in Israel that have been working intensively for months and have made it possible for the company to address the IMOD's need during the war. I also want to send my sincere condolences to the families of our employees that have lost loved ones during this conflict and send our prayers to the injured for a speedy recovery. I along with the entire company hope for quick return of all the hostages that remain healthy.

Speaker 3

I am encouraged by our financial results in the Q3 as there has been significant increase in our order backlog. We surpassed $20,000,000,000 and approximately 12% in revenue growth. I would like to highlight 2 main points of major importance to our businesses. The relevance of Elbit Systems portfolio of advanced technological solutions that have been operationally proven in light of the increasing global defense budget and the high demand by the Israeli MOD with positively impact the revenues and growth of the company. Elbit Systems is continuing to implement its long term strategy and plans, while strengthening its global presence and maintaining its commitment to customers.

Speaker 3

The company is continuing to implement its transformation plan in order to enable our internal target of $7,000,000,000 revenues, which I believe will be achieved ahead of schedule and our internal target of around 10% operating margin. Throughout this world of iron ore, we have accelerated the R and D of some of our solutions that were still in development. Some have already been deployed to the front lines. We are also upgrading multiple systems and solutions based on lessons learned during the war. We have ramped up our production to support the IDF requirements while maintaining deliveries to our international customers.

Speaker 3

We increased production capacity at our factories by adding shifts and recruiting several 100 additional employees to support the surge in demand. The last quarter was impacted by massive recruitment and we are still recruiting new employees, mainly for manufacturing and development projects. I would like to now focus on several successful decisions that we have made as part of our long term strategy that can explain the financial results in the Q1. The acquisition of IMI was a remarkable success. The synergy between the capabilities of IMI and LBT Systems enabled us to offer an enhanced portfolio, fulfill the potential of the technological and increase our market share.

Speaker 3

There is a significant international as well as Israeli demand for the product that could not have been deployed without the acquisition of IMI. We plan to continue developing precision ammunition and increasing production. The increasing demand require us not only to operate 20 fourseven, but to grow. As such, in 2024, we plan to begin the operations at our new ammunition production site in Ramait Becca, which will operate in parallel with the IMI facility in Ramat Asharom. A good example of the successful integration of IMI into Elbit system was the announcement on May 21 of our award of a group of contracts in an aggregate amount of approximately $760,000,000 for the supply of ammunition to the Israeli Minister of Defense.

Speaker 3

The contract will be performed over a period of 2 years. Since the beginning of this world of iron war, Elbit Systems has experienced a material increased demand for our products and solutions from the Israeli Ministry of Defense compared to the demand level prior to the war. Subject to further development, which are difficult to predict, the IMOD increased demand for the company product and solutions may continue and could generate material additional orders to the company. In addition, on March 26, we announced that we were awarded an approximately 6 $100,000,000 contract to supply systems to Hanwha Defense Australia for the Australian Land 400 Phase 3 project. This project aimed to deliver advanced protection, fighting capabilities and sensor suite to the Redneck Infantry Fighting Vehicle for the Australian Army.

Speaker 3

The contract will be performed over a period of 5 years. The decision to invest in manufacturing facilities has proven itself positively impacting our order backlog and revenues and we hope that our target as stated in our previous investor conference would be reached even earlier than expected. In addition to the contract that we had received in Israel and in the Netherlands a few months ago, on May 5, we announced an initial contract of approximately $27,000,000 to supply Iron Fist active protection systems to GDOTS for upgrade the U. S. Army Bradley vehicles.

Speaker 3

The contract will be performed over a period of 24 months and has significant potential. The system provides armed platforms with 360 degree protection from a wide variety of anti armor threats such as rocket propellant grenade and up to kinetic energy tank ground in both open terrain and urban environment. This system required years of investment in R and D. There is already a lot of interest in the system and that is a good example how our advanced solutions maintain our position as a global leader and contributes to the high demand of our product internationally. On the night of April 14, Iran attacked Israel with hundreds of drones and missiles.

Speaker 3

On that historic night, Israel along with its allies successfully intercepted the majority of the incoming aerial threats with coordinated precision showcasing the talent of the Israeli Air Force and the strength of our air defense systems. Our role in helping to defend against this attack was twofold. Our simulators helped train the air crews and our strategic command and control centers of the Israeli missile defense system including the Arrow aid in the interception of the Iranian aerial threat. Our Golden Almond and Citron Trace solutions are the heart and brain of the interception system. The synergy of the two elements led to the successful defense of Israel.

Speaker 3

And with that, I will be happy to take your questions. Operator?

Operator

Thank you.

Speaker 4

The

Operator

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

Speaker 4

Yes. Good afternoon, everyone. And let me apologize, I'm out of the office right now and on my cell phone. So hopefully you can hear me okay. But, Betsy, certainly quite incredible backlog growth the last couple of quarters.

Speaker 4

I remember only 5 years ago, it was about $10,000,000,000 of backlog. So this is this will challenge your capacity, that's for sure. But let me ask this because I'm wondering if there's yet another leg up to come because the U. S. Passed a fairly substantial Israeli security supplemental, multiple 1,000,000,000 of dollars.

Speaker 4

I'm not sure how much has flowed yet, but maybe that's what you can give us insight into. To what extent do you think Elbit has exposure to the U. S. Security supplemental for Israel, a third, 50%, 75% and because it is quite substantial and over what timeframe do you think you would book orders from that funding? Thank you.

Speaker 3

Hello, Pete. Good morning. I'm you're right. It's a very remarkable backlog, and I'm sure that we'll be able to handle it and to convert it into revenues and profit. Yes, it's true, Israel is going to get an additional fund, an additional package from the U.

Speaker 3

S. And the Elbit is certainly Elbit is having part of it. I cannot mention exactly the percentage or the numbers, but we have part of this package. And we are working with our IMOD right now to discuss the details. And for sure, it will help us to strengthen our position here in Israel as well as in the U.

Speaker 3

S. Of course, these additional contracts will all most of them will be done in our oil based system of America subsidiary and our U. S. Facility.

Speaker 4

Okay. I appreciate that. I guess last question for me then. Can you talk about workforce challenges and supply chain challenges just in terms of your ability to execute on this backlog in a timeframe in which your customers want? I know you said you're working 20 fourseven, but just talk about the challenges you face there.

Speaker 3

Yes. We're working 20 fourseven. In some of the facilities, we are working in 3 shifts. And in order to meet the growing demand, we have invested quite a lot in inventories, and you can see it in the reports. And this is in order to make sure that we don't suffer from any supply chain challenges or our exposure to supply chain challenges are limited.

Speaker 3

So, we took a strategic decision to increase inventories. Of course, it cost us money. But this is the way we this is one way for us to make sure that we can meet our commitments to our customers. And this is on top of that, as was mentioned, we are recruiting 100 or even 1000 of employees. And just to make sure that we have enough workforce and the Israeli MOD allow us or we are working with IMOD to continue the work we do in Ramatasharon in parallel to the new facility in Ramat Becca.

Speaker 3

So we'll have actually 2 production sites in parallel that will enable us to meet the demand.

Speaker 4

Okay. Thank you very much. Appreciate it.

Speaker 3

Thank you.

Operator

The next question is from Sheila Kahyaoglu of Jefferies. Please go ahead.

Speaker 5

Good morning, guys, and thank you for the time. Great top line momentum, and I know you don't necessarily want to kind of commit to this 12% and should we continue to think about low double digits growth for this year just given the sustained level of demand you're seeing out of Israel? And any color you could provide it by segment on how we think about the growth trajectory?

Speaker 2

Thank you, Sheila, and good morning. This is Kobi. As you know, we don't provide guidance, but you see the order of backlog, the increase in backlog, which is 29% year over year and huge growth also in the adjusting that in the specific quarter. In the end, all the backlog is going to be turned to revenues. So we can predict ongoing revenue growth also for the rest of the year.

Speaker 5

Okay. And maybe can you talk about how much of it is tied to artillery and ammunition? And I know you don't want to put a concrete number around for 2024, but curious if you could provide some high level puts and takes on like the mix impact of that?

Speaker 2

Sheila, I can share 2 points of view. The first one, as you see in our financial results, there was an increase in our sales in Israel. The revenue in Israel increased year over year by $200,000,000 from $250,000,000 to over $450,000,000 And secondly, we announced just this week as Burtsey mentioned, a $760,000,000 order from a group of orders from the Ministry of Defense. So that is those are the details that we can provide.

Speaker 5

Okay. All right. I'll jump back in the queue. Thank you.

Speaker 3

But it's very important, Sheila, it's very important to mention that the majority of our revenues coming from the international market and it will continue to be this way.

Speaker 2

And we see the $7,000,000,000 internal targets that we have that we saw them coming over 'twenty six. We see that coming sooner than 2026 with this increased backlog.

Operator

The next question is from Omriya Forney of Oppenheimer. Please go ahead.

Speaker 6

Hi guys and congrats on a great quarter. I have a couple of questions. The first is you had a huge increase in revenues from Israel and I wondered as you got now the $760,000,000 of additional contracts of munitions, what is the gain and productivity gain and gross margin gain you're going to get from getting into full ramp up and full capacity in the Ramazzo Peca side compared to Ramazzo Pecao?

Speaker 2

So, Amari, good afternoon. As we mentioned, we're going to work in parallel both in Ramatashone and Ramatbek operational sites. So it's going to double our capacity and the work there is very intensive and 20 fourseven and few shifts every day. We are going to inaugurate the sites in Ramat Becca later this year. So it's not going to be fully operational this year, but it's going to be fully operational next year.

Speaker 2

So we are going to enjoy of course a better and modern site that will be working gradually up in capacity during 2025.

Speaker 6

And you see the full ramp up is going to be completed in the first half of twenty twenty five, is it realistic numbers?

Speaker 2

We are going to ramp up production during 2025. I think that the prediction of first half is a good one.

Speaker 6

Okay, got you. For the second question for me, I was hoping if you can get some color about the production systems and against drones, specifically accounted drone systems that maybe Elbit is looking to develop and a little bit more color on loitering munition as it's been proliferated in the Middle East and a lot of our enemies of Israel is using local munitions and inbound and what opportunities are we seeing in that business segment? Thank you.

Speaker 3

Oui, it's Buti. Are you talking about way to defeat ones?

Speaker 6

Yes, both as the kind of UAS systems, the way to defeat drones and an additional lithium ionization for attacking purposes.

Speaker 3

Okay. So let's divide the answers into 2. First, we have a very successful solution or system by the name of Redrum, which can, using unique EW capabilities and EO and radar package can detect the threat and can block it or jam it. This system is very successful in several countries. We announced, I think it was half a year ago or maybe even prior to that, a nice contract we own in the Netherlands for this system.

Speaker 3

I can tell you that the Dutch process is only one customer for this system and we see a lot of potential for that in many countries. It can be fit small drones, quadcopters and it can detect them and defeat them as well. So this is in regards to that. We have a very attractive solution in our portfolio and there is a big potential for that these days in many countries. With regards to loitering ammunition, we have a system by the name of Sky Striker, which this system was delivered to many countries as well.

Speaker 3

It's also it's a small UAV, which can growing market for fat solution, for lotterimmunitions, and we have it in our portfolio with many contract as well.

Speaker 6

Okay, great. Great and congrats on the great quarter. Thank you.

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 all participants that a replay of this call will be available in 2 hours after the conference end. In the U. S, please call 1-eight 80eight-seven 80two-four thousand two hundred and ninety one.

Operator

In Israel, please call 3,925, 5900 and internationally, please call 9,7,239,250,900. A replay of the call will also be available at the company's website at www.elbitsystems.com. Mr. Machlis, would you like to make a concluding statement?

Speaker 3

I would like to thank all 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.

Operator

Thank you, Mr. Machlis. This concludes Elbit Systems Limited's Q1 2024 results conference call. Thank you for your participation. You may now go ahead and disconnect.

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Elbit Systems Q1 2024
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