Q2 2021 Elbit Systems Ltd Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by welcome to Elbit systems second quarter 'twenty 'twenty, one results conference call.
Participants are at present in listen only mode. Following management's formal presentation instructions will be given for the question and answer session. As a reminder, this conference is being recorded 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 Dot Elbit systems dotcom.
Now I'd like to hand over the call to Rami Myerson, Elbit Systems' Investor Relations Director Rami. Please go ahead.
Thank you Michelle Good day, everyone and welcome to our second quarter 2021 earnings call on the call with me today, I would say Mark Smith, 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 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 financial information and the reconciliation in today's press release, you actually will begin by providing.
A discussion of the financial results followed by policy can you 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.
Jesse please.
Army and everyone and thank you for joining us today.
That is also what our second quarter reflect sustained demand for Elbit system solutions and services from our customers around the world as reflected in the growth in revenues and the backlog and an encouraging operational improvement.
Second quarter results include the results of sparkling mineral car acquired in the beginning of April.
At the beginning of July we completed public tenders for two series of notes raising approximately $600 million.
S&P global ratings monologue, and Israeli rating agency assigned to each Israeli double AA rating with a stable outlook to the nodes.
Which are traded on the Tel Aviv stock exchange the significant participation by investors in the tenders provides a strong vote of confidence in the company.
I will now highlight and discuss some of the key figures and trends in our financial results.
Second quarter revenues were $1.302 billion increased 21% year over year, a major part of the growth was organic in addition to the contribution from Sparta.
In terms of annual revenue breakdown across all areas of operation Airborne systems accounted for 40% of total quarterly revenues and increased year over year, mainly due to the Airbus precision guided munitions seats.
Systems accounted for 22% of total revenues a similar level of revenues for the second quarter of 2020.
She for ISR at 26% of revenues increased year over year, primarily due to the acquisition of spectrum.
Electro optics accounted for 8% of total revenue and declined year over year, mainly due to the phasing of Elbit night vision recent programs in the U S. I would like to note that significant volumes of electro optical equipment are included on solutions that we report as part of our airborne land in <unk>.
Systems areas of operation.
Other sales were 4% of revenues and increased significantly year over year due to growth at the U S medical device subsidiary.
Our diverse geographic revenue base is important to the long term sustainability of our business in the second quarter North America was the largest contributing 34% of our revenues Israel was 21% Asia Pacific, 26% and Europe, 16%.
The growth in the U S was mainly due to the Spartan acquisition and the revenues from non defense medical device seats.
Asia Pacific revenues increased mainly due to the sales of precision guided munitions.
The non-GAAP gross margin for the second quarter was 26, 6% compared to 26, 5% in the second quarter of 2020.
GAAP gross margin in the second quarter of 2021 was 26% of revenues in line with the second quarter of 2020.
The sequential improvement in gross margin compared to the first quarter of 2021 is encouraging and reflects the initial benefits of cost control measures, we adopted to help mitigate the financial impact of the stronger shekel and the Covid 19 that we discussed with you previously.
The second quarter non-GAAP operating income was $114.9 million or eight 8% of revenues compared with $92.7 million or eight 6% of revenue last year GAAP.
GAAP operating income for the second quarter was 117 million similar to the second quarter last year.
GAAP operating income in the quarter included a profit from the sale to a building in Israel recorded under the other operating income.
GAAP operating income in the second quarter of 2020 included a profit from the sale and leaseback of two.
Of Elbit systems of America specifics.
The operating expense breakdown in the second quarter was as follows net R&D expenses were seven 3% of revenues similar to the second quarter of 2012.
Marketing and selling expenses were five 8% of revenue versus six 2% last year.
G&A expenses were five 1% of revenues compared with 548% last year due to the acquisition related expenses in the quarter.
Financial expenses were $7.1 million in the second quarter compared with $16.5 million in 2020.
The lower level of financial expenses was mainly as a result of gains from changes in fair value of financial assets and liabilities.
We recorded a tax expense of $20.1 million in the second quarter compared with $23.6 million in 2020.
The effective tax rate in the second quarter was 18, 5% compared with 28% in 2012.
Our non-GAAP diluted earnings per share was $2.
11 cents in the second quarter compared with $1.56 in last year.
The GAAP diluted EPS was $2.30, compared with $2 <unk> last year.
Our backlog of orders as of June 32021 was approximately $13.6 billion at two 8 billion higher than the backlog at the end of June 2020, and $1.8 billion higher than that at the end of March 2021.
Approximately 51% of the current backlog is scheduled to be performed during 2021 and 2022 and.
And the rest is scheduled for 2023 and beyond.
This ratio is lower than at the second quarter of last year. Following a number of multiyear contracts awarded awarded recently.
The order backlog is equivalent to more than two and a half years of revenues and provides good visibility for future revenues.
Cash flow from operating activities for the second quarter was $117 million inflow compared with $179 million inflow in the same quarter last year.
The net proceeds from the recent bond offering will be included in our third quarter results.
Following a review of capital structure and cash requirements of the board of directors declared a dividend of <unk> 46 per share for the second quarter of 2021.
I'll now turn on the call over the call to Mr. Mark This.
Let's see.
Thank you Yossi I would like to begin by thanking the investors.
So it's about <unk> 10 for Elbit systems notes in July for the strong vote of confidence in the company.
Trends.
The Zip code.
13, 6 billion in backlog at the end.
The second quarter included the $1.65 billion <unk> comp growth form the Hellenic Ministry of National Defense to establish and operate the international flight training center over the Hill.
<unk> signed an effort.
Elbit systems has developed a broad portfolio of market, leading training and simulation solution for militaries around the world.
Thats, all expanding the simulator training capabilities.
These solutions provide a more realistic training is that better.
Soldiers for a wide range of scenarios at a lower cost.
Firefighting Squadron and Greece, Elbit system operators, the Israeli firefighting squadron on behalf of the Israeli fire and rescue Dorothy This week, the Israeli government sent to firefighting foams.
Homes this quarter as well as an air Force transport.
To assist.
The Greek fireplaces.
Battling wildfires across the country.
So litigation includes Elbit systems employees that can provide logistic logistical support.
I'm proud that Elbit system is taking part in this critical mission is our commitment to protecting the environment in Israel and the army.
The world.
Growth engines.
At the Investor day when.
We highlighted three medium term growth engine.
Precision munition maritime systems and high powered laser I'm pleased with the progress that she is a growth engine demonstrated during the second quarter.
But decision guided munition or through one of the revenue growth devices.
In the quarter as Yossi mentioned.
The recent conflict in the south of Israel highlight the growing Swift brokered and MISO has risen to civilian population and a military installation on the world increasing urgency to develop more efficient and cost effective solutions in June.
The system together with the Israeli MLP and Israeli Air Force successfully carried out a series of this.
The exceptions to shoot don't drones with available high powered laser install.
On a light aircraft.
If successful in perceptions with an important milestone in our development of airborne high powered laser systems that will be capable of.
Defending large areas by intercepting multiple multiple threat.
Hi.
Elbit systems has made significant investments in recent years to develop and acquire comprehensive solution for the increasingly contested maritime domain in April we completed the acquisition of bottom in the U S and received an $18 million due to a contract in June to supply AI.
Victor.
Ill electro optical systems for military and Maritime forces of in Asia Pacific countries.
Elbit systems.
<unk> is a multi spectral long range electro optical systems that provide naval air and land forces with ISR capabilities in both day and night and on the low visibility conditions.
All utilize artificial intelligence to continuously scan for target extract operational insights and reduced human edibles in June our UK subsidiary Elbit system U K.
The $60 million contract to supply exact 90 division Goldberg to UK armed forces.
To inform the exact family has accumulated significant operational experience and have been selected by a number of major countries, including Germany.
In June our U S subsidiary Elbit system for America.
The two older <unk>.
Community value of $20 million.
The U S Army pilot night vision systems.
In June a big system German subsidiary Elbit system.
<unk> was awarded a $20 million contract to supply <unk>.
Defense multichannel lead us to the Swedish home.
Under the corn crop Elbit systems.
Additionally, <unk> for bakery is bulk of the Sweden, Dr. Dickler when you updated logo.
Eating reviews have been selected by favorable armed forces across Europe, including Switzerland, Spain, and other NATO countries.
In summary, our broad based backlog continues to provide us with good visibility and we continue to see significant potential zoom for our leading high technology solutions and with that I will be happy to take your questions operator.
Yes.
Thank you ladies and gentlemen at this time, we will begin the question and answer session.
If you ask a question. Please press star one if you wish to cancel your request. Please press star two if you are using speaker equipment.
Lift the handset before pressing the numbers youre questions will be pulled in the order. They are received please stand by while we poll for your questions.
The first question is from Greg Konrad of Jefferies. Please go ahead.
Good morning.
Good morning.
Jeff.
Hey, How's it going just to start first on airborne sensors <unk>.
Our system is that you mentioned.
<unk> and precision munitions I mean, how lumpy is that or does this business reset at kind of this higher level. Let me just think about it going forward.
Oh well.
The basics of this product lines there are several of those.
Coming from them.
Acquired subsidiary.
IMI that we did in 2008.
<unk>.
There is a big variety of products.
That Dod in that category that means airborne launched.
<unk> guided munition.
When we bought.
IMI, we had about a 20% or less of international business.
At IMI.
Which includes a very low level of revenues from this kind of product lines with all of that.
Geographic spread of our marketing.
And contacts with various customers, we were able to promote.
Significantly the interest of customers in this kind of precision guided munitions.
And we do see a significant growth over the years for this kind of family of products.
Our estimate is that this growth will continue into the future as well, particularly because we also introduce some significant upgrades in this kind of munition for improvement.
<unk> launching capabilities on one side and improvement of precision guidance on the other side by the way the acquisition that we did a smaller acquisition that we did this quarter.
Any by name of real Cod that we bought them from B E.
They do have.
The capability and the technology to improve the precision guidance of this kind of munitions. Therefore looking forward. We do see we are very optimistic.
<unk> continuous growth in this area.
That's helpful. And then you brought up IMI, which I think you've done a good job kind of improving the margins I mean margins stood out in the quarter sequential.
[noise] progression in some of the highest over the past several years I mean, how much did mix play into that or have you been able to drive productivity wherever you kind of think about a nice step up for margins as we go forward.
Well, we have a multiyear plan going out for over covering over five years.
We are somewhere in the middle of performing and achieving the goals of this plan.
We had another two years to go I think we are ahead of what we initially planned.
We are improving at a nice rate the margins.
It looks like that there is still room for improvement.
The following two to three years.
A major milestone that we will be achieving towards the end of 'twenty three beginning of 'twenty four is the movement of their manufacturing stack production facilities.
To the south southern part of Israel into a new modern production facility.
And through that also lowering the cost of labor and that will give us another boost for improvement of profitability of production of these products.
And then just last one for me I mean strong free cash flow in the quarter you had a nice tailwind from working capital I mean, any changes or thoughts around your assumptions for working capital as you kind of move through the year given the good conversion in Q2.
Over the years.
Over the quarters, we did have.
Some delay in payment from one of our major customer, which is the ministry of defense here in Israel.
During the second quarter.
Did some of that.
Some of them.
Billings.
However, these are fluctuating a little bit.
There may be some fluctuations in the in the next quarter.
We're very optimistic that everything will be settled.
By year end, because the delays were caused by the approval of the overall budget of Israel, including the budget of the Ministry of Defense. This will be solved somewhere in November.
And therefore.
Everything it looks like every outstanding billings will be paid by the year end.
Thank you.
Thanks, Craig.
The next question is from Dana portion of of leader. Please go ahead.
Hi, guys how are you.
Congratulation with Joe Great results.
Thank you.
I have a couple of questions I think the first one and the most interesting is that what are the main.
Segment.
You may.
Big increase in the revenue this quarter can you.
Tell us they think it's sustainable for some kind of amount or something.
It happened just this quarter.
Do you know.
Good afternoon.
Okay.
Aye.
Growth in revenues is not.
Related just for one line of business, we see it all over the portfolio.
And.
No.
And it seems that the strategies.
We have chosen.
Is.
This is starting to bring results.
The strategy is the right portfolio advanced.
Wide portfolio on one hand.
<unk>.
Being global as much as we can with local subsidiaries around the globe.
And we see a growing demand on one hand.
This portfolio because of.
Tensions around the globe.
<unk>.
Two.
<unk> increased defense budget on the other hand, we also see a trend to create.
To support the local economies and to create more jobs and the effects that we have so many subsidiaries around the world is certainly helping us to grow.
Two good construct.
So the answer is we see a growing demand for the for the whole portfolio all around the globe.
And you will see in the backlog.
This backlog to be converted into revenue and profit.
A new as a new quote in the near future.
Useful.
In these results.
Two.
This trend.
Growth in revenue and profitability will continue.
Talking about profitability.
First the hotel footholds in order to increase.
Effectiveness efficiency.
To create synergies between us.
The different.
<unk> revenue the company and Thats why we are successful to gain loopnet appropriate.
I believe that this trend will continue.
And then does the high revenue volume contributed to the increase in the profitability in the quarter.
Yes.
No known studios.
The highlight in revenues is related to backlog, which is due.
Due to the transformed into the news.
Uh huh.
And the reason for the growth and profit is big efforts.
We have implemented.
Quite a long time ago, and he's starting to bring results to increase effectiveness and efficiency of the company.
And then last question there Ed.
And do you expect some kind of decline as a result of next quarters. If there will be an acceleration covid 19 restrictions.
In the world.
I think that the medicine by things that we have proved that we know how to operate and hope to be successful also on the <unk>.
The restriction because of Covid 19.
And.
We understand that.
This pandemic disappears.
Disappears in the future.
To continue to operate in.
Q2 also on the new restrictions.
Again that we have so many subsidiaries around the globe certainly helping us.
<unk>.
Things that we are ready.
Tool undo newest opinions or phone.
They had been in the future.
Understood Okay, great. Thank you guys.
Thanks Nina.
The next question is from Pete Skibinski of Alembic Global. Please go ahead.
Yes, good afternoon, Betsy and Youll see and Rami very very nice quarter all around guys.
First question.
The large cash advance that you guys received in the quarter. It was pretty sizable was that related to the Greek contract being signed or is that related to something else.
It's a combination of various contracts the Greek contact is definitely.
A significant contributor to that.
Okay. Okay.
And you'll see.
I think you guys have been alluding to the implementation of the new implementation of your ERP system.
That complete at this point is that an ongoing process and.
Has that been pretty important to them.
So the margin strength.
Well, it's an ongoing effort.
The plan and the implementation starts at about three years ago. It was a very detailed.
Plan and we are on plan.
Give or take some changes.
All right now by the end of this year, we will probably be completed around 70.
70%.
The implementation.
And by the end of 2022, we expect to be close to 90% of implementation, maybe a little bit higher than that so.
As I said, our financial report statements include all of the capital.
Investments that we deem that ERP system. They include all the expenses related with the implementation.
Unfortunately, so far we did not see the benefits coming through because not the whole organization is on the same system. We stopped right now to see some of that very small amount of I'll.
Savings, but it looks like that somewhere in 2023 will be.
We will face.
Some more material improvement in cost reduction.
A reduction of inventory.
Because of commonality of items.
In the short term turnaround times and other benefits that will improve the operational performance of the company hopefully, including the cash flow.
Great. That's good I appreciate the color a couple more for me.
I wanted to ask you about a program. The F 35, because I know you guys have a good amount of content on the F 35, and the reason I asked is because we've heard from other suppliers that.
There've been some some revenue headwinds over the last couple of quarters, maybe two or three quarters call on the F 35, because of like you kind of slowed things down a little bit they.
They needed to kind of wind down some inventory.
Have you guys kind of been through that where you've had maybe some revenue headwinds on the F..35 for maybe the last couple of quarters, but maybe that should start to grow again. Maybe later this year into 2000.2022, I don't know if you could provide any color on that.
On the F 35, where you are right that we have significant content.
The helmet system is one of them.
The full display.
Of the cockpit is another one in some other parts as well.
So far we are working with.
Lockheed Martin hand by hand, and our production our production plans are very closely related with their requirements.
They give us some forecasts and according to that.
We work and of course, according to the purchase orders that we get from them so far.
Didn't say that we have experience material headwinds.
And but we definitely work hand in hand with them to see that we adapt our engineering and production.
Performance According to what they need as I said, so far nothing material yet.
Okay. Okay I appreciate that.
And then last one just with the large capital raise guys I guess I'm just curious in terms of.
How you're approaching kind of M&A going forward. How active you are in and also just kind of.
Do you see gaps in the portfolio that you'd like to fill kind of how you see your desire to reshape the company going forward.
M&A is part of our strategy towards <unk>.
It has been it will continue to be and the rationale behind that is to extend our portfolio on one hand and.
Also to get additional.
Global position in the global market.
And we continue to look for opportunities we are monitoring the market, we see some opportunities which are relevant to us.
Based on our and as you said, we have the right capital who has a hiccup.
Right now to continue doing it.
We also prove to the market that we know how to make acquisitions and how to manage the activities in home too to get synergies.
Acquisitions, and it will continue to be both a full futures such as usual.
That's great appreciate the color I'll get back in the queue. Thanks, guys.
Thanks Pete.
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If there are any additional questions. Please press star one if you wish to cancel your request. Please press star two please standby, while we poll for more questions.
There is a follow up from Pizza Kubicki of Alembic Global. Please go ahead.
Yes. Thanks.
But there was some press out there some articles out there in the quarter about your ground your mobile our Chillers system I think it's called Sigma I think James had an article and I think it's still in development, but I think maybe it's nearing the end of development perhaps.
Maybe you could give us a sense of.
What kind of mastic and international opportunities are out there for that system, because as you know.
I think it's maybe the maybe the most modern mobile system that's out there right now since it's finishing up development. So.
Thank you to the middle of development, we have a good control tune as well for this Sigma one five circle zone.
Diversifies to create the piece of equipment.
The robot actually.
Rich rich oranges for more than 40 kilometer.
The limited demand for crew members.
And it can further guided munitions will.
<unk>.
We are in the middle of the development, we are progressing well.
So customers in Israel.
And we will start performing life shooting next to you and the first systems in the completed.
Around the end of <unk> and.
Next you.
We see a lot of C I.
I agree with you that.
One of the most if not the most advanced solutions to the market right now we see growing demand growing.
Demand was it in.
In Civil concludes.
And we are promoting it already in several countries.
And I.
I just want to add.
This quarter, we acquired the <unk> from B and human insulin in Jerusalem, and one of the one of the technologies and one of the assets. You have is a guided fuse, which can be added to a regular <unk> to make it.
To make your guidance.
Which will actually enable us to provide a complete solution for our customer which include the <unk>.
Also.
With all the automation embedded in the final.
<unk> control system embedded.
Some reconnaissance capabilities collected.
We target.
Two.
Tuesday Bogo two.
All type of formulation.
Which can be filed including guided munitions world.
So we can provide the full solution for customer and we in theory is a growing demand was up it was also published recently.
The previous version will through the gun.
Presented in the U S.
For some requirements, which are a little bit as the U S market as well.
It might be also an opportunity for us.
Okay. That's great I appreciate all that color.
I guess last one for me.
It seems like.
In terms of the government in Israel things are kind of progressing now and are pretty stable and could you just maybe give us an update in terms of you know is the government made all of its appointments to the to the Israeli M O D.
It's a budget outlook fairly stable at this point just.
Things like that that maybe people like me internationally, you don't have as much visibility into.
Of course, there is an understanding Q in Israel in the government bodes the size.
The defense budget for the coming years.
And actually the agreement has been made between as a means to find them.
The minister of defense is presenting a growth.
In defense spending soon as well.
This budget.
The initial budget.
Yeah.
<unk> onto <unk>.
Is under an.
An improvement process.
In the country and to be concluded.
But at the beginning of November.
And then.
It should be implemented.
This is up to more than two years.
Yeah.
More than two yield results emission of a budget too.
And when this budget will be implemented many additional opportunities for us.
Which I expect to happen.
So that's the status of the budget the budget is bigger and civil opportunities forward with embedded in this budget and this budget will enable the Israeli I M O D.
And to implement.
To implement.
Glenn It's a five year plan.
To acquire new type of technologies to support the Israeli forces.
What's also important to mention because the budget will be put to use.
To cover <unk> 'twenty 'twenty, one 'twenty two.
Okay. So much much more visibility at this point it seems like than you've had in a while so that's correct.
Thanks, so much for the color guys have a great day.
Thank you thanks Pete.
Yeah.
Yes.
The next question is from a large crowds of excellence. Please go ahead.
Hi, Betsy you've seen Rami I guess couple of questions first of all regarding the new businesses.
Do you see any change in the margin.
We're selling them.
Regarding compares to the past because it's higher or lower.
<unk>.
Well I.
I just wanted to clarify a little bit of how we work so that.
You all understand first of all of course, the prices offset by the market.
And that is where we.
Compete on one hand.
There might be some movements.
Because of changes in the economies in the various parts of the water and so on.
But the prices are set by market competition.
The cost element.
A set of course by our estimates of cost of the various programs.
And on a multiyear basis, and we definitely take into account anything for the future economic.
Environment that could affect the cost of materials and labor. The difference is the budget. So this is the process we're going through.
If we look at.
At what we are.
Getting new businesses that.
We acquire.
Then definitely we can.
See that.
There are some movements, but not major movements in the prices that we're getting on one hand on the other hand, there is movement in the cost structure of our company which are.
Multi year basis.
We have a significant effort to reduce overheads to increase yields of production to our centralized production and acquisition.
And the acquisition operations.
And that and as I mentioned earlier.
System that we are implementing all of that should lead to effectively lower the cost structure of the company, which we do see some movement already in that direction.
That helps us improve profitability, but by the end of the day.
The market is the one that is.
He is defining the prices in the competition stake I also want to add to that that we have much more to offer to the market than we had few years ago because of the acquisitions that were made in the quarter the synergies between all the different parts of the portfolio.
We have much more solutions to provide.
The effect that we control multiple for technology creates a big.
It creates opportunities for us also for cost reduction.
Okay.
What I'm, saying do you see any major changes in the Capex of the company due to the fact that you're moving out from the Central zone.
Thanks, Brian.
Well.
Capex.
I would I would split that into two parts.
The part, which is I won't call them ongoing.
Which.
Supports the ongoing operation of the overall company in that we do not see significant changes.
There are two elements in the Capex, which do affect the numbers that.
I would say.
One of a kind one of it is <unk>.
<unk> in the one year <unk> system, which is a significant investment over the over years.
Which does affect our capex to the tune of I would say.
10 to 20, maybe some more.
Initial dollars per year.
The other element, which is extraordinary is the movement of the production facilities of IMI to the south southern part of the country, which will which is also one of a kind it does effect.
And it will affect also 2024 and 2023 I don't see a significant step up in that part.
The following two years, but is that one of our guidance. So if you look at what's happening in the Capex in the last five years.
Let's say the last three years.
We went through in the next two years are coming they do support the Capex number that support these two major airports, which are not recurring efforts the recurring capex.
Essentially is rather stable, maybe with some minor increases in some advanced.
Advanced technologies that require specific.
Engineering capabilities, but nothing outstanding.
Alright, thank you very much and great quarter.
Thanks, a lot.
There are no further questions at this time before I ask Mr. Marcellus to go ahead for his closing statement I would like to remind participants that a replay of this call will be available two hours after the conference and in the U S. Please call one 887 eight to 491 in Israel. Please.
Call It 039 to 55900.
Internationally. Please call nine seven to three nine to 55900, a replay of the call will also be available at the Companys website at Www Dot Elbit systems Dot com, Mr. <unk> would you like to make your concluding statement.
I would like to thank all of our employees again for the continued hard work, particularly in these challenging times.
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 second quarter 2021 results conference call. Thank you for your participation you May go ahead and disconnect.
[music].
Okay.
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