Q3 2020 Elbit Systems Ltd Earnings Call
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Ladies and gentlemen, thank you for standing by welcome.
From third quarter 2020 results conference call, all participants and a listen only mode following that.
Management faulty punctuation instructional think of and for the question and answer session.
As a reminder, this conference is being recorded you should have already seen by now the company's press release and it is available on the news section of the company's website Www <unk> Elbit systems stuff.
I would now like to hand over the call to Rami Myerson Elbit system Investor Relations Sir on me.
Please go ahead.
Thank you Donna good day, everyone and welcome to our third quarter Twentytwenty earnings call on.
And on the calls me today on what seem on Smith, our president and CEO and you'll see us from our Chief Financial Officer, before and again I would like to point out that the safe Harbor statement and the company's press release issued and here today.
From the content on this conference call Yossi will begin by providing a discussion on the financial results.
Let's see who will talk about some of the significant events during the quarter and be on he will then turn the call over to a question and answer session, what's that Oh, dark and I'll turn the corner over to Yossi Yossi. Please.
Thank you Rami.
Hello, everyone and thank you for joining us today.
The results of our third quarter reflected resilience on Elbit systems. This sustained demand for all products and services and the operational improvement that you said results and initiatives. We have discussed with you in the bus.
And sure all from me I wish COVID-19 has resulted in a significant sold on in commercial and traffic and the industry expense for cash that the commercial and tragically company to the 29 gene level.
Will likely take and number of years and.
It systems commercial aviation exposure is relatively small and as a percentage of revenues.
But we are not immune to the slowdown in the market.
Our third quarter results include the 60 million non cash expense for the betterment of commercial aerospace assets and inventory write offs and not a result of the impact on the Cobi 19 on demand for products and services that EBIT systems supplies to the commercial aviation markets.
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Excuse me these expenses have been reported and maintaining the cost of revenue line item in the PNM and have been excluded from our non-GAAP results. As we believe these expenses are not true presenter Tivo and beach and get our ongoing business.
The recent news on COVID-19 vaccine are encouraging and we continue to monitor and distillation closely while adhering to the instructions from the governments on the various countries in which we operate.
Turning on 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 these non-GAAP information provides additional detail to help understand the performance of the ongoing business.
And find all the details GAAP financial data as one of the non-GAAP information and the reconciliation in todays press release.
The non-GAAP information is particularly relevant this quarter as the third quarter results in 29 and included a one off capital gain from a sale and leaseback transaction and he's right and the third quarter results on this year, including to been Doherty write offs and impairment as mentioned above.
Overall, we are satisfied with the improved and performance in a challenging environment, our order backlog and revenues increased year over year and in comparison to the previous quarter.
The improvements in profitability, reflecting increased focus on operations as well as the measures we have implemented to mitigate the financial impact on.
COVID-19 and them.
On backlog of orders as of September 30, Twentytwenty was 10.9 billion more than 1 billion higher than the backlog of DNA and the end on the third quarter of 2019, and 55 million higher than that at the end of the second quarter of Twentytwenty.
The order backlog is equivalent to more than two years on revenues and provides good visibility into the future.
I should also note that day acquisition of Elbit night vision from L. Three Harry's closed on September 15, 2019, and was therefore consolidate and team to all financial statements commencing that the data on the acquisition.
I will now highlight and discuss some of the key figures and trends on our financial results.
Our third quarter Twentytwenty revenues were 1 billion and on $154 million in terms of revenue breakdown across the area. So from operation and then systems sales accounted for 29% of total sales and increased year over year, mainly due to precision guided from initial sales to customers and.
North America and Asia Pacific.
And next optics accounted for 10% to flow to sales and increased year over year, mainly due to the acquisition of Elbit night vision.
Before I saw at 25% of sales declined year over year, primarily due to lower radio sales to Latin America.
Our diverse geographic revenue base is important to the long term sustainability of our business in the quarter North America was 30% of total revenues.
Was the largest geographic area, followed by Israel, and 25% Asia Pacific and 22% Europe at 19% and Latin America and 2%.
Gross and Newsweek and was driven by tank fire control systems and the decline in Latin America was due to lower C for Isight assays as much.
For the third quarter, the non-GAAP gross margin was 26.7%.
From the 26.3% in the third quarter last year.
The improvement reflects increased focus we have placed on operation on improvement that includes multiple initiatives and workflows.
GAAP gross margin was 20.9% compared to 26% the third quarter of last year as a result of the non cash expenses related to inventory write offs and asset impairment and due to the impact of the COVID-19 as mentioned above.
First quarter non-GAAP operating income was $93 million or 8.2% of revenues from fit was $81 million or 7.3% on revenues in the third quarter of last year due to higher gross margin and lower operating expenses.
GAAP operating income in the quarter was 24 million versus 102, moving in the same quarter last year. Following the inventory write offs and impairments our GAAP operating income in the third quarter of 2019 included and 28 million capital gain related to a sale and leaseback transaction in Israel.
The operating expenses breakdown in the quarter was as follows net R&D expenses at 8% on revenues versus 7.2.
And into third quarter of last year.
Cutting and selling expenses declined to 6.3% on revenues versus 6.9% last year due to reduced travel and participation in trade exhibitions.
DNA expenses were 4.5% of revenues versus 5.2% last year.
Financial expenses for the third quarter Twentytwenty were $9.7 million compared to 18.5 million last year, mainly due to changes in the shekel dollar exchange rate in the period.
The effective tax rate and third quarter of Twentytwenty was 15% higher than denying the half percent tax rate in the third quarter 2019, mainly due to the geographic spread of the income.
Which included the write off in the quarter.
Income from and affiliated companies and partnership was $4.9 million versus a loss of 4.4 hundred 70000 during the third quarter 29 Pete.
Due to a 2.3 million write off of an investment.
And as company and these late last year.
Our non-GAAP diluted EPS was $1.64 cents in the third quarter compared with $1.33 cents in the third quarter last year.
GAAP EPS was 38 cents versus $1.63 cents last year.
I'll back on mobile orders as of September 30, Twentytwenty was 10.86 billion 1.1 billion higher than the backlog at the end of the third quarter of 29 feet and 55 million higher than that and the end of the second quarter of 2020.
Approximately 46% of the current backlog is scheduled to be performed during the remainder of Twentytwenty and Twentytwenty, one and the rest is scheduled for Twentytwenty two and beyond.
This ratio is broadly similar to that on the third quarter of last year.
Operating cash flow for the quarter was a negative of 63 million and component was a negative $49 million in the same quarter last year and reflects on working capital outflow due to the timing of invoicing and collections from our customers mainly from the Ministry of defense in Israel.
The board of directors declared a dividend of 44 cents per share for the first quarter of 2020.
Ill now turn the call over to Mr. Machlis, Please let's see.
On to you before.
Before I review the results for the quarter on I would like to provide our perspective on global defense budgets and.
We have received numerous questions from investors on this soon.
And the ultimate break corporate and execute.
Elbit systems has not seen and changes in demand for its products and services from.
Customers on all.
The growth is a better flow over.
Over recent quarters and provides a good indication of the demand and we have growth of fee and.
And expression of interest and our.
We also have not seen any indication of and then we've got defense budget and most of all of the countries in which we operate.
Gil political tension on the world have not decline on during the quarter the things from them.
And we expect these extensions to continue to drive the budget growth over the medium and longer term.
We also expect currently.
Defense budget to stimulate growth and so.
All domestic room and and integration.
And then announcement by the bridges and government to increased defense spending by six and it has been on over the next four unit is very encouraging.
UK is an important market for us.
And systems, UK employees and more than apart from people across the UK delivering key programs and capabilities to the UK SAR.
Sorry.
And once you get to you is the Paragon and affinity that provide services for the UK military flying for index systems.
We believe there are many opportunities.
For our solutions and.
And for that market, including coal mining from port system, running solution and on and men and.
On systems.
Elbit systems.
No go go after the customer base and prisoner and.
And strategic office.
EBIT systems divert worked at the customer base and president.
And what did you cost.
Taking a decade to boot and Weve continued.
You mean standard the non sense of stability will flow business flow defense budget cycle.
Elbit systems will review, our businesses and portfolio on a regular basis to ensure that the company is a line cause you to before being customer oil it is and the general it synergies between the Broadridge technologies and on portfolio.
Following the latest review.
Decided to implement and new organization from.
Well flow business.
Activities.
Our unmanned aircraft systems business will be integrated within the mens business level and the synergies that growth men and and then mid threes.
We will integrate our electro optical systems, and electronic warfare and signal and didn't businesses.
Leverage our sense, those and capabilities to provide advanced and new and cost electable moving it.
The precision guided and munition activities.
Oh powerful flow admitted to Elbit systems activities will be integrated into the store and PJM portfolio that we acquired with our in line.
Zilber and position will begin during the coming months and will be completed doing 2020 one.
Moving on to the business and the quarterly results and the third quarter included and number of authentic milestone and bold and development across different.
Forward.
In October.
Night vision in the us the standard.
$23 million booked on view on me for enhanced night vision goggles, and that's sort of systems.
This was fall off and others on assumption on told you all at the same or corn GAAP.
Up to $444 million on.
Elbit systems is warm.
Flow and would you be.
To the U.S. on uses and 400 margin for the night vision business that we acquired in September last year.
We are very pleased with that acquisition.
That is performing better than expected.
And even more optimistic about the petition and general with synergies between our legacy some on imaging and night vision portfolio and the image sensors for a night vision business over the coming to you.
This is clearly the future advanced systems.
And I'd operation and.
And one position benefited from the demand for integrating night vision systems.
And wins in recent months, we will receive support comes from.
From all night vision head up display system for filed on form the you with on me and was selected by the use of volumes to develop and integrate the targeting sorry.
Corn products highlights.
On the Brits flow lift on optical portfolio. That's I'll also integrated into aerospace sales.
And we'll see and then buttons.
Elbit system market, leading equipment on board solution provides relative.
We have the ability to connect force is going to do.
On the ground and see seamlessly and effectively to support more doom and inflation.
Our coal miner from both solutions are deployed and arms on but customers from Australia to Sweden.
The idea is willing to all the least this vision and the.
Systems talk from Winick on board solution, but the neighborhood highly sixtyv sharing information and core multi domain.
The feet on the uses across all domains has been very positive there.
They have been impressed by the ability to still inflammation and seamlessly in ways that will move possibly on the bus.
Elbit system from another tough applies the U.S., we bump into one and acuity.
On the commodity from fourth dilution on for the yours border with Mexico, and we also plan to for the youth Amit Kumar from fully integrated in force book to Bill CP.
Good day.
In November the your sales force and lifted distant.
From Middle income.
To compete for joint or domain from any point Board bus orders and.
Total flow to I'd, a coupon for moving to prove the price.
This election is another won't.
Confidence.
From the U.S., so forth following the logs and reseller warning systems local on it was earlier in the U.
We are in the goods and integrating our decision and then to do and data analysis into a wonderful and core solution that.
And that will be and important growth drivers for would be over the coming years.
Elbit systems has allowed portfolio of solutions, and the food and things, including manned and unmanned target equity or fiction systems delegates acquisition growth all day and communication systems.
Comment on to demonstrate to integrate the latest.
Question on legacy capabilities, and new percentages on what the.
This concludes our vision that provide the goal with 360 degree vision.
On slide the Zigs and Leverages, our helmet mounted displays and extensive couple of ability to provide unique and highly innovative solution.
We were recently teamed up with be a system one of the largest liberman and June on almost from what they develop and integrate the advanced capabilities for home, but the.
We are or when you walking will be on and integration I will focus on b.
Moving 94 and other non and.
There is a significant and potential for this partnership over the coming years as minute duties and on the wall and placed and obviously the chromebook day.
In summary, I would like to think Elbit systems employees on the war for their continued hard will in challenging times.
Oh, a better flow continues to provide us with good visibility and we continue to see significant nation Irans award flow, leading hike and when would you. So we can and.
Will generate value.
For all of both the core to our employees and customers both for player and the growth for you our shareholders and with that I would be happy to take your questions.
Well, we don't.
Thank you, ladies and gentlemen at this time well begin the question answer session.
A question Please press star one less.
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Using speak on equipment.
The headset pressing the numbers your question will be pulled from the order. They are received please stand by we fulfill.
Question.
The first question is from Sheila Kahyaoglu of Jefferies. Please go ahead.
Hi, good.
Good afternoon, and good morning, guys. Thank you for taking the question.
Can we talk about maybe just free cash flow to start and missed them.
Mr. Yossi, but during the call my prepared remarks, you mentioned, some reversal and the Israel payments can you just talk about what's going on with the working capital balance and how we should think about quarterly free cash flow and right.
Yes, Hi, Sheila how are you.
Good.
Yeah, we are facing some I would say challenging times was all on a customer here and Israel the Ministry of defense.
Well right now.
There are some discussions about setting the budgets for.
Well this year.
EBITDA next year and this is on the discussion.
Our parliament.
And this is actually the main the main hurdle.
In front of day I am on D to release their payments days.
There is no question about it.
About are we going to get the payments and there's a question on we're going to get.
And.
On on a little bit later, we need to I am will be done.
Late payments on programs this quarter.
Just to remind ourselves last quarter, the second quarter of Twentytwenty was a good quarter and they did they ask quite a significant amount. However, they are that the increase this quarter and from our discussions with day and multi day expectation is that the debt to EBITDA reduced towards the end of the year.
Although we have no guarantee yet on this there's no doubt we are going to be paid.
As soon as the I am on D. gets its budgets.
Place when is that going to happen hopefully this year during December.
And the latest during the first quarter of next year.
Okay got it and then can we just talk about some of the organic growth trends you guys are seeing or land systems was particularly strong.
How sustainable is that and then what if you could just give us a little bit more detail on C. four I'm, sorry, you mentioned lower radio sales to Latin America, what's going on and that business. When do you expect that recovery and then similarly with electro optic systems, just why the decline on an organic basis there.
Although she.
She line as you know our company and we recommend to look at outperform and so on a multi quarter basis.
Specific quarter.
Can fluctuate one way or another and revenues.
And definitely in the various geographies and order.
On the business areas that we operate and.
Specifically your question is we started definitely to see some.
Improvement and synergy and built already and.
Through the acquisition of I am I.
With significant contracts and international markets.
And with that did help.
And the growth solved.
On the land systems business.
Also we had some increased sales into this quarter on fire control systems for the eye and multi.
That is the land systems.
Going forward, we definitely looking.
To see increase the increase in revenue seen line systems of course on the average over a multi quarter basis.
Cost.
And the nice things that are happening with the integration of why am I.
In the land systems.
Regarding C.
And no radio equipment is 17 batches.
Worldwide and last year, we had and assess quarters some significant.
Sales of radio equipment to Latin America.
We do see.
We do see.
A strong interest in our age on communication equipment worldwide and May I, just Matt just mentioned a significant.
Significant event that happened.
So the weeks ago that.
Major a major potential contract was in.
And in Switzerland, and was approved by the Parliament.
And we hope that somewhat in the near future, we're going to get the contract on that.
But similarly, we have and many places that our C and equipment is sold you sold and is.
We expect more contracts.
Remember, our Australia and position.
Which essentially our C business brought in a growth over a billion dollar business and the command and control and and regular.
And that equipment.
Netherlands, and other places and the was so we and do consider that interoperability.
Really requires a lot of bandwidths and communication and therefore that will continue to push and a gross and net revenues in this area of our business.
Okay. Thank you so much I'll jump back in the queue.
Thanks.
And the next question is from Peter.
Ski of Alembic Global Please go ahead.
That's good afternoon and.
I see and Rami.
I just want to review.
Guys. The commercial aerospace exposure, just we have a sense of when and how things are likely to on annualized for you can you ballpark for us just either in absolute terms your revenue exposure to commercial aerospace or as a percentage of revenue and then I think a lot of the suppliers out there on average.
You are looking and maybe a 40% type of decline in revenue for the third quarter and expecting maybe a couple of more quarters of tough comps before things annualize.
Probably no later than this.
The second or third quarter of 21 so.
Okay and can you maybe ballpark your exposure and let us know if that kind of profile is something that you guys are seeing.
Yes, well.
The total non defense business.
Elbit systems and 10%.
And just composed of two elements one is the commercial aviation.
The Onyx business and the other one is the medical instrumentation business.
Out of that now we are all revenues is a hot and four and a half over $4.5 billion. So less than 10% is the non defense spot and a part of that 10% is the commercial.
Annex business, so as a standard hundreds of millions of dollars at the mix.
We did see a reduced requirement for.
For our products and services and this area due to what the whole world has experience with lower traffic.
And the expectation is from what we hear a lot on.
And.
That level of traffic and requirements for products and services of 2019, we'll come back somewhere in the 2023 Twentytwenty four timeframe.
And we looked at the demand for products.
And we analyzed on water so our the hour.
And therefore, we have impaired that accordingly.
So this spot we still have.
Revenue rose.
We still are selling.
Most of the areas we are quite unique for example in the area off.
Landing systems in diverse.
Weather.
We have very specialized solutions for that.
And this is still required however.
Flying less so we are spending less.
All all day.
We do see a significant increase in the other part on the commercial business and that is the medical instrumentation business and.
Fall, which is in.
And $100 million to $150 million presently and growing strongly.
Yeah and rule, making.
Data, making and that is.
Laboratories for and that is this all from liquids and loved and stuff like that and very involved in the presently required and the Cobi 19 detection.
Detection environment the needs for that so that is partly compensating for the view the reduction in the commercial aviation and on the growth that we have seen in.
In the recent quarters.
Which is not very strong, but this is still growth.
Doesn't reflect also the reduction in the commercial aviation business.
Okay I really appreciate all the color.
Let me it was also a and treat about the reorganization so.
Maybe you guys can talk about was this primarily was just the cost take out cost reduction type of all move or was it more so revenue revenue synergies, maybe you know with the desire to kind of a line business development activities can you give us a sense what the primary driver of the reorganization was yeah.
We're just and on and the primary driver for the organization was the two generally more synergies.
And within the component.
And the to bring on.
And to bring more revenue to the company and.
We are having good stuff as you said and that you were trying to predict what will be the market need and the future and based on that we are dovetail portfolio.
And this new organizations that are on.
We have declared this week.
Exactly force or to leverage.
Images and.
Great and advanced portfolio.
Which we believe will lead the market in the future.
That's great very helpful and very last one from me more financial on cash from investing activities. This quarter. It looks like you guys booked a large.
We're on 70 million or so sale of PPD and look in this quarter, but can you give us some color on what that was.
You know what that was about.
Well our.
Our teams are kept on the investment.
Includes.
Replacement on equipment.
The order of inventories and so long and then also we.
We are starting to see some investments required to establish.
The production site for the I and my transition to dispose of Israel and.
On this.
Well, we are preparing everything needed so that transaction that transition can be achieved somewhat during 2023.
We do so we have stopped and some investments in that area and that will continue doing.
Doing good the next and following years.
Okay did you get a payment from the government for that this quarter.
Oh this quarter and all we did another deadly ahead, the pace and seen the boss. The this quarter, we got a really inflow, we had from different transactions from other kind of transactions.
Okay. Okay, great. Thanks, so much cash.
Thank you.
Thanks Pete.
The next question is from a lot crops with excellence. Please go ahead.
Hi, Thanks to our world on.
Regarding the margins on margin the company.
I am I think we just lowered your margin. So you will see improvements and the margin LD and the future.
And the synergy with and with the.
In line and so when do you see it.
We are definitely improving working hard to improve the margins and we started seeing some.
Some of his thoughts on that and this quarter is definitely one of them.
This is a gradual process it will take some time.
But it is on the right direction, we have a multi year plan that includes many elements.
Of cost reduction off the yield improvements and.
We did mention in the past implementation Alpha one ERP system across the whole organization.
By the way all the investments that you see and expenses. So late and would that are included in our ongoing results.
We have we have initiated that already hit in hitting the fossil day Airborne division and the U.S. on.
Operations.
By the end of this year would have DNS optics business going with the same ERP and next year, we expect the other divisions to implement that and we expect that to resulting from the very nice improvements and efficiencies reduction in inventory.
Stories, and so on and so forth. So bottom line yet we are working on it we have a multiyear plan we on improving.
Unfortunately, we.
Good on the reap all the benefits of it because some of that is.
And is I would say is offset by the strong.
Israeli currency the strong shekel versus the US dollar. However, we are managing to take it on that as well as we can go forward.
All right. Thanks.
The next question from doing that question on leader and Mike.
Please go ahead.
Hi, guys how are you.
And you answered most of my questions.
I have one.
Can you tell us and based on both the financial but then sale I'll say and partnership you have with BA.
We have taken together with the four and.
New program and reaches about to happen in the U.S.
Zone.
Yeah and tend to two plus we expect that tend to move on to.
The Brittany fleets.
The U.S. market.
And the Bradley is the and fighting the income which was produced may be by governments.
And and to that.
On the teaming agreement, which we had with them is.
Four and advanced solution, both of which will come from B. and positively to income for us.
And we will submit a joint proposal full distance from that potentially is quite a bit.
To a plus.
Moving on to paper and in the us market and as I mentioned in my brief we tune them also on the and probably on the CV 90 isn't isn't on.
And they want and.
We will provide the simple our systems such as.
I want to put the consistent flow.
For the sitting on cash.
Okay, and this stem and when when do you expect on.
Things will happen [laughter] wanelo sales from this area.
We are waiting for the our fixed income.
And I don't want I don't remember the day to buy all active but to take on.
Okay. Thank you very much growth.
Thanks Dana.
Is there any additional questions. Please press star line.
Accounts here request. Please press star two please stand by we pull from Merck.
And.
There are no further questions at this time before I ask Mr. Machlis to go ahead with his closing, Steve and I would like to my participants and a replay of this call will be available two hours after the conference and and.
The U.S. please call one ABT seven to four to nine line in Israel. Please call.
I mean, nine to 5591 day and internationally please call nine seven to.
Nine to 559.
A replay of the call will also be available and the company's website www <unk> Elbit systems.
Dotcom, Mr markets and she'd like to make your closing statement.
Now I would like to thank all our employees again for their continued hard will fortify and jet engines bonds.
Deliver on on the call. Thank you for joining us today and for your continued support and interest in our company.
Good day and good bye.
Thank you. This concludes the Elbit systems Ltd third quarter two sales results conference call. Thank your families and patient you May go ahead and disconnect.
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