Elbit Systems Ltd (ESLT) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems First Quarter 2020 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. You should have all received by now the company's press release.

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

Thank you, Ray. Good day, everyone, and welcome to our first quarter 2020 earnings call. On the call with me today are Butzi Machlis, our President and CEO; and Yossi Gaspar, our Chief Financial Officer. 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. Yossi will begin by providing a discussion of the financial results, followed by Butzi, who will talk about some of the significant events during the quarter and beyond. 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 Yossi. Yossi, please.

Thank you, Rami. Hello, everyone, and thank you for joining us today. Before reviewing our financial results, I would like to address the COVID-19 pandemic and the global economic environment. We are monitoring the situation closely and are adhering to the instructions of the governments of the various countries in which we operate.

During the first quarter of 2020, our businesses were not materially impacted by the pandemic. Subsequently, some of our businesses have begun to experience certain disruptions due to government-directed safety measures, travel restrictions and supply chain delays. As of today, the financial impact of these disruptions has not been material. As we reported on April 13, we have implemented a series of actions to protect the safety of our employees, maintain business continuity and our supply chain and leverage our abilities to assist and protect our communities. All of these actions remain ongoing.

We have also initiated a series of cost-control measures to mitigate any financial impact on the company in parallel to the measures we are taking to maintain business continuity and deliveries to our customers. We believe that as of the end of the first quarter, Elbit Systems has a healthy balance sheet, adequate levels of cash and access to credit facilities that provide liquidity when necessary.

We have prioritized cash management and adequate cash reserves to run the business. During the quarter, we drew additional cash from our existing credit facilities to increase our financial flexibility. We utilized some of our financial resources to secure our supply chain and build buffer inventories to mitigate the potential impacts of COVID-19.

The extent of the impact of COVID-19 on the company's performance will depend on future developments, including the duration and the spread of the pandemic, the measures adopted by governments to limit the spread of the pandemic and resulting actions that may be taken by our customers and our supply chain.

Turning now to our results. As we do every quarter, we will provide you with both our regular GAAP financial data 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 may find all the detailed GAAP financial data as well as the non-GAAP information in the -- and the reconciliation in today's press release.

Overall, we are satisfied with our performance in the quarter. We booked a number of significant contracts that indicate continued momentum across our end markets and sustained demand for our products and services. Our backlog of $10.8 billion provides good visibility and reflects the long-term nature of our business. It generally takes time to finalize contracts in our industry, but once we book them, they often provide many years of revenues. I should also note the acquisition of Elbit Night Vision from L3 Harris was closed on September 15 last year and was, therefore, consolidated into the income statement of Elbit commencing the date of the acquisition.

I will now highlight and discuss some of the key figures and trends in our financial results. Our first quarter 2020 revenues of $1.071 billion were up 5% year-over-year. In terms of revenue breakdown across our areas of operation, airborne systems sales at 36% of sales increased year-over-year primarily due to growth in military aircraft systems to U.S. customers. Electro-optics accounted for 11% of total sales and also increased year-over-year mainly due to the acquisition of the Night Vision operation in the U.S. Our diverse geographic revenue base is important to the long-term sustainability of our business.

In the quarter, North America was the largest, contributing 34% of our revenues; Israel was 23%; Asia-Pacific, 20%; and Europe, 17%. The growth in North America in the quarter more than offset lower revenues in Israel, Europe and Asia-Pacific. The growth in North America was primarily due to the airborne system sales, as mentioned, and the acquisition of Elbit Night vision.

For the first quarter, the non-GAAP gross margin was 27.6%, similar to the first quarter of last year at 27.7%. GAAP gross margin was 27% compared with 27.2% for the first quarter of last year. The first quarter non-GAAP operating income was $90.4 million or 8.4% of revenues compared with $84 million or 8.2% of revenues last year. GAAP operating income was $80 million versus $76 million last year.

The operating expense breakdown in the quarter was as follows: net R&D expenses at 7.5% of revenues versus 7.6% last year.

Our investment in R&D as a percentage of revenues is significantly above the average of our industry, enabling us to maintain and build our technological leadership and underpins our long-term prospects. Marketing and selling expenses at 6.6% of revenues versus 7% last year, and G&A expenses at 5.4% of revenues versus 5.2% last year.

Financial expenses for the first quarter of 2020 were $12.5 million compared with $13.9 million last year. Other income of $1.2 million was impacted by a $3.2 million gain from reevaluation of Elbit's share of Cyberbit, our commercial cyber subsidiary in the first quarter.

On May 19, we announced the $70 million investment by Charlesbank Capital Partners in Cyberbit. Elbit received $49 million for a portion of its shares, and $22 million was invested in Cyberbit. Following the investment and sale of its holdings, Elbit Systems is now a minority shareholder in Cyberbit. Cyberbit is held at fair value on our balance sheet. As I just mentioned above, in the first quarter, we reevaluated Cyberbit as the negotiations on the investments were going on.

As a result of the closing of the Cyberbit transaction last week as well as the completion of a sale-and-leaseback real estate transaction by Elbit Systems of America last week, we expect to record income before tax of approximately $40 million in our financial results for the second quarter of 2020, which will be released in August this year. This income will be eliminated on our non-GAAP results due to the nonrecurring nature of the income.

During the second quarter of 2019, Elbit Systems raised $185 million through the sale of treasury shares to institutional investors in Israel. This increased our share count by about 3% to 44.2 million shares, having a slight corresponding impact on our earnings per share relative to the first quarter of 2019. Our non-GAAP diluted earnings per share was $1.63 in the first quarter compared with $1.54 in the first quarter last year.

GAAP EPS was $1.44 versus $1.18 last year. Our backlog of orders as of March 31, 2020, was 10.8 billion, 1.1 billion higher than the backlog at the end of the first quarter of 2019 and 760 million higher than that at the end of 2019. Approximately 59% of the current backlog is scheduled to be performed during the remainder of 2020 and 2021, and the remainder is scheduled for 2022 and beyond. This ratio is broadly similar to that of the first quarter of last year.

Operating cash flow for the quarter was $10 million outflow compared with $47 million inflow in the same quarter of last year. Our cash flow in the quarter reflects payment to our supply chain and inventory buffers we built during the quarter to mitigate potential COVID-19 disruptions, as I mentioned previously.

Elbit Systems continues to manage its balance sheet conservatively. Besides our cash, we have access to multiple credit lines that can provide us with additional liquidity. We drew cash from these facilities during the quarter to increase our flexibility and facilitate the smooth running of our business. This has increased the cash levels on our balance sheet to relatively higher levels.

In February, Midroog, the Israeli rating agency affiliated with Moody's, reaffirmed our AA1 local rating on our Series A notes following a review of our financials. The Board of Directors declared a dividend of $0.35 per share for the first quarter of 2020. The Board decided that the reduced dividend for this quarter was appropriate in the current environment as part of the broader effort relating to all of our stakeholders with respect to combating the potential impact from the COVID-19 pandemic.

I shall now turn over the call to Mr. Machlis, our CEO.

Thank you, Yossi. I also would like to start by discussing our priorities and measures we are implementing to address the COVID-19 pandemic. Since the outbreak of the COVID-19 pandemic, our priority has been to protect the safety of our employees, maintain business continuity in our supply chain and leverage our abilities to assist and protect our communities. I'm particularly proud of the innovative spirit of our employees that have worked rapidly to adopt to our technologies to help the medical teams fighting the pandemic. We developed a stellar command-and-control system for medical staff based on our market-leading command-and-control technologies. This system has already been rolled out in 16 Israeli hospitals.

We have also developed a sensor system to remotely read physiological parameters to protect health worker. And following the request for the Israeli government, we are leveraging our manufacturing capabilities to produce ventilators. KMC, our medical technology subsidiary based in New Hampshire, designs and manufactures diagnostic equipment and medical devices for leading health care companies. KMC has seen increased demand growth due to the COVID-19 and is actively supporting a number of our customers by accelerating some product lines to support COVID-19 diagnostic testing, blood management applications and ventilators while exploring a range of export opportunities for these and other products related to the combating COVID-19.

We have implemented a series of protective measures to protect our employees including adding shift and working from home where possible. As a critical industry, manufacturing at almost all our facilities around the world continued as planned as we work to deliver on our commitment to our customers. I'm pleased that most of our operations are starting to return to levels similar to those at the beginning of the year.

We have allocated additional resources to secure our supply chain and support timely delivery of our products in order to overcome possible disruptions related directly or indirectly to the pandemic. While the current situation presents unique challenges, it could also provide Elbit Systems with certain opportunities to leverage the global market position we have achieved and advance technologies we have developed in recent years.

I would highlight our diverse geographical client base that has taken decades to build and in which we invested significantly to maintain. Our broad portfolio of capabilities enhance the effectiveness of platforms and solutions in a cost-effective manner, helping our customers to accomplish more mission at a lower cost. As Yossi mentioned, we have initiated a series of efficiency measures relating to our operations and -- that strengthen our balance sheet to help mitigate potential impact of COVID-19.

Moving to the business and the quarterly results. I would like to discuss the significant and strategically important EW contract received in recent months from customers in the U.S., Europe and Asia Pacific that continued to the growth in our backlog -- that contributed to the growth in our backlog in the first quarter.

Elbit Systems has been an Israeli Defense Force -- Forces' electronic warfare center of excellence for many decades and is developing the next-generation of EW systems for the Israeli Air Force, Navy and ground forces. We are one of the world's first companies to develop influence missile detection system. The Israeli Air Force decided to equip its aircraft with our systems. And following the success in the Israel airports, a number of other countries around the world have chosen to equip their aircraft with Elbit Systems' Missile Warning Systems. In February, we were selected by the German Air Force to supply EW systems for their CH53 helicopter. This followed the contract from the Portuguese Air Force in October 2019 for EW systems for their new KC-390 transport aircraft. Under this $50 million contract, Elbit Systems will supply a complete EW suite for the aircraft comprised of radar and Laser Warning Systems, IR Missile Warning Systems, countermeasures, dispenses, DIRCM and an Active ECM POD system.

In March, the U.S. DoD announced the award of Elbit Systems of America of a multiyear IDIQ contract with a total value of up to $471 million for our Missile Warning System for the National Guard and Air Force Reserves [at 16th]. This is our first EW contract in the U.S. and is an important recognition by the U.S. Air Force of Elbit Systems' market-leading EW capabilities.

In April, we received an approximately $103 million 3-year contracts to supply comprehensive EW suite for an Air Force in Asia country -- in an Asia country. As Yossi mentioned last week, we will announce the $70 million investment by Charlesbank Partners in Cyberbit, our cybersecurity affiliates that provides market-leading commercial training system for cybersecurity teams. The investment should enable Cyberbit to further invest, grow and realize its significant potential. We will use this opportunity to derive the capital gain and cash return to Elbit Systems while maintaining a minority stake that will allow us to endure any future upside. We continue to invest in our defense cybersecurity capabilities that are fully integrated within our core portfolio.

In summary, Elbit Systems has continued to work hard in recent months to maintain deliveries to our customers and protect our employees. It is too early to assess the impact of the COVID-19, but I am encouraged that our activities have begun to return to pre-pandemic levels. Our backlog continues to provide us with significant visibility, and we continue to see significant potential around the world for our leading high-technology solutions as we work to generate value for all our stakeholders, our employees, our customers, our suppliers and, of course, for you, our shareholders.

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

(Operator Instructions) The first question is from Pete Skibitski of Alembic Global.

Yes. I apologize if there's any background noise. I'm traveling. But maybe we could talk about cash flow first. You guys, I think, had high expectations to start off the year for cash flow. I think it was a little lighter than expected, but I imagine perhaps COVID was an impact, and it sounds like you helped out your suppliers a bit. So maybe you could talk a little bit more about what impacted cash flow in the first quarter and then how that potentially could unwind the balance of the year? And maybe we can start there.

Okay. Pete, this is Yossi. Regarding cash flow, yes, we did 2 things -- 2 major things in the first quarter. First of all, we did collect on some of the late cash from our Ministry of Defense here in Israel. However, we didn't get all of it. We are in a process now in the second quarter to further collect from them. So that is one thing we did.

The other thing, we did use our cash to increase our inventories, to have some buffer inventories to enable us, I would say, independence almost for our deliveries, not being dependent on late deliveries from our supply chain. The increase in the inventory, if you look at our balance sheet, was close to about $80 million. And that has also used up cash.

The third item, if you again look at our inventory, our balance sheet, you would see that we have paid out to our suppliers something close to about $100 million, reduced our payment -- increased our payments to suppliers in the first quarter to enable them to operate properly to reduce risk and, again, to help our supply chain. Of course, by the end of the day, they are partners in our business. All of that, of course, has created the situation that we reported, negative of slightly less than $10 million of operating cash flow. We expect during the year to continue to collect the cash from our customers, and that will probably -- will definitely improve our operating cash flow.

Okay. Okay. I appreciate it. And then maybe give some detail also on the cost savings measures that you've implemented across the company. It sounds like with COVID coming through that you really focused on taking out costs. So maybe you could touch on that.

Okay. I will address and maybe Butzi will add on, on this. We have analyzed our cost basis during the first quarter and have taken some measures. Some of our people, of course, were not very effective in the environment that there were no flights. And most of our business is international. So we had to reduce their level of activity during the first quarter. That is one aspect we did. We have reduced -- we haven't used actually a temporary reduction in the salaries of management, executives in the company. We have actually reduced significantly our overhead expenses wherever possible and stopped any overhead things that -- expenses that could be delayed to a period that will be after the COVID-19 time frame.

We did also review some of our short-term and long-term and critical engineering activities so that the efforts are focused for doing, in the midterm and in the short term, what is absolutely necessary and delay whatever is not critical in the performance of the programs and the development activities. So all of this -- I would also mention that we -- yesterday, when we had our Board meeting, we were nicely -- as management, we were nicely surprised by the initiative of our Directors to suggest cutting their payment -- temporary cutting their payment, which is probably not material for the overall performance of the company, but it definitely sends a very positive sign of -- to everybody supporting the company.

I just want to add that we are also working with our suppliers to use -- to encourage savings and to reduce our cost as well. And I'm happy to say that they are very supportive in helping us to reduce the supply chain cost as well.

Okay. I appreciate it. Maybe one last one for me, and then I'll get back in the queue. But from a sales perspective, it looked like the organic revenue growth in the first quarter started off kind of low single digits, but you've had this tremendous backlog growth. So I'm wondering, are you expecting organic sales growth to accelerate the balance of the year? Or is there still -- is it still kind of hard to tell globally with the -- because of the impact of COVID?

I think it's a little bit too early to tell because of the COVID-19 situation. Presently, we did not -- as I mentioned earlier, we do not see a material impact. However, we do sense a little bit of a slowdown in some areas. It very much depends on how early we will get out of this situation, and that will strongly impact, of course, how our revenue growth will show. Presently, I would say we cannot give you a better answer than that.

The next question is from Sheila Kahyaoglu of Jefferies.

So I guess, following up on Pete's question, can you clarify for me the comments on the supplier payments? I think you mentioned $100 million. I might have missed the inventory amount in terms of -- was that all Q1? Or is that your expectation for all of 2020? And how do we think about receivables and the timing of the Israeli government payments?

About the payables, if you look at our balance sheet as to the payable number by the end of 2019 compared to the payable of the first quarter, we reduced the payables significantly. That is the -- close to $100 million, $90 million or some number close to that. So that is one. We paid out to our suppliers so that they would be in a significantly stronger position to perform their responsibilities. So that is the payables in our balance sheet.

Regarding the inventories, they grew by about $80 million, and that is in order to enable us, as I mentioned earlier, to be able to supply our products in time to our customers and not being dependent on critical suppliers chain. So this is the second item.

The third item, the receivables, they did not change a lot if you look our line on the balance sheet. And we expect to receive those receivables during the year and collect that. Still, our Ministry of Defense, a little bit behind the time frame for the paying their debt. But we have intensive discussions with them and now that there is a stable government in place. And hopefully, there will be a reviewed budget very soon. So it looks like that everything will be in line to solve this issue.

Okay. That's super helpful. And then maybe just given the diversification of your backlog geographically, how do we think about what's going on? And I know there were some comments in the prepared remarks. What are you seeing from international governments in terms of defense budgets? Where are you seeing the areas of most strength and perhaps some pockets of weakness?

It's -- we don't see a major change right now from the original plan. We see -- in the U.S., we see additional investments in defense spending, and we enjoy from that. We see it also in other areas. And this is mainly to support the local industry. And we are lucky to have many subsidiaries all around the world, and these subsidiaries are in a good position to get additional orders to create more jobs and to support the local economy. We see stability in Israel, in Asia and in the EU right now. It's too early to judge what will happen in the future. Because of that, we are conservative, as Yossi mentioned. We are trying -- we are -- we have good strong balance sheet and we're in a good liquidity situation. And I believe that in the coming -- in the next quarter or maybe the quarter after that, the picture will be a bit clearer. And then we can understand where the direction is going. We are in a good position by having a large portfolio and a strong global presence. So we are able to deliver -- to support different needs and also to help boosting local economies. And I believe that, that's a big strength of the company, and it will help us to overcome difficulties in other markets, which might happen.

Sure. That's super helpful. And then just on the C4ISR market, what are you seeing there? I think the business declined in Q1? Is that some sort of seasonality in that segment? And how do we expect it to sort of grow for the rest of the year?

No. We -- on the contrary, we see a lot of potential for us in the C4I domain in many places. And just to remind all of us, we have been selected to provide the huge contracts for communication in Switzerland -- contract communication in Switzerland. We didn't receive this contract yet. We hope to get it by the end of the year. We are also in a very good position in the Netherlands to get follow-on orders and also in Australia and in other markets. So there is a lot of potential for us in the area of C4I. We really believe that we are in a leading position in this domain. And there is a lot of interest and a lot of potential.

There is a follow-up question from Pete Skibitski of Alembic Global.

I wanted to see if we can get a little more color about your exposure. Maybe just on a 2019 basis, your exposure to commercial aerospace and business aviation. I know particularly in business aviation, you do the electro-optics and some of the Gulfstream jets, I believe. So maybe you could size that business for us overall, commercial and business jets. And I imagine that might even have greater headwinds this year because of some of the slowdowns.

In the commercial -- Pete, this is Yossi. In the commercial field, aviation field, we have actually 2 major branches of activities. One is related with the commercial avionics part, which the acquisition that we did in the U.S., Universal Avionics, is part of that. And also what we had before is the operation for Night Vision and adverse weather landing that we had previously with Gulfstream that you mentioned and some other businesses in Europe in that area. So we have probably -- in that branch, we have probably a couple of -- about a couple of hundreds of millions of dollars of business. And we did see a little bit of effect of a down -- of a decline in that. But I wouldn't call that material, several tens of millions of dollars per year on average. And that is in the recent quarter. I mean, if I average it over the whole year. So nothing material, I would say, there.

The other branch that we have is a branch related with the composite materials that we manufacture parts for major aircraft and also for commercial aircrafts. Boeing is one of our customers, but there are some others as well. Here, we have very long-term contracts, multiyear contracts, firm-funded contracts that, presently, they are not affected, and we deliver on time as requested by our supplier. I would say we are probably a third or fourth tier in that level. So any change in the requirement of number of airplanes and so on, if that will have stayed with us for 3 or 4 years, then yes, we would be affected. However, the military side of that is very strong, and that is -- the commercial part is only about several tens of millions of dollars. So in total, we did not really see a strong negative impact on that.

Okay. Great. Just one last one for me, a more minor question. On the Cyberbit transaction, can you remind us -- I think you already were not booking Cyberbit revenue, right? You were only booking the EBIT. So nothing should meaningfully change post that transaction from a revenue perspective. Do I have that right?

You are right. All the commercial part was not consolidated in our statements at all. So the military, the defense cyber, is consolidated in our statements. It's part of our C4 division, and it is actually a very good business and growing.

And this element will continue to be with us.

(Operator Instructions) 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 (888) 782-4291. In Israel, please call 03-925-5900. And internationally, please call 9 (723) 925-5900. A replay of the call will also be available at the company's website, www.elbitsystems.com.

Mr. Machlis, would you like to make your concluding statement?

I would like to thank all of our employees for their continued hard work, particularly in these challenging times. 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. First Quarter 2020 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.