Elbit Systems Ltd (ESLT) 2023 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' First Quarter 2023 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 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 Myerson, Elbit Systems Investor Relations Director. Rami, please go ahead.

Thank you, Joni. Good day, everyone, and welcome to our first quarter 2023 earnings call. On the call with me today are Bezhalel Machlis, our President and CEO; Kobi Kagan, our CFO; 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. 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 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 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 Kobi. Kobi, please?

Thank you, Rami. Hello, everyone, and thank you for joining us today. The financial results of the first quarter of 2023 reflect the sustained demand for our leading technological solutions that supported the growth in the order backlog to $15.8 billion, up 15% relative to the first quarter of 2022. I'm encouraged that our operational activities and the cost base are gradually returning to normal following the supply chain and labor challenges in 2022. We continue to invest in the operational transformation to realize the potential presented by the large funnel of opportunities around the world, and we are on track to deliver an improved performance.

We started to report segment information in 5 segments from the year ended December 31, 2022. In our press releases for the first, second and third quarter, we will provide revenues by segment, and we report revenues and operating income of each segment in our annual report. Revenues by segment in our press releases for the first, second and third quarter, we placed revenues by areas of operation that were previously provided. The 5 portable segment are aerospace, C4I and Cyber, ISTAR and EW. Land and Elbit Systems of America, or ESA.

I will now discuss some of the key figures and trends in our financial results. I would note that the sale of the (inaudible) to FIMI Opportunity plans was completed at the end of the second quarter of 2022. In our results in the first quarter of 2023, do not include a contribution from (inaudible). First quarter revenues were $1.393 billion compared to $1.353 billion in the first quarter of 2022. In terms of quarterly revenue by segment, aerospace revenues decreased by 10% in the first quarter of 2023 compared to the first quarter of 2022, mainly due to lower airborne precision-guided munition sales, partially offset by growth of training and simulation sales.

C4I and Cyber revenues increased by 19% year-over-year, mainly due to growth in command and control system sales. ISTAR and EW revenues increased by 17%, mainly due to electronic warfare system sales. Land revenues increased by 8%, mainly due to armored vehicle upgrade sales. Elbit Systems of America's revenues in the first quarter were similar to the first quarter of 2022.

Our various geographic revenue base is important to the long-term sustainability of our business.

In the first quarter, Europe contributed 27%; North America, 24%; Asia Pacific, 24%; and Israel contributed 18% of revenues. European revenues increased mainly due to the growth in UAS, munitions and training and simulation sales. Asia Pacific revenues declined mainly due to lower precision-guided munition sales. Latin America sales increased due to C4I sales.

The non-GAAP gross margin for the first quarter was 26.4% compared to the first quarter of 2022 at 24.6%. GAAP gross margin in the first quarter was 25.9% of revenues compared to 24.2% in the first quarter of 2022. GAAP and non-GAAP gross margin in the first quarter of 2022 included approximately $20 million of expenses related to stock price linked compensation plan. First quarter non-GAAP operating income was $105 million or 7.5% of revenues compared with $66 million or 4.9% of revenues last year. GAAP operating income for the first quarter was $94 million or 6.7% of revenues versus $59 million or 4.3% of revenues in the first quarter of 2022.

The operating expense breakdown in the first quarter was as follows. Net R&D expenses were 7.9% of revenues versus 7.4% in 2022. Marketing and selling expenses were 5.8% of revenues versus 6.4% last year. G&A expenses were 5.5% of revenues compared to 6.2% last year. GAAP and non-GAAP operating profit in the first quarter of 2022 included expenses of approximately $35 million related to the stock price linked compensation plan, which, in the first quarter of 2023, were not material.

Financial expenses were $24 million in the first quarter compared to financial income of $1 million in 2022. Financial expenses in first quarter reflect the higher interest rate environment, financial expenses in the first quarter of 2022 included gains from changes in fair value of financial assets and exchange rate differences.

We recorded a tax expense of $9 million in the first quarter compared to tax expense of $8 million in 2022. The effective tax rate in the first quarter was 12.8% compared to 13.8% in 2022. Our non-GAAP diluted EPS was $1.70 in the first quarter compared with $1.22 in 2022. GAAP diluted EPS was $1.40 for the first quarter compared with $1.19 in 2022.

Our backlog of orders as of March 31, 2023, was $15.8 billion, $2.1 billion higher than the backlog at the end of the first quarter of 2022. Approximately 54% of the current backlog is scheduled to be performed during '23 and '24, and the rest is scheduled for '25 and beyond. Operating cash flow for the first quarter was $73 million outflow compared to $35 million inflow in the same quarter last year.

The Board of Directors has declared a dividend of $0.50 per share.

I will now turn the call over to Mr. Bezhalel Machlis, CEO. Butzi, please go ahead.

Thank you, Kobi. I'm encouraged by the financial results in the first quarter. The strong demand and large funnel opportunities and a series of significant contracts booked since the end of the first quarter. Over the last 3 years, we have experienced the challenges of COVID-19, supply chain disruptions and changes in the labor market. Elbit Systems has demonstrated its resilience through this period and the remarkable ability of our employees to deliver and support our customers during a very volatile period. There is still work to do to complete the operational transformation we presented at our Investor Day in March. I believe the first quarter results provide confidence that we are on track to deliver the transformation.

Elbit Systems is benefiting for the healthy demand for artillery solutions from countries and militaries around the world that have started to implement the lesson learned from the Russia-Ukraine conflict, including the critical importance of effective indirect prices. We also continue to receive orders from legacy customers. Elbit Systems has developed a comprehensive portfolio of systems and solutions for its [annual report] The portfolio includes [orbiters], (inaudible) and rocket launcher, ammunition (inaudible) component combining control system, target designator of UAV and (inaudible) system. We provide this to our customers as [selloff] solutions or as stand-alone systems.

A few weeks ago, on May 18, we announced a USD 305 million, 5 years contract to supply 20 precise reversal launching system or full pocket of (inaudible) system as well as rocket and missile of various ranges to the Royal Netherlands Army. The [full] system can launch both fully bring rockets and precision guidance workers and (inaudible) in ranges of up to 300 kilometers. The (inaudible) launchers can be mounted on broad range of wind and truck platforms, providing a significant reduction in maintenance and planning costs.

The Dutch contract follows rocket [utility contracts] from 2 opinion countries we received during the first quarter. In 2022, German defense company (inaudible) signed a cooperation agreement with Elbit Systems Land and Elbit Systems Deutschland to develop the Euro land generation European-originated system. This agreement will enable both companies to address the growing potential in the European market for this solution.

In April, we were awarded a $102 million, 8-year contract to supply a battalion of utmost [150] (inaudible) truck-mount to an international customer. The [utmost] is a combat (inaudible) designed for (inaudible) development, deployment and operations, enabling provision of price support for all loan deputies.

In May, the [Ramita LBT]conducted a life-fire demonstration of an automated [155-millimeter] (inaudible) in [Southern Asia]. This demonstration was part of the corporation agreement signed (inaudible) in 2022 to develop market and manufacture at European automotive (inaudible) sell for (inaudible). The solution combines and leverages the technological abilities of both companies and will provide a mature and relevant solution for NATO army that are planning to recapitalize and expand the (inaudible).

Elbit Systems provides a broad portfolio of market-leading war fighters in all domains, means in the air, underground, and in sea forming a single [solider] to large formation and headquarters. Our simulation solutions provide more realistic training that better prepared soldiers for a wide range of scenarios at lower cost. In May, our British subsidiary, Elbit Systems U.K., was awarded a USD 71 million contract by the U.K. MOD to provide, maintain and operate the brand maneuvering in (inaudible) system, or [GMSG], or (inaudible) on vehicle and challenges (inaudible).

The contract will be delivered over 3 years with an additional 9-year of operation and maintenance service at U.K. facility. A few weeks ago, we marked a significant milestone for our lending international flight clinic center contract with the arrival of the first 2 MP-46 aircraft at the International Pilot Training Center in Carmona. The MP-46 aircraft are equipped with Elbit Systems, integrated virtual avionics that simulates combat and flight scenarios to enhance the (inaudible) to (inaudible) The (inaudible) flight school contract is on track and delivering as planned.

At our recent Investor Day, we discussed the investments we are making to upgrade and expand our (inaudible) for as part of the transformation of our company and enable our internal target of revenue of USD 6.5 billion -- or USD 7 billion and operating margins around 10% in the future. In May, we opened our new manufacturing facility in North Charleston, South Carolina. The new facilities will employ hundreds of people and assemble large vehicle systems for the United States military and allied nations, including the mission command platforms for the U.S. army, Army CPI2 program and the [Sigma Holter system] for the Israeli (inaudible) force. Construction of our new ammunition production site in (inaudible) is on track, and it should be up and running from 2024. The new state-of-the-art facility will benefit from the growing demand of munition.

Last week, thousands of Israeli employees for (inaudible) during (inaudible), which means they're doing good at Elbit, volunteer contribute and give back to the local communities. During this year, Elbit (inaudible) with our employees contributed more than 3,000 hours featuring dozens of projects around the country with Holocaust survivors, (inaudible) as well as younger that needs a healthy enhanced. I'm proud to see the enrollment of thousands of (inaudible) employees around the world that we continue to participate activities that benefit out.

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

(Operator Instructions)

The first question is from Sheila Kahyaoglu of Jefferies.

Just wanted to ask a little bit deeper into the segments, if you don't mind, the aerospace sales to start with, maybe were down 10% year-over-year, I believe. Is this the precision (inaudible) ammunition (inaudible) related to a single program? And how do we think about sort of that return to growth there?

The answer to the question is a reduction in airborne precision-guided ammunition sales that we had at the first quarter of 2022. And due to program mix, we didn't have that substantial amount of (inaudible) precision guide ammunition sales in the first quarter of 2023. This is the main explanation for this decline.

Sheila, I would say -- I want to add that, if you remember, last time we discussed the different segments, we mentioned also the importance of looking on the entire corporation because there are many synergies between the divisions. One quarter, one division is doing better than the others also, there's also a mix of projects, which are also impacting the results. So I like to remind this mark again. And to make sure you see the all of the thing -- the overall integrated future, I think that's a better the performance of the corporation.

Okay. No, that's helpful color. And then maybe if you could just go to land for a second. Your partners with BAE on [OMSC]. That program. Maybe if you could just provide us an update coming on that program and how you're thinking about the opportunity and next steps in this sort of armored vehicle upgrade?

This opportunity is -- as you know, it's a tender, and we are participating in the tender in more of the teams with our solution. And we are waiting for all the decisions actually. We expect decisions (inaudible) about the first phase of the project. And that's more or less the status.

The next question is from Atinc Ozkan of Wood & Company.

I have a couple of questions. The first one is, in your previous investor call, you mentioned that following this transformational couple of years. You are now in a position with infrastructure to support annual revenues of $6 billion to $7 billion with improved profitability. And you also mentioned that you think you will hit 10% operating margin target soon. Can you elaborate or provide some more granularity. When do you expect to basically hit these levels both on top line and operating margin levels. Is it some kind of midterm guidance? Or do you think it's going to be achievable in 2023, 2024? That's my first question.

And my second question is, given that you'll be completing most of your CapEx up cycle with the new ammunition plant in negative operational next year and South Carolina plant already behind us and the 1 ERP investment is already completed, but do you see your CapEx budget -- annual CapEx budget or annual CapEx [revenue trend] going forward.

This is Yossi. Regarding your first question, I think the best indicator to look at is our backdrop of orders. We are close to $16 billion backlog of orders growing very nice double digit year-over-year. Our revenues have grown year-over-year, probably in the mid-single digits, as you can see so far. And we -- as we explained in the past, we are making every effort to close the gap between the growth of the backlog and the growth of the revenues, of course, by increasing the revenues.

If you look at our press release today, you see that of the $15.8 billion of backlog, about 54% are planned to be transformed in revenues in the next 7 quarters. That means this year and next year. Just by making a simple calculation, you will see that we probably will be in the $6-plus billion next year and getting closer to the $7 million number, maybe a year or 2 years after that. So this is the range of the top line growth driven by the backdrop of orders that we already have. So it's no speculation. It's just a simple calculation of the backlog transformation.

In parallel, as you see in our investors meeting explained, we have initiated all the efforts to build the operational capability to do that, actually to manufacture and deliver to our customers and in the various places in the world, the various facilities, and this is underway. Some of them are completed. Some of the -- will be completed during 2024.

So all of this would enable us to perform. Regarding -- and of course, by growing the top line and by keeping the overhead rates and G&A under control, we expect to return to the level of operating profit that we used to be several years ago. So this is first question. I believe the second question, I will turn it over to Kobi to respond.

Thank you, Yossi. As Yossi explained, we are currently in the process of building our infrastructure to support the transformation of backlog to revenues. This is involved with CapEx investments. In terms of specifics, the South Carolina facility is almost finished. We actually started working there, and most of the investment there is done. The 1 ERP investment is also in process of conclusion. We hope that the last big division will go live at the first of July this year.

And we are still in the cycle of CapEx investments in the Ramon Makhtesh-Negev Desert, South of Israel ammunition plant to actually have all the facilities that will be relocated from the (inaudible) facility to the [Meggitt] facility. So we are expecting a modest decline in CapEx investments due to the conclusion of the -- mainly of the ERP system, but we still invest heavily in our production capacity in order to having the backlog-transformed revenue.

Okay. Crystal clear. And a follow-up just with a very short question regarding aerospace segment. I do remember that you guys have now additional capacity put into operation in your production line for drones in Israel. Is it possible to basically tell us what the waiting line, if a client comes and orders you. I don't know, it does no drones right now. Just to give you an example from your unlisted peer in Turkey, [Baykar] has now a 3-year waiting line for drones. I'm just trying to have an idea whether you have the same kind of bottleneck.

We are expanding our production facility -- our production capabilities for UAVs. We are building a new facility right now in the city of (inaudible), which is not far away from Jordan and Israel. And this is on top of the facilities we already have. And this facility should go live by the end of this year, which will enable us to meet the growing demand for UAVs that we are seeing around the globe, and to enable us also to deliver to our customer in a relatively short period of time.

The next question is from Ella Fried of Bank Leumi.

I have actually a few. And the first question is, what was the reason for inventories going up? I mean, it could be future growth, rising prices from materials, [slight] delays or it means investment in long-term projects?

This is Yossi. As we indicated back in our investor event, we are planning this year, the ['23] year, to have each quarter. We are building each quarter. to transform the backlog to revenues with increased sales quarter-after-quarter in '23. That means that in order to be able to fulfill this backlog for '23, we needed, of course, to buy raw materials, to invest more in [wheat] and we were doing that in the first quarter. This is according to our plan, to have those inventories ready to be transformated to revenues in 2023 and some of that in 2024. So that is just a way for us to build the additional revenues -- that increased revenues that we're expecting in the coming quarters.

Okay. So we should be looking at it as a positive indicator. Okay. I have 2 -- a couple of more questions. In 2 weeks, you're going to Paris, in 2.5 weeks, you're going to Paris (inaudible) And you obviously will return with even more orders and with even more massive backlog. And it's just a follow-up to all these questions that were asked. How do you plan to cope with even more massive backlog in the short, medium term? I mean, it seems that you will be really getting a lot of orders and attempts to order. And I mean will you be taking more distant orders like the American leading companies or other? Or implementing any other strategy more -- I don't know if you have the possibility for more outsourcing.

Thank you, Ella. This is Butzi. You are right. We see a growing demand for our products and systems and we see a very big funnel ahead of us. And that's exactly the -- and we took it an account. That's exactly why we took a decision to invest to enhance our facilities (inaudible) Just to remind all of us, we expand our (inaudible) facility here in the north part of Israel to port more [Elbit Systems] revenues. We expand our radio facility in the north part of the country in order to support growth and revenues of the C4ISR and Communication Equipment division. And the same we did also at (inaudible) in order to support more revenues coming from our ISTAR division.

We mentioned already the new UAV facility we are building these days, and we are going to (inaudible) by the end of this year. And that's on top of the much better investments, which we started to build 3 years back and will go live next year. That's only in Israel, a broad new facility in the U.K., in South Carolina, new facility in Bristol U.K., which we are going to [go] it very soon. A new facility, which was in (inaudible) already in Germany to deliver more equipment to our European countries to open new customers.

So we took into account the growing demand. And we have mature products. We are local in our markets via the dozens of subsidiaries we have all of the Europe, more around the globe. And we will be able to take more orders from the growing demand that we see, and to convert it in relatively short period of time to revenues and to profit. And because of that, we feel confident to mention the $6.5 billion to $7 billion revenues that we will be able to achieve. This is a level of 10% (inaudible)

Well, it sounds like a lot of work. And I have another follow-up question. Does it mean that we should be looking again at your pipeline? I mean, this also caused for some kind of, I don't know, M&A or any kind of new acquisitions pipeline that will help all these workloads?

Yes. But this is -- yes, the answer -- first, Ella, the answer is yes. But this is not just to handle the -- the main reason (inaudible). There are 2 main reasons for it, to do M&A. One is to expand our market position. And because of that, for example, we took the decision to acquire as part of the U.S. -- in order to build a stronger position in the U.S. Navy. And because of that, we took a decision to acquire a nice vision in the U.S. of (inaudible) or (inaudible) positions on U.S. These are just 2 examples.

So 1 reason is to look for new markets, the new market position. The other reason is -- and we're not talking about new markets, and new market position, this is mainly in the U.S. and Europe. And the other type of M&A we are looking is new technologies. And another example for that is the acquisition of (inaudible), which we acquired a few years back in (inaudible), which brought us a new technology to the company.

So we have proved already in the past that we know how to do M&A in a very good way. We know how to great synergies between them, and the new companies that we are acquiring to the portfolio (inaudible) the current portfolio of (inaudible), and we know how to manage it. And so we certainly look for more opportunities to expand the company in these 2 aspects. On the same time, I would like to mention that we are -- all the time, we are reviewing our portfolio. And we are making sure that what we have in our portfolio fits the strategy of the company today. Because of that, a year ago, we took a decision to divest a (inaudible), which was a great company.

But we took a decision to divest it not because it was not a good company. The reason for that because it was not [synergistic] to the portfolio. So it took a design to divest it, and we're happy that (inaudible) decision to acquire for us. It was a good deal for us and for them. So we continue this process as well. The parallel of looking for new M&A where we are checking our portfolio at the time, making sure that the current portfolio which we have fit the current strategy of the company.

So can you shed a bit more light in both directions or we have to wait?

I have nothing special to report right now. But I can tell you that we are both -- we are working both directions and (inaudible)

(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 972-3-925-5900. A replay of this call will also be available on the company's website, www.elbitsystems.com. Mr. Machlis, would you like to make a concluding statement?

Thank you. I would like to thank all our employees for their continued hard work and contribution to Elbit Systems success. For everyone on the call, thank you for joining us today, 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 2023 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.