Q4 2021 Elbit Systems Ltd Earnings Call
Okay.
Okay.
Thank you.
No.
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Ladies and gentlemen, thank you for standing by welcome to Elbit systems fourth quarter, 2021 result conference call. All participants are 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 web site Www Dot Elbit system Dot Com I would now like to hand over the call to Mr to Rami Myerson Elbit Systems' Investor Relations Director. Please go ahead.
Thank you operator, good day, everyone and welcome to our fourth quarter and year end 2021 earnings call on the call with me today are the same.
Our president and CEO .
That's been our Chief financial Officer, and Kirby Kogan will take over from you'll see on April 1st before we begin I would like to point out that the safe Harbor statement in the company's press release issued earlier today.
The contents of this conference call.
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, you'll see will begin by providing a discussion of our financial results followed by Boise, 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.
Today, we hosted an Investor conference at the Tel Aviv stock exchange a recording of the event will be available in the Investor Relations section of our website Www Dot Elbit systems Dot com investors and analysts who wish to ask questions related to topics discussed at West conference welcome to present their questions. During the Q&A session of the call with that I would like now to turn the call over to Yossi.
Yossi please.
Thank you Rami.
Hello, everyone and thank you for joining us today.
Rami mentioned on April 1st Colby <unk> will take over as Chief Financial Officer.
I will continue our senior executive Vice President business management, and what are you seeing among others hopefully quite use Houston as possible people capital markets and Investor Relations working together with the army.
I look forward.
Losing Kobe, three vessels and analysts over the coming weeks and months.
I would like to take this opportunity to wish Colby good luck and success in his new role.
The 2021 annual results today they all.
I'll just make sense formation of L. B over the last few years during which we successfully moved up the value chain from a provider of products and systems that will provide the comprehensive solutions.
He has any flight school contract is a good example of a comprehensive contract as a result of this transformation as well as what's the growth in order backlog and revenues that indicate the strong demand for our systems and solutions.
We are continuing to implement mitigation plans to limit the impact of distinction Israeli shekel.
And the competition for talent in.
In the short term. These include the adoption of rolling currency hedge policy and the efficiency measures over the longer term, we plan to extend our engineering and manufacturing footprint in high quality low cost countries to better balance our currency exposure in the used space.
Production of our company wide ERP system will support these efforts.
I will now highlight and discuss some of the key pieces and things in our financial results.
Yeah.
Fourth quarter revenues were $1.494 billion and increased by eight 5% easily.
For 2020 , one as a whole our revenues were $5 3 billion versus $4 7 billion last year, representing a growth of 13%.
A major part of the growth was organic in addition to the contribution from sponsors, which we acquired in the second quarter of 2021.
In terms of annual revenue breakdown across our areas of operation Airborne systems accounted for 38% of total annual revenues and increased year over year, mainly due to ample precision guided munitions seats.
That system sales accounted for 74% of corporate revenues, a similar level of revenues to 20 plus.
She put ISR and 26% of revenues increased year over year, primarily due to the acquisition of Boston and unmanned systems seats.
I think the optics accounted for 9% of total sales and other things were 4% of revenues and increased year over year, mainly.
Mainly due to the growth of our U S medical instrumentation succeed.
Our diverse geographic revenue base is important to the long term sustainability of our business.
In 2021 North America contributed 31% of our revenues Asia Pacific, 27%, Israel was 21% and Europe , 17%.
The growth in U S was mainly due to the spot some acquisition and sales of commercial medical instrumentation.
Asia Pacific revenues increased mainly due to the seasonal precision guided munitions and unmanned airborne systems.
The growth in European revenues was primarily through training and simulation seats.
He has always view Europe as a strategically important market with significant potential.
We have made significant investments to extend our positions across the continent.
Since 2014, all European revenues increased by more than 90% significantly faster than the growth of the European NATO members defense budgets in the same period.
Almost all of this growth was organic.
Following many years of investment we believe <unk> is well positioned to benefit from the planned increase in the European defense spending.
Compared with the fourth quarter last year, we saw strong growth in Asia Pacific than more than offset lower sales in certain other markets.
Flex the pacing of programs and trends to fluctuate from quarter to quarter.
We believe the longer term trends are more representative of our business.
The non-GAAP gross margin for the fourth quarter was 25, 5% compared with the fourth quarter of 2020 at 26, 3%.
For the full year 2021 non-GAAP gross margin was 26, 2% compared with $26 seven last year.
non-GAAP gross margin in 2021, reflecting unfavorable program mix as well as the impact of the strong shekel versus the U S dollar compared to 2020.
GAAP gross margin in the fourth quarter with 21 was 25, 1% of revenues compared with 26% in the fourth quarter of 2020.
GAAP gross margin in 2021 was 25, 7% compared with 25% in 2020.
GAAP gross profit in <unk>.
<unk> included.
Expenses of approximately $60 million as a result of a noncash expense related to inventory write offs and asset impairments, mainly in our commercial aviation activities.
The impact of the COVID-19.
The fourth quarter non-GAAP operating income was 120 media or 8% of revenues compared with $113 8 million or <unk>.
2% of revenues last year.
But she has declined slightly year over year due to lower gross margins and higher G&A expenses in the quarter.
GAAP operating income in the fourth quarter was $107 3 million versus $104 6 million in the fourth quarter of 'twenty.
non-GAAP operating income in 2021 was 461 million or eight 5% of revenues compared with 319 million or eight 4% of revenues last year.
GAAP operating income was 419 million versus $326 million last year.
The operating expenses breakdown in 2021 was as follows net R&D expenses were seven 5% of revenues versus seven 7% in 2020.
Marketing and selling expenses declined to five 5% of revenues versus six 2% last year.
G&A expenses were five 1% of revenues compared with four 8% last year the.
The increase in the G&A expenses was mainly related to the Spartan acquisition.
While we do not provide pull our guidance I would note that the recent rise in the share price could lead to an increase in expenses in 2021, and all related to employee share price link compensation for that.
Financial expenses was supposed to begin in the fourth quarter compared with 33, new born in 2000.
The lower level of financial expenses were mainly due to exchange rate differences related to delay yeah evaluation. After these liabilities in the quarter.
The national expenses in 'twenty, 'twenty, one with $14 million compared with 71 million last year.
We recorded a tax expense of $92 2 million in the fourth quarter, compared with $1 9 million and plentiful.
Texas on the income in the fourth quarter included a one time expense of approximately $80 million related to the release of earnings or do you see all abreast of these properties on 22nd of February this year.
We have excluded this expense from our non-GAAP net income due to the non recurring nature of this expense.
Including this extraordinary expense the effective tax rate in 2021 was 34, 2% compared with 13, 9% in 2000.
Our non-GAAP diluted earnings per share was <unk> 14.
In the fourth quarter and $8 in Turkey since for the full year of 2021.
GAAP diluted EPS was <unk> 18 for the fourth quarter and $6 <unk> for the full year 2021.
Our backlog of orders as of December 30, <unk> 2021 was $13 7 billion.
Two 6 billion higher than the backlog at the end of 'twenty one.
Approximately 60% of the current backlog is scheduled to be performed during 2022 and 2023 and the rest is scheduled for 2024 and beyond.
This shows the short term backlog declined in recent years Halloween the seats are long term contracts, improving our visibility for the future values.
Operating cash flow for the fourth quarter was 260 million compared with 172 million in the same quarter last year.
For 2020 , one as a whole we reported 417 billion operating cash versus $279 million in 2020.
Operating cash flow benefited from receipts of delayed payments from these initial defense in the fourth quarter as well as growth in advanced payments on contract by customers.
The board of directors declared a dividend of <unk> 50 cents.
Per share for the fourth quarter of 2021.
I will now turn the call over to Mr markets Buchi. Please.
Thank you Yossi.
Also like to wish coffee and Youll see a good luck in the New awards I look forward to continue walking with voices.
2021 or it's totally due for elevate and the growth in there with you.
He was a bit slow flip or strategy that combines strong market positions in all of the wall.
Broad portfolio and technological capabilities that were liberal contango market, leading relevant and close to 50 of solutions for our customers.
At the Investor Conference to date, we discussed this past June .
Investments made in <unk>.
Past and continued to make to grow both these market positions and disruptive.
We've continued to see good momentum across almost all of our end markets and recent in recent weeks.
We had all hoped you opinion and naturally do and no plan to.
Dramatically increased defense spending.
Elbit systems has its public subsidiaries in countries across Europe .
Part of our strategy will be a global move to domestic comfort.
Ooh subsidiaries employ hundreds.
He is creating local jobs and supporting domestic supply chain.
They provide engineering manufacturing and support services for domestic and export customers.
<unk> has invested a lot more.
Capital.
Subsidiaries.
So on the commodity piece of IP.
This best practices and provide the subsidiaries with benefit Lp's Global sales force and our footprint.
Our investments in Europe , because it wouldn't be generated good returns.
<unk> opinion doesn't use.
We have grown significantly faster than European defense budgets budgets and listening to us.
I think an encouraging indication of.
Both our market position and the demand for solutions.
Good news.
Provide inaugural example.
Our strategy in 2021, we opened Elbit systems with them following a number of commercial success.
It includes of your earnings for the group employed to reduce and ammunition for the army and combat management system for the oil finish Nathan.
The Swedish Prime Minister recently announced plans to increase defense spending two 2% of GDP.
GDP I.
I believe this system can.
Chemical by the Swedish immediately with a broad range of additional advanced in the other buckets one of abuse capabilities to help address the increasing strip environments.
This is also true for additional countries with Elbit system subsidiaries also announced plans to increase defense spending.
Including Germany, Belgium, and Romania.
In 2021, we opened our subsidiary in the United Arab Emirates and in generally this new it system.
Emirates received its first contract.
It did come in electronic warfare.
System for the UAE.
Airbus 330, and move to oil tankers.
Yes.
Im optimistic about the potential for Elbit systems' ease of UAE and additional countries that were part of the story ever hungry codes.
It's all Investor day in 2020, we presented the maritime market is one of Lp's growth surprises and investments we have made to develop a range of solution for this growing market.
Following the progress made over the last 12 months, we decided to highlight our activities in the Medicare market. It today 2022 days 2020 Investor day.
This progress includes the acquisition of bottoming in the US a contract for our neighborhood Spectre X O system as well as contract will follow suit unmanned naval vessels.
The $100 million oil, maybe 20 quarter cone costs, although the UK subsidiary Elbit system UK recipient.
There was a significant achievement for both our UK subsidiary.
Oh maritime activities.
Both of these contract Elbit system, UK will design and manufacture of maritime AWD suite comprised of digital.
Whether it's one support measures and EW clinical Bull system.
This latest generation technologies.
Situational awareness and anti ship missile defense.
Navy ships, improving our capability to exploring the history and but I.
I believe there's a significant potential for cooperation of course LP subsidiaries that operate in the maritime market.
Following the acquisition of GTR in kind of day in 2018.
Talk to him ease of use in 2021.
Today is a supplier to the U S Navy the Canadian Navy and the British Snowboarder Amazing.
These three countries are members of this fiber alliances with Australia and New Zealand.
Optimistic about lb book.
They showed in the maritime market following the progress we delivered in 2021.
In summary, I believe Elbit systems investments.
To build significant market position, along the walls and the lending portfolio openness technological capabilities will enable us to penetrate.
Future growth in defense budgets.
And with that I will be happy to take your questions.
Operator.
Thank you ladies and gentlemen at this time, we will begin the question and answer session. If you have a question. Please press star one if you wish to cancel your request. Please press star two if you are.
Using speaker equipment kind of science, that's before pressing the numbers questions will be call. It in the order. They are received please standby while we poll for your questions.
The first question is from Pete Skibinski.
Global Please go ahead.
Yes, Hello Budd.
Youll see in Colby and Rami and good afternoon, everyone is doing well.
Good afternoon page.
Maybe we could start off talking about backlog.
Backlog in the quarter was fairly flat versus the third quarter, but.
I'm wondering how the continuing resolution in the United States impacted that.
That was on the CR was ongoing through the entire December quarter end.
And really ongoing until after only a few weeks ago. So I was just wondering if you saw some order headwinds from the CR in the fourth quarter and maybe you expect that to continue through the first corner given given the length of that.
Ivy This is you'll see.
No I cannot confirm that we have seen any headwinds.
As you know.
We have increased significantly about two and a half a billion dollars the backlog in this year.
Significant part of that came also from the U S.
There are fluctuations in.
In these income orders. However, we are very optimistic when we heard today that <unk>.
<unk> administration has proposed an increase of 4% over a $30 billion in.
And I commented budget for next year that will definitely.
Be something very positive for us as well.
Yeah well.
And then as a segue into my next question.
You guys alluded to that in your opening commentary.
We're seeing certainly a higher defense spending in the U S. Now.
In Europe pretty pretty sizeable increases it sounds like so if we put that altogether, maybe it's too early but how are you guys now thinking of your organic revenue growth outlook, maybe through the mid term given this.
So pretty strong kind of macro environment, what we're seeing out there.
C <unk> beauty, we see.
A lot of interest in our portfolio.
I see.
The funnel with potential new business opportunities that we all have.
<unk> right now has increased a lot.
We also got some.
Immediate orders already we just published last week.
This contract you got from Sweden to provide things munition for the arm.
So I'm quite optimistic.
This.
This fun that it would return phone to growing the growing backlog in the near future is worthy of their own future.
Sure Mike Thanks, and sorry, one last one for me if I could.
On the gross margin in the fourth quarter could you say it was.
Which was more of a headwind in the fourth quarter gross margin was was it the program mix or was it FX.
FX headwind.
You could give us a sense of.
If you can.
Reverse those headwinds in 2022.
Yeah, well, it's a combination of both.
We as you know being we're working very hard to mitigate these headwinds.
Paul.
Our future planning, we have as a.
Extensive long term plan to improve profitability.
And in our business and.
We are working hard to implement the one company feed as I mentioned earlier.
One of them the reorganization that we did the synergy that we're building between the various parts of the organization to reduce cost and.
And the overheads all of that is underway with the long term planning.
We hope to.
To see some improvements in the.
Mid term.
Future.
So I won't ask any more questions, but let me just say congrats on the free cash flow performance. This year it turned out to be over 90% one of the.
Best year is I think over five years or so for all of us so great job there and thanks for the time guys.
Thank you thanks, and thanks Pete.
The next question is from Dana Carson off of <unk> capital markets. Please go ahead hi.
Great talking to you again today.
And I have couple of questions. My first question is regarding the widening crane.
Can you. Please detail what are the immediate and long term effects regarding the supply change and I'm, calling alteration.
And then Ken it's escalated to a significant rise in costs or disruption in activity.
This is my first question you can answer then I will ask any other questions.
Probably not I don't see any effect on supply chain Zoe is in effect because.
Because of Covid.
Which we found some ways to handle.
But I.
I don't see any immediate effects on supply chain and other.
And the other cost drivers, which is which might affect our performance in the future.
In the future. So I don't see actually I see more puts you I see many opportunities related to the screening wall.
For new business for the company.
I understand thank you the second question and what are your estimation regarding the future trend in defense budget.
Budget, the medium and the long term.
And.
I, maybe not in the next year, but you know in a couple of years.
I think that we will see increased spending in <unk> as well as in the future.
Actually.
It looks like this was a wake up call to need tool and there is a decision to increase defense spending.
NATO countries to 2% of GDP and.
Oh, just yesterday, it was announced that.
<unk>.
Yes.
Increasing.
The defense budget, two 4% might take place which is about <unk>.
Additionally, 30 billion.
We also see.
Additional.
Growing defense spending also in Asia Pacific not just the NATO countries. So I believe that.
<unk> as well as in the coming years, we see growing.
Defense spending.
All over the globe.
I understand I think the long term, maybe I don't know 510 years once you stop it.
Some point of time.
In Kuwait.
Who are difficult to.
To predict what would be in the five to six years, but it looks like.
Many countries in Europe took a strategic decision to bring.
Yeah.
Strong.
Local defense industries.
To support the industries.
We heard that Germany for example will invest 100 billion euros.
D C U E.
In defense.
And.
We also see a trend to invest most of the budget locally and hope it is very well positioned.
Via our subsidiary with the Europe as well as all around the globe to take benefit of this growing business.
Great. Thank you and my last question.
What are the main progress or a segment that is expected to rise in the U S budgets in 'twenty two 'twenty three proposals that can influence your demo or vice versa.
We see we see.
Additionally, our investment in enable domain.
This was a growing investments enable demand. This was one of the reasons for our strategic decision to invest in this domain and one of the reason to acquire Spartan.
Which supplies tone of voice.
The U S Navy.
And we also see an.
An increase in defense increased increasing spending.
For airborne platforms.
The army.
I assume that based on the lost a conflict in Ukraine, We will see also increase.
In the army budget this year with what are the near future.
Okay I understand thank you great great question, and so those sites with Lux.
Thanks Dana.
The next question is from Alan Page of Jefferies. Please go ahead.
Hi, Good morning, guys, it's actually on the line.
Hi.
Slow up on Pete's question Vasily.
Can you remind us of your largest.
Oh sure there in terms of on a country basis I know you mentioned.
Okay.
And if you can give us a breakdown.
Could you repeat please.
Sorry about the background noise.
Yes.
Can you remind us of your exposure.
As you are on a country basis.
We think about the opportunities actually being accretive avenues in terms of <unk>.
Thanks.
Okay.
Hey, Scott.
Hi.
Wendy.
Country sorry.
Each country, how many people do you have any conference call.
Actually revenue exposure in terms of country sorry.
Well our subsidiaries major subsidiaries in European countries, we have.
Starting with the U K, we have actually under <unk>, we have about five various plants that are operating in the various business areas that we work on and.
Do business in.
We have hundreds of people in these operations.
The other one that's worth mentioning is of course, Germany we.
We have two operations there.
Again, several hundreds of people operating in Germany.
I'd say operating then I would say it's a.
It's it's.
Factoring.
Engineering work.
Customer relations customer support and everything related with the business definitely outperforming in that.
That country, we have.
Thank you.
We Havent, Belgium 700 people.
Operating in the electro optic systems.
Again, developing and manufacturing equipment.
Have a relatively significant base in Romania, which is high.
High quality low cost territory, we are manufacturing over there are quite a lot of mechanical and electronic assemblies.
Boston assemblies and of course, we have as well some software capability to develop software and related with all of the engineering work that we are doing that's in Romania, we have several hundred people over there we have in Hungary.
We have in Hungary subsidiary that is operating in the advanced auto.
Our auto.
Business, including leaned our systems, we have quite a lot of.
Quite a lot of people.
People Oh.
Over there we have a subsidiary in Sweden.
We established.
In the half ago, but already received significant contracts for the Swedish minister of defense.
And we have the people on site.
<unk> performing these contracts.
Austria is another of our base of ours did start in the past with the command and control systems, but he developed in many other areas as well like.
Like our power control systems.
I meant sorry.
And then power control systems and so on.
And communication.
And the thing that I mentioned is just a.
Just a part of it we of course have subsidiaries, maybe it's a little bit lower skin and <unk>.
Yes.
We are doing over there and our commercial avionics.
<unk> the local.
Commercial.
Industry.
And we also have subsidiaries in Italy, and other places as well so.
Quite a lot of.
Spreads in total I would say.
In Europe .
We are close so probably over 1000 people that are working for all subsidiaries and this and this content.
Okay, great. Thank you for all that color and then maybe I wanted to ask about free cash flow once again, we get conversion.
First on adjusted earnings.
<unk> <unk> or so on that.
I think it suggests that there's still customers pay that's outstanding can you maybe remind us on those.
Oh yeah.
Yes.
We had a sharp.
During which there was no step both seen the budget.
The whole budget of the country of Israel.
With the establishment of the new government. The budgets are stabilized was approved.
Part of that budget.
Budget for the Ministry of Defense in Israel was approved and they have actually.
Paid up all their debt to us.
And that actually continuing on the normal regular basis.
Whatever they.
Has to pay to us so I would not.
I would not look at them.
Any debt holder.
Four four.
Hi.
Well part of you off.
A question.
On inventory I think.
Okay.
But you could talk about inventory and that's my last question.
Yes.
Okay. Thank you very much.
Thank you.
Okay.
If there are any additional questions. Please press star one if you wish to cancel your request. Please press star two please stand by while we poll for more questions.
Okay.
There are no further questions at this time before I ask Mr. <unk> to go ahead with his conclude with his closing statement I would like to remind participants that a replay of this call will be available two hours. After the conference lines in the U S. Please call 188878 to 4291 and Israel.
Please call 039 to five.
5900 and internationally please call 972.
Three nine to 55900, a replay of this call will also be available on the company's website at www Dot Elbit systems, dotcom and starting off with what do you like to make your concluding statement.
In Q I would like to thank all our employees again fulfill continued hard work and contribution to Elbit Systems' success.
To everyone on the call. Thank you for joining us today and for your continued support and interest.
Company.
Have a good day and goodbye.
Thank you. This concludes the Elbit systems Ltd fourth quarter 2021 results conference call. Thank you for your participation you May go ahead and disconnect.
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