Q1 2021 Elbit Systems Ltd Earnings Call
Good day.
[music].
Ladies and gentlemen, and thank you for standing by.
Welcome to Elbit systems first quarter, 2021 result conference call.
All participants are present in a listen only mode.
Following managements formal presentation instructions will be given for the question and answer session. As a reminder, this conference is being recorded.
And I have all received by now the company's press release that is available and the news section of the company's website at Www Dot Elbit systems Dot Com I would now like to hand over the call to Rami Myerson Elbit systems Investor relation director Rami. Please go ahead.
Thank you brought her and good day, everyone and welcome to our first quarter 2020.1 earnings call on the call with me today on <unk>, 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 and the company's press release issued earlier today also referred 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 and non-GAAP information and the reconciliation in today's press release.
And Youll see it will begin by providing a discussion of the financial results followed by placebo will talk about some of the significant events during the quarter and beyond we will then turn the call over to our question and answer session with that I would like now to turn the call over to you.
Thank you Rami and the evident every.
And everyone and thank you for joining us today.
The results of our first quarter and reflect the sustained demand for Elbit systems solutions and services from our customers around the world as reflected in the growth in AUM and revenues and the backlog.
The results also reflect the impact of COVID-19 in the quarter that led to lower commercial aerospace sales as well as lower sales and marketing expenses in the quarter.
Countries around the world are gradually opening up following the rollout of Hollywood and 19 vaccines.
We continue to monitor the situation closely while adhering to these sections of the governmental day, various countries and which we operate.
I will now highlight and discuss some of the key figures and trends and our financial results.
First quarter revenues of $1.118 billion increased 4.4% year over year and.
In terms of annual revenue breakdown across the areas of operation Airborne systems accounted for 37% of total annual sales and increased year over year, mainly due to precision guided munitions sales then.
On system sales accounted for 27% of total revenues as soon as other level of to 2021.
She put ISR and <unk>.
82% of sales increased year over year, primarily due to UAS sales to Asia Pacific.
And extra optics accounted for 9% of total sales and declined year over year, mainly due to the phasing of Elbit night vision programs in the U S.
Other sales were 4 and 5% of revenues and increased significantly year over year due to growth and our U S medical device subsidiary.
Our diverse geographic revenue base is important to the long term sustainability of our business in.
And the first quarter and North America was the largest contributing 31% of our revenues Israel was 25% Asia Pacific, 21% and Europe, 17%.
The gross and the year, Israel was due primarily to UAS and security systems and Asia Pacific sales increased mainly due to sales of UAS and precision guided munitions.
The decline in North America was primarily due to lower commercial aerospace and night vision seats.
The non-GAAP gross margin for the first quarter was 25, 6% compared to the first quarter of 2020 and 27, 6%.
GAAP gross margin and the first quarter of 2021 was 25, 2% of revenues compared with 27% and the first quarter of 2020.
<unk> gross margin and first quarter reflect the impact of a stronger shekel versus the U S dollar relative to the first quarter of 2020, and the less favorable program mix of revenues.
We continue with our long term plan of cost control measures to help mitigate the financial impact of the stronger shekel.
The first quarter non-GAAP operating income was $92.9 million on 8.3% of revenues compared with 94 million or 8.4% of revenues light here.
GAAP operating income for the first quarter was $83.8 million versus 84 million and the first quarter of last year.
Operating margins in the quarter were similar to the first quarter of 2020, as lower marketing and sales expenses helped offset lower gross margins.
The operating expenses breakdown and the first quarter was as follows net.
Net R&D expenses were 7.5% of revenues similar to the first quarter of 2020.
Marketing and selling expenses declined to 4.6% of revenues. This was 6.6% last year due to the reduced level of travel and marketing support and trades exhibition expenses.
G&A expenses were 5.5% of revenue similar to last year.
Financial expenses were $200000 in the first quarter compared with $12.5 million in 2020, the lower level of financial expenses was mainly and result of weakening of these really shake out versus the U S. Dollar.
Between December 2020, and March 2021.
The recorded tax expense of $10.8 meeting and the first quarter compared with $8.8 million in 2020 day.
The effective day effective tax rate in the first quarter was 13, 4% compared with 12, 6% in 2020.
Our non-GAAP diluted earnings per share was $1.72 in the first quarter compared with $1.62 last year.
The GAAP diluted EPS was $1.64, compared with $1.44 last year.
Our backlog of orders as of March 31, 2021 was approximately 11.8 billion 1 billion higher than the backlog at the end of March 2020, and 770 million higher than that at the end of 2020.
Approximately 59% of the current backlog is scheduled to be performed during 2021 and 2022 and the rest is scheduled for 2023 and beyond.
This ratio is similar to that and the first quarter last year.
The order backlog is equivalent to more than 2 years of revenues and provides good visibility for future revenues.
Cash flow from operating activities for the first quarter was 13 million outflow compared with 10 million outflow in the same quarter last year.
Cash flow from investing activities included a $61 million deferred payments for the IMI and quiet in 2018.
The board of directors declared a dividend of <unk> 44 per share for the first quarter of 2021.
I will now turn the call over to Mr market is.
And let's see please.
Thank you <unk> before I begin as a view of the results I would like to think the thousands of employees of Elbit.
Systems, and all suppliers and Israel that have worked tirelessly to support our customers and Israel and the on the wall and.
And extremely challenging periods.
Turning back to the first quarter and I am pleased with the growth using older backlog and that includes many of the current box we discussed at our fourth quarter results and our Investor day in April.
Revenue and backlog rules.
In the quarter provides a good indication of the strong demand from our customers on growth.
Elevated geopolitical tensions and you.
And Europe and Asia Pacific have contributed to this demand many governments around the world are increasing defense spending to mitigate the impact of the COVID-19, pandemic and prefer to spend increased defense budgets domestic and.
And this system is well positioned to benefit from this trend you are and move to domestic strategy and subsidiaries and dozens of countries.
In April we were awarded a 165 billion US dollars 20 year contract from the Hellenic Ministry automation on defense to establish and operate the international flight training Center.
Linear.
This follows. This this follows the selection announced and generally after and international competitive tender.
The contract is part of an agreement between Us and defense ministries.
And in Greece.
Under the current Brook Elbit systems, we supply you know knowable and 346 aircraft and we maintain and tennis swimming fleets.
Dozens of and true for 6 and 6 aircrafts.
And we'll also provide other embedded virtual of your on X all evil on boards and training aircraft net walked flight simulators and wrong based training stations as well as a command and control systems to enable efficient management of the strikes and nimble fruition.
We believe that the militaries around the world on Q2 expenses similar to and training capabilities to provide more realistic training.
Is that better prepared the soldiers for a wide range of scenarios at the lowest cost Elbit systems has developed.
<unk> portfolio and market, leading training and simulation solutions and other was the last to you we have been awarded to any contracts in Israel, and the U K and and Asia Pacific.
In April and LP.
90 vision is a U S received a $40 million $41 million contract from the U S. Marine Corp, full squad binocular night vision goggles or S&P.
And reduces items.
This was part of the 249.
Million idea Q contract from September 2019.
Elbit night vision acquired in 2019 is the single source supplier B.
And we do systems to the U S moving forward.
In March Elbit systems dose was selected to provide exact and research between night vision Blues for the special forces and special operations units over to Jim and first of all parties. These kinds of might be and googles already in service with the gym and offices.
I'm optimistic about the potential to generalists to generate synergies between our legacy thermal imaging and vision portfolio and.
And the image Intensifier night vision business over the coming to US. This is clearly the future of advanced systems for night operations and Elbit systems is well positioned to benefit from demand for integrated night vision systems.
In April we completed 2 acquisitions spoke on corporation and Wilco.
And we'll use subsidiary Elbit systems, and 4 million completed the acquisition of both from Corporation from Silke.
<unk> capital management.
$380 million.
Total and develops and supplies electronics sensors that support undersea warfare and for the U S Navy and Allied military forces.
Bolt on is 1 of 2 flow for phone and voice to the U S. Navy.
Both of them with expense and hence elbit systems portfolio of maritime capabilities and integrated solution that includes very time.
Unmanned systems communication.
With management and weapon systems, as well as some of and maritime and if 24 from solutions.
And we also completed the acquisition of Korlym and <unk>.
<unk> system for $31 million.
And we'll call. It is based on deal was on them and develops and manufactures high and GPS receivers and guidance systems for advanced defense applications.
I would like to welcome the 100.
Bolt on and the whole public employees to Elbit systems.
I look forward to getting to know you and your contribution to the long term success of our business.
In summary, although vessel continues to provide us with good visibility and we continue to.
And you see significant potential and along the world for Lithia type technology solutions.
And with that I will be happy to take your questions.
And so on.
Thank you.
Ladies and gentlemen at this time, we will begin the question and answer session.
If you have a question please press star 1.
You wish to cancel your request please press star and tennis shoes. If you are using speaker equipment can be Mr. Headset before pressing on the numbers.
Your question will be pulled in the order they are received.
Please standby, while we poll for your questions.
And with your first question is from Alan Page of Jefferies. Please go ahead.
Good morning, Thanks for the question.
Wanted to ask about the organic decline and electro optics.
<unk> to 'twenty as well.
And I just wanted to get a sense of when.
Growth might return on that business and how to think about the conversion of debt, reaching 41 million net.
Sure and contract with the U S Marine Corps.
Well.
We have seen a temporary delay in some of the development processes.
And as to Elbit night vision. This has been already solved and we expect to see.
The result of debt in the end.
The revenues of the second quarter and on.
So that is the.
Regarding the first question second question is just and ongoing.
The multi year program with over $250 million.
Potential.
And we are getting sequential purchase orders.
We record in our backlog and only the firm funded purchase orders.
Although in the <unk> program, we are quite certain debt all of debt will be equal will come through during the future.
Okay. Thank you that's it from me.
Thanks Peter.
The next question is from.
And of Alembic Global Please go ahead.
Yes, Hello, Betsy and and you'll see and Rami and good afternoon, and I hope everyone is doing well.
Okay.
But it sounds like the global demand environment is very strong right now you mentioned Europe and Asia Pacific was just wondering if if COVID-19 is still you know sort of slowing things down at all particularly with India being a sort of a COVID-19 hotspot are you seeing any problems closing deals because of COVID-19.
Phil.
And we.
We see if we see an improvement and the overall situation, which is related to COVID-19 those along the world. We are starting to travel and to meet customers. However in Samsung.
Like in India and.
And Brazil for example.
<unk>.
Difficult.
To meet customers and because of that so still some delays.
And to deliver programs and.
To conclude construct however, I believe that the situation is improving and.
And.
In the coming quarters, we will continue to do business as we used to do in the bus and.
And.
The situation and this country's willing toward wolf.
So we are not yet it is not.
It's impacting us.
We certainly see and improvement and I.
Believe and I hope that it will improve and in the coming quarters.
Understood understood.
And then any color on what drove the sequential improvement in backlog and look to be up nicely and I wasn't sure. If the Greek deal got booked in the first quarter or if that won't get booked into the second quarter.
And the greater on the.
The 1.6.
<unk> billion dollars corn crop and we got from the Greek Ministry of Defense is not is not yet and the bit local for the first quarter. We got it on in April. So you will see is thought of as a result of the second quarter. It is it is the same answer is also relevant for the 2 acquisitions we made.
This bolt on as well as the whole cost position.
Out of the subsidiaries on Nokia is included as well and the first.
It is also for the first quarter, you will see them embedded.
As a result of the second quarter.
Okay. So first quarter was just pure organic backlog growth but.
Okay.
And so on.
On the headwinds to gross margin.
From the shekel strength should we expect maybe another 1 or 2 quarters of <unk>.
And when there before things kind of level out what's the right way to think about that.
And all.
Hi, Peter.
We expect this.
Over the year of the rest of the year to improve.
Our gross margins.
Gradually on.
And we expect to have a.
Unimproved number.
The second quarter.
As you and all we do not give guidance or not.
Say anything about the specific number but the improvement will come.
Okay got it and I guess you also you just a couple more for you.
The decline and marketing expenses this quarter was fairly substantial for that particular line.
Was that just kind of a 1 off.
Spending save there or.
Do you expect that spend and returned to kind of that $70 million or so per quarter level or is that more of a permanent kind of a step down and in and expense for the marketing on <unk>.
This this quarter as it was a it.
It was an extraordinarily low.
Number.
Low travel low marketing expenses essentially no.
No meetings face.
<unk> phase.
And no shows and so on and so forth so looking forward.
We see that will.
And we will catch up on this.
The second third and fourth quarter and gradually grow over the year and essentially I would not be surprised if we come back to.
To the average levels.
And of the 2019 and numbers.
And that we have seen in marketing and sales.
Okay. Okay got it and then just last 1 from me on the IMI payment that you mentioned and in the quarter.
Is that the last payment for IMI I had actually mall, a payment and in 2022.
Wasn't sure if you had 1 more left or not yes.
<unk> payment.
And Youll see that and we did it in January we paid on January initially it was planned to be paid in December. So it moved a couple of days into this year and then next payment will be day by towards the end of 2022.
And it May move also into 2023, but right now its planned for the end of 2022.
Okay, and then and that's the last 1.
And that is and.
And that is.
Yes. It is the last 1.
And.
Okay.
There is 1 item there in our agreement with them that.
If we have and extra ordinary business performance by IMI.
And until the period of 2026.
We might need.
Need to do and other small payment to the government.
Right now and we hope that we'll be doing it in the future but right.
Right now it is in the out years.
Okay. Okay understood. Thanks, so much for the help guys.
Thank you.
The next question.
And some Dana.
Yes.
Of leader capital market. Please go ahead.
Hey, guys good afternoon on Oreo.
And you know.
2 questions. My first question is and if you can tell us a bit about this.
And.
Regarding the COVID-19, do you see any recovery in this field and.
Well no.
On the worldwide expectations on plan right now is that the.
And the recovery will be gradual.
And we'll come back to the levels of 2019 somewhere in 2024 and that is the overall, our overall opinion of most of the analysts.
Of that business area.
In all of the operation and the U S.
We.
Do see some recovery.
It is not yet.
Right.
And that shows us significant growth. However, we do see positive numbers.
Compared with.
Compared with what happened during 2020, but.
But we are still planning our multiyear plan is to be.
Like what the overall.
Spectation side to come back or maybe even grow more than 2019 levers.
And by 2023 or 2024.
And then Sam. Thank you and then second question, Jim Ajello beat about I, and my implementation and what about it anyway, where does it stand on that.
<unk>.
And I don't know we combined combined.
We've combined IMI with Zelle and division.
And they're the 2.
So and this division we all are producing.
Platforms I had COVID-19 too.
And Moto and upgrading tanks and we are also we also.
On the developing and delivering guided munitions.
Recently, we announced a reorganization and other boots and.
Under this new organization actually we we're combining all our guidance capabilities on the diesel and this new land Division.
And so I'm quite convinced that the.
And that this new division will be a world leader.
And to provide further support solutions.
And the platform upgrade from.
And for many customers and.
Around the globe and when we acquired them on most of the activities were in Israel and.
And I'm happy to say is that last year more than 50% of zone, New business came from the international market and we did it.
There'll be marketing capabilities and viola subsidiaries.
And.
We have and I'm also happy to say is that we have.
First.
Nice contract for active protection systems here in Israel as well as the Netherlands, and we are also progressing as the U S and the split on market as well.
With this system and.
And we see a growing demand for.
For the new portfolio, which we have.
And.
And we're also walking.
All of the loans and on the margins to improve the margins on fire.
And we are progressing according and and even we're even ahead of the of the Av.
The plan we had.
And we had when we did the acquisition and we are also progressing in the new facilities for IMI that were establishing in the south part of the country and right. Now we are planning to move IMI to fortify them out to these facilities around 24.
And <unk>.
Yes.
Alright, and I understand thank you very much guidance.
And acuity Dana.
The next question is from Ella fried of Bank Leumi.
Please go ahead.
And good afternoon.
I have also.
And couple of questions. The first is and.
And what our immediate or and and the long term impact if any and all.
And I'm seeing from the recent operation and Gaza and day.
And the results.
On the local scene and day and may be on results concerning potential exports and will it affect in some way dosing Cam and bookings from me.
Local and foreign customers.
As you know was Israeli customers and ideas.
Is it really is a very important customer to elbit and we are walking with ideas.
And to develop and to deliver new systems for many years and of course, we supported our troops student debt off the fruition zone.
And I'm happy to say that.
With.
And the solutions that we.
And that we provided.
And as relevant and effective.
And we continue to develop new technologies and new systems.
To the Israeli customer and business systems together to deliver this distribution and also to other customers.
And if I if I.
Just to touch 1 area, which is very relevant and even more relevant than ever and is the high power lasers at the Philippines for Israel.
And for these volume.
High power laser we are really really warm leads and this technology is a breakthrough technology.
We believe that.
And we can provide.
And our solution to protect Israel as well as other customers against MISO and rockets.
And by on a high power laser.
And.
We.
We have been.
And.
That.
Easily MLD and have chosen to do and to develop this system and we are working hard to do so and it will flow.
And for sure will be a growth engine for us.
Full and.
For for Elbit, and the future and I believe we can change also the way Israel defense itself will lose and.
And.
And can be relevant also for other customers and wood.
This is only just 1 example.
And I have a question if you don't mind and.
And I know that the army is very much a and waiting for day say high power laser and when do you think I mean, roughly it will become operational and it's about 2 years 3 years or is there any deadline.
This is more on the timeline.
We are actually waiting for the defense budget.
Israel Defense budget too.
To.
To continue the development and the production and I hope that this budget will be from soon.
And I believe that everyone is.
And as everyone.
And.
Convinced right now that the zone.
He has a need to find a way to finance this program and 2 brings to the free to soon.
And I hope it will take the answer a question and if you take a few years and.
Sales of development will be concluded.
A few years from meaning more than 2.
Oh, okay.
No no precise and deadline okay.
And I have and another question actually more on the price surroundings and day I really would like the total.
And from your experience and.
Because as we all know it here and they'll come in Israel, and the Israeli shekel strength.
And.
Uh huh.
And I must say exporters and the Israel and.
And what day.
And not only and is from the weakening.
On a dollar is say and.
And actually affecting many many other many other exporters in there and.
And so.
From your experience and.
And and and also there is some inflation and I expect it in the next 2 years.
Prominent and inflation and versus what we had anywhere and any other.
And we experienced Canada prices and.
And such surrounding be adjusted for currency.
Currency exchange influences, all and think that they're very much remain and.
A steady dollar dominated because I think it's very important for forecasting and.
And many many companies who are not.
And operating in the U S.
Hi.
Good to hear you yeah.
The I would I would give you 2.
Aspects of of debt answer 1 is on contracts that we have and quite a lot of them we have elements of indexing.
So that the day to protect us.
Maybe not 100%, but quite significantly material protection against inflation.
And <unk>.
Dollar index or specific and.
<unk> expense.
And with the customer on and on the currency. So it varies of course, so that is regarding what we call the backlog of orders regarding future guidance.
Gotcha.
And future contracts.
We do take into consideration when we price our hour.
Our proposes we do take into.
Into consideration expected.
Inflation rates and.
We expect that internal labor rates, which are.
Which are dependent on.
Expected local currency versus the dollar.
So to some extent on.
We do mitigate through debt.
And future.
Medium and longer term impact and though with debt of course, we do every effort possible in order to reduce our cost base and.
And in order to improve our our competitiveness on 1 hand, and our profitability on the other and these processes take some time.
Did mentioned in the past implementation on the 1 ERP system that we do implement worldwide.
And in our <unk> and all.
Sure.
Subsidiaries, we do look at.
Additional aspects that we have initiate debt in order to move some of the.
Production activities and even some of the engineering activities to low cost countries.
So in that way, we do mitigate our cost increase and the cost basis of the company. So all of this is going on these are multi year plans.
Company executes them and we are optimistic that.
We will be able to mitigate the impact of the currency.
Change right.
Well first of all good to hear that many aspects are protected because day and Nextgen Joanne current rate changes and we're quite as dramatic as we even know here and they on on on.
The other hand and.
The other thing, we'll see also and timely and youre collecting payments.
And from your customers, becoming short there alright, because say.
You mentioned, thus far and so 1 of the companies with day and longer collection times. So on.
And all at once.
On marketing tool.
Well I think we did well.
We did.
That's the strategic cycle that you referred to about using the payment terms as a marketing tool.
We stopped debt actually or is significantly reduced debt last year already and then came over on that.
And then thinking and color on and Thats right, but.
1 of our major customers the ministry of Defence and in Israel.
Nicely towards the end of last year, they continue to pay a little there still.
Material debt that they have not completed.
Yet the payment off.
Looking for the upcoming budget.
That is going to be approved somewhat this year hopefully and then this will be resolved as well in other places worldwide.
We are we are on a process of reducing.
We just said reducing the debt terms of definitely.
And we give our customers of payment and actually.
If you have looked at all other.
A recent 2 or 3 quarters.
And you look at the <unk>.
A number of the customer advances in our contracts you can see and constant increase India advances and that is.
Got it.
And as a result of the change of policy that we have here and putting more emphasis on cash flow and.
Getting more initial down payments and progress payments from our customers. So this is an ongoing process, which focus on cash flow.
Okay. Thank you very much for taking my question nice to talk to you.
Thank you Ed.
There are any additional questions. Please press star 1 if you wish to cancel your request. Please press star 2.
And the standby, while we poll for more questions.
There are no further questions at this time before I ask Mr. Market is 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.
And the U S. Please call 1.8.
7 Q4, 291, and Israel Please call <unk>.
Moving to 5590 and zero and internationally. Please call 9.7 Q3.
5900.
Play on this call will also be available on the company's website.
W Elbit systems Satcom on.
And now like to let <unk> ask another question. Please go ahead.
Okay. Thank you and.
It's not and that's important but I'd just say it was late and man and reacting and.
And on the call and.
So and I would like to ask you about the factoring and cancelled and we spoke about cash flow actually.
And how and I.
Are you still.
And I used to using it and day is it evenly and.
And it is at the higher and.
Right now and then you'll get used to use it or it's the same level more or less.
Occasionally we'll use it and the first quarter, we had a relatively low level of factoring and if you look at the trend.
Compared to last year, we have a lower level and overall and we plan to have a lower level during the year as well.
And in assessing and our assessment the payments from the customer will come in time and will not need debt element.
And as you'll see.
We frequently okay. Thank you again.
Mr. <unk> would you like to make your concluding statement.
I would like to thank all our employees again for the continued hard work, particularly in these challenging times.
To everyone on the call.
Q4, joining us today and for your continued support and interest and our company.
Have a good day and goodbye.
Thank you. This concludes the Elbit systems Ltd first quarter 2021 results conference call. Thank you for your participation you May go ahead and disconnect.
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And.
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Hello.
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