Q1 2023 Elbit Systems Ltd. Earnings Call
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Ladies and gentlemen, thank you for standing by. The conference will begin shortly.
Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems first quarter 2023 results 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. Thank you for using Elbit Systems as a first quarter 2020 twelve to twenty-six year time Smart culturally friendly company to help you influences truckers sought quality to better or better use price good in the market for your marketing opportunities are available. For the your risk assessmentes as part of M alter, a cam to the own group online approach for business online fund numerous featuresol rom long sometimes Running fast p s
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 new section of the company's website www.elbitsystems.com. I would now like to hand over the call to Rami Meyerson Elbit Systems Investor Relations Director. Rami, please go ahead.
Thank you, Jony. Good day everyone and welcome to our first quarter 2023 earnings call. On the call with me today are Vuti Machlis, our President and CEO , Kofi Kagan, our CFO and Yossi Gaspar, senior EVP business management. Before we begin, I would like to point out that the safe harvest statement in the company's press release issued earlier today also refers to the contents of this conference call.
As we do every quarter, we will provide you with both our regular GAAP financial data as well as certain supplemental non-GAAP information. We believe that this non-GAAP information provides additional detail to help understand the performance of the ongoing business. You can find all the detailed GAAP financial data as well as the non-GAAP information and the reconciliation in today's press release.
Kobi will begin by providing a discussion of the financial results followed by Buti who will talk about some of the significant events during the quarter and beyond. We will then turn the call over to a question and answer session. With that, I would like now to turn the call over to Kobi. Kobi, please. Thank you, Rami. Hello, everyone, and thank you for joining us today.
The financial results of the first photo of 2023 reflect the sustained demand for our leading technological solutions.
that supported the growth in the order backlog to $15.8 billion, up 15% relative to the first quarter of 2022.
I'm encouraged that our operational activities and the cost base are gradually returning to normal following the supply chain and labour challenges in 2022.
We continue to invest in the operational transformation to realize the potential presented by the large panel of opportunities around the world.
and we are on track to deliver and improve performance.
We started to report segment information in five segments from the year ended December 31, 2022. In our press releases for the first, second and third quarter, we will provide the revenues by segment and we report revenues and operating income of each segment in our annual report.
and cyber, ISO and EW, land, and ALBI systems of America, or ESA.
I will now discuss some of the key figures and trends in our financial results.
I would note that the sale of Ashotashkelon to FIMI Opportunity Funds was completed at the end of the second quarter of 2022 and our results in the first quarter of 2023 do not include a contribution from Ashotashkelon.
First quarter revenues were $1,393,000,000 compared to $1,353,000,000 in the first quarter of 2022.
In terms of quarterly revenue buy segments,
Aerospace revenues decreased by 10% in the first quarter of 2023 compared to the first quarter of 2022, mainly due to lower airborne precision guided munition sales, partially upset by growth of training and simulation sales.
C4I and cyber revenues increased by 19% year over year, mainly due to growth in command and control system sales.
I-STAR and EW revenues increased by 17%, mainly due to electronic warfare system sales.
Land revenues increased by 8%.
mainly due to armored vehicle upgrade sales. Elbic Systems of America's revenues in the first quarter were similar to the first quarter of 2022.
Our diverse geographic revenue base is important to the long-term sustainability of our business.
In the first quarter, Europe contributed 27%, North America 24%, Asia Pacific 24% and Israel contributed 18% of revenues.
European revenues increased mainly due to the growth in UAS munitions and training and simulation sets.
Azure Pacific revenues decline mainly due to lower precision guided munitions sales.
Latin America sales increased due to C4I sales.
The non-GAAP gross margin for the first quarter was 26.4% compared to the first quarter of 2022 at 24.6%.
Gap gross margin in the first quarter was 25.9% of revenues compared to 24.2% in the first quarter of 2022.
margin in the first quarter was 25.9% of revenues compared to 24.2% in the first quarter of 2022. Type in non-GAAP , gross margin.
in the first quarter of 2022 included approximately $20 million of expenses related to stock price link compensation plan.
First-quarter non-GAAP operating income was $105 million, or 7.5% of revenues, compared with $66 million, or 4.9% of revenues last year.
Gap operating income for the first quarter was $94 million or 6.7% of revenues versus $59 million or 5.3% of revenues in the first quarter of 2022.
was as follows. Net R&D expenses were 7.9% of revenues versus 7.4% in 2022. Marketing and selling expenses were 5.8% of revenues versus 6.4% last year.
J&I expenses were 5.5% of revenues compared to 6.2% last year.
GAP and non-GAP operating profit in the first quarter of 2022 included expenses of approximately $35 million related to the stock price link compensation plans.
which in the first quarter of 2023 were not material.
Financial expenses were $24 million in the first quarter compared to financial income of $1 million in 2022.
Financial expenses in first quarter reflect the higher interest rate environment.
changes infer the value of financial assets and exchange rate differences.
We recorded a tax expense of $9 million in the first quarter compared to tax expense of $8 million in 2022. The effective tax rate in the first quarter was 12.8% compared to 13.8% in 2022.
Our non-GAAP diluted EPS was $1.70 in the first quarter compared with $1.22 in 2022.
GAAP diluted EPS with $1.40 for the first quarter compared with $1.19 in 2022.
Our backlog of orders as of March 31, 2023 was $15.8 billion, $2.1 billion higher than the backlog at the end of the first quarter of 2022. Approximately 54% of the current backlog is scheduled to be performed during 23 and 24.
and the rest is scheduled for 25 and beyond.
Operating cash flow for the first quarter was $73 million outflow compared to $35 million flow in the same quarter last year.
The board of directors has declared a dividend of 50 cents per share.
I will now turn the call over to Mr. Marliss, LBCO. Bootsy, please go ahead.
Thank you, Kobe. I'm encouraged by the financial results in the first quarter.
a strong demand and large panel of opportunities and a series of significant contracts booked since the end of the first quarter.
Over the last three years we have experienced
the challenges of COVID-19, supply chain disruptions, and changes in the labor market.
Elbit Systems has demonstrated its resilience through this period and the remarkable ability of our employees to deliver and support our customers during a very volatile period.
There is still work to do to complete the operational transformation represented at our investor day in March.
is still work to do to complete the operational transformation represented at our investor day in March. I believe that the
The first quarter results provide confidence.
that we are on track to deliver the transformation. L-bit system
from the healthy demand for artillery solutions from countries and militaries around the world that have started to implement the lessons learned from the Russia-Ukraine conflict, including the critical importance of effective indirect fire support.
We also continue to receive orders from legacy customers. Albert Systems has developed a comprehensive portfolio of systems and solutions for artillery forces.
The portfolio includes Robitess, Mortals and WorkX launchers, Unition, File Control and Command Control systems, target designators, UAV and training systems.
We provide this to our customers as tailored solutions or as standalone systems.
A few weeks ago, on May 18, we announced a $305 million, five-year contract.
to supply 20 precise universal launching systems or full rocket artillery systems as well as rocket and missiles of various ranges to the Royal Netherland Army.
The pull system can launch both free flying rockets and precision guidance rockets and missiles with ranges of up to 300 kilometers.
The Pulis launcher can be mounted on a broad range of wheeled and tracked platforms, providing a significant reduction in maintenance and training costs.
can be mounted on a broad range of wheeled and tracked platforms, providing a significant reduction in maintenance and training costs. The Dodge Compost can also be mounted on a wide range of wheeled and tracked platforms,
follows rocket artillery contorts from two opinion countries we received during the first quarter.
workers artillery contacts from two opinion countries were received during the first quarter. In 2022
German defence company CAMW signed a cooperation agreement with Elbe System Land and Elbe System Deutschland to develop the Euro Force, the next generation of European and long-range Vocal
This agreement will enable both companies to address the growing potential in the European market for this solution.
In April , we were awarded a 102 million 8-year contract.
to supply a battalion of Atmos 155mm truck mounted orbiter to an international custom. The Atmos is a combat proven wheeled orbiter designed for rapid deployment and operation, enabling provision of fire support for all to land missions.
In May, the Rheinmetall LP team conducted a live-fire demonstration of an automated 155mm wheel set for Petrovetsa in southern Israel.
This demonstration was part of the cooperation agreement we signed with RIMetal in 2022 to develop, market and manufacture European automatic wheeled self-propelled robots.
The solution combines and leverages the technological capabilities of both companies and will provide a mature and relevant solution for NATO armies that are planning to recapitalize and expand the utility port.
The Elbit system provides a broad portfolio of market leading for war fighters in all domains in the air, on the ground and at sea forming a single soldier to large formation and headquarters.
Our simulation solutions provide more realistic training that better prepares for a wide range of scenarios at lower cost.
In May, our British subsidiary, LBT System UK, was awarded a US$71 million contract by the UK MOD to provide, maintain and operate the Ground Maneuvering Synthetic Training System or GMST for the UK Army Boxer-Owned Vehicle and Charges.
our Hellenic International Flight Training Center contract with the arrival of the first two M346 aircraft at the International Flight Training Center in Karamata.
The M346 aircraft are equipped with LBT systems integrated virtual avionics that simulate combat and flight scenarios to enhance the pilot's training experience.
The Hellenic Flight School contract is on track and delivering as planned.
At our recent investor day, we discussed the investment we are making to upgrade and expand our electricity footprint.
as part of the transformation of our company and enable our internal target of revenues of 6.5 or 7 billion USD and operating marked gains around 10% in the future.
In May, we opened our new manufacturing facility in North Charleston, South Carolina. The new facility will employ hundreds of people and assemble large vehicle assistance for the United States military and allied nations, including the Mission to the United States protecting the private sector.
command platforms for the US Army, Army's CPI-2 program, and the Sigma-Hovitzer system for the Israel Defense Forces. Construction of our new ammunition production site in Ahmet Beke is on track.
and should be up and running from 2024. The new state of the art facility should benefit from the current demand for munitions.
Last week, thousands of Israeli employees volunteered to
during a big talk which means that doing
They're doing good at Elbit Week to volunteer, contribute and give back to their local communities.
During this year, Elbik's Stoves Week, our employees contributed more than 3,000 hours volunteering on dozens of projects around the country with Holocaust survivors, the elderly, as well as youngsters that need a helping hand. I am proud to see the involvement of thousands of Elbik's Stoves employees around the world.
that volunteer to participate in activities that benefit our communities.
And with that, I will be happy to take your questions. 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. If you wish to cancel your request, please press star 2. If you are using speaker equipment, kindly lift the handset before pressing the numbers.
Your questions will be pulled in the order they are received.
Please stand by while we poll for your questions. The first question is from Shira Kayagulu of Jeffries. Please go ahead.
Hey, good morning guys and thank you for the time. Just wanted to ask a little bit deeper into the segments if you don't mind. Aerospace sales to start with maybe we're down 10% year over year I believe. Is this the precision guided conditions headwind related to a single program and how do we think about sort of that return to growth there.
I share a good afternoon here. The answer to the question is a reduction in airborne precision guided munition cells that we had at the first quarter of 2022 and due to program mix we didn't have that substantial
If you remember last time we discussed the different segments, we mentioned also the importance of looking at the entire comparison.
Because there are many synergies between the divisions, one quarter, one division is doing better than the other. There is also a mix of projects which are also impacting the results.
I would like to remind this remark again and to make sure you see the overall integrated picture, I think that reflects better the performance of the corporation.
Okay, no, that's helpful, Color. And then maybe if you could just go to land for a second. You're partnered with BAE on OMSD on that program. Maybe if you could just provide us an update on timing on that program and how you're thinking about the opportunity and next steps in this sort of armored vehicle upgrade. This opportunity is, as you know, it's a tender. Repackaging interesting experience and looking at the
We are participating in the tender in one of the teams.
with our solution and we are waiting for the decisions actually.
We expect decisions during the DCU about the first phase of the project.
And that's more as a status.
And that's more as a status.
You got it. Okay. All right. Thank you very much. The next question is from Ateensh Ouskan of Wooden Company. Please go ahead.
Thank you and good afternoon all. I have a couple of questions. The first one is, in your previous investor code you mentioned that following out this transformation over the past couple of years, you are now in a position with infrastructure to support annual revenues of $6 to $7 billion with improved profitability and you also mentioned that
you think you will hit 10% operating margin targets soon. Can you elaborate or provide some more granularity? When do you expect to basically hit these levels both on top line and operating margin levels? Is it some kind of midterm guidance or do you think?
capex upcycle with the new ammunition plant in negative operational next year and South Carolina plant already behind us and the one ERP investment is already completed. Where do you see your capex budget annual capex budget or annual capex over revenue strength going forward? Thank you.
Hi, this is Yossi. Regarding your first question, I think the best indicator to look at is our backlog of orders. We are close to 16 billion backlog of orders, growing, very nice double digit here over here.
Our revenues have grown year over year, probably in the mid-single digits, as you can see so far. And we, as we explained in the past, we are making every effort to close the gap between the growth of the backlog and the growth of the revenues, of course by increasing the revenues.
If you look at our press release today, you see that of the $15.8 billion of backlog, about 54% are planned to be transformed in revenues in the next seven quarters. That means this year and next year.
So, this is the range of the top-line growth driven by the backlog of orders that we already have. So, itís no speculation. Itís just a simple calculation of the backlog transformation into revenue. In parallel, as Butsi in our investors meeting explained, we have initiated all the efforts to build the operational capability to do that, actually to manufacture and deliver to our customers and in the various places in the world.
the various facilities and this is underway. Some of them are completed, some of them will be completed during 23 and 24, so all of this will enable us to perform. Regarding, and of course by growing, and of course by
the top line and by keeping the overhead rates and the GNA under control, we expect to return to the level of operating profit that we used to be several years ago. So this is
I believe the second question I will turn it over to Koby to respond. Thank you, Yossi.
As Yossi explained, we are currently in the process of building our infrastructure to support the transformation of backlog to revenues. This is involved with CAPEX investments. In terms of specifics, the South Carolina facility is almost finished.
1st of July this year and we are still in the cycle of capex investments in the Ramat Bekeh Negev desert south of Israel ammunition plan to actually have all the facilities in
that will be relocated from the Ramata-Shoron facility to the negative facility. So we are expecting modest decline in Carpex investments due to the conclusion mainly of the ERP system.
but we still invest heavily in our production capacity in order to have the backlog transform to revenue.
Okay, crystal clear and if I may follow up just with a very short question regarding the aerospace segment. I do remember that you guys have now additional capacity put into operation in your production line for drawing to these routes.
Is it possible to basically tell us what's the waiting line if a client comes and orders you, I don't know, a dozen of drones right now. Just to give you an example from your unlisted...
Pier in Turkey. By car has now a three-year waiting line for drones. I'm just trying to have an idea whether you have the same kind of bottleneck. Thank you.
We are expanding our production capabilities for UAZs. We are building a new facility right now near the city of Moudin.
which is not far away from Jozalem in Israel. And this is on top of the facilities we already have. And this facility should go live by the end of this year.
which will enable us to meet the growing demand for UAVs that we are seeing all around the globe and to enable us also to deliver UAVs to our customers in a relatively short period of time. Ok, that's good enough for me. Thank you very much for the detailed answer. Thank you.
The next question is from Ella Freed of Bank Lumi. Please go ahead. Good afternoon and thank you for taking my question. I have actually a few. The third question is what was the reason for inventories going up?
I mean it could be future growth, rising prices of raw materials, supply delays or it means the investment in long term projects.
Hi, good afternoon.
As we indicated back in our investor event, we are planning this year, the 23 years, to have each quarter, we are building each quarter to transform the backlog to revenues with increased sales quarter after quarter in 23.
That means that in order to be able to fulfill this backlog of the 423, we needed of course to buy raw materials to invest more in WEEP and we were doing that in the first quarter. This is according to our plan to have those inventories ready to be transformed to revenues.
in 2023 and some of that in 2024. So that is just a way for us to build the additional revenues, the increased revenues that we are expecting in the coming quarters. Okay, so we should be looking at it as a positive indicator.
Ok, I have a couple of more questions. In two weeks you are going to Paris, in two and a half weeks you are going to Paris to Le Bougher Airshow and you obviously will return with even more orders and with even more massive backlog and it's just a follow up.
And will you be taking more distant orders like the American leading companies or other or implementing any other strategy? I don't know if you have the possibility for more outsourcing.
Thank you, Ella, Debouti. You are right, we see a growing demand for our products and systems and we see a very big funnel ahead of us. We took it in account and that's exactly why we took a decision to invest to enhance our facilities in Israel as well as abroad.
Just to remind all of us, we expand our YorkNam facility here in the north part of Israel to support more land systems revenues. We expand our radio facility in the north part of the country.
in order to support growth and revenues of the C4I and communication equipment division. And the same also at Hobart in order to support more revenues.
coming from our I-STAR division. We mentioned already the new UAV facility we are building these days and we are going to inaugurate by the end of this year. And that's on top of the Ramat-Beka investment, which we started to build three years back.
and will go live next year. That's only in Israel. A broad new facility in the UK, in South Carolina, a new facility in Bristol, UK.
which we are going to never wait very soon.
a new facility which was inaugurated already in Ulm, Germany, to deliver more equipment to our European countries.
We took into account the growing demand
So we took into account the growing demand and we have a mature product.
We are local in our markets.
via the dozens of subsidiaries we have all over Europe and all around the globe.
dozens of subsidiaries we have all over Europe and all around the globe and we will be able to take
to take more orders from the growing demand that we see and to convert it in relatively short period of time into revenues and to profits. And because of that, we felt confident to mention the $6.5 to $7 billion revenues that we will be able to achieve with a level of 10% OP.
Well, it sounds like lots of work. I have a follow-up question. Does it mean that we should be looking again at your pipeline? I mean, this also calls for some kind of, I don't know, M&A or any kind of new acquisitions in the pipeline.
is to expand our market position.
And because of that, for example, we took a decision to acquire a Spartan in the US and now to build a stronger position in the US Navy.
And because of that we took another decision to acquire night vision in the US as well to improve our position in the US arm.
These are just two examples. One reason is to look for new markets and new market positions. The other reason is, and when I'm talking about new markets and new market positions, this is mainly in the US and Europe .
And the other type of M&A we are looking at is new technologies.
And another example for that is the acquisition of our car which we acquired a few years back in Jordan, which brought us a new technology to the company.
We have proved already in the past that we know how to do M&A in a good way. We know how to create synergies between them and the new companies that we are acquiring to the portfolio of FERDI, to the current portfolio of FERDI.
and we know how to manage it. So we certainly look for more opportunities to expand the company in these two aspects.
At the same time, I would like to mention that we are reviewing our portfolio all the time and we are
making sure that what we have in our portfolio fits the strategy of the company today.
Because of that, a year ago we took a decision to divest Ashota Shkrelon, which was a great company.
But we took the thing to divest it, not because it was not a good company. The reason for that is because it was not synergistic to the LBB portfolio.
So we took a decision to divest it and we were happy that FIMI took a decision to acquire it from us. So the good thing for us is that.
So we continue this process as well in parallel of looking for new M&A where we are checking our portfolio at the time, making sure that the current portfolio which we have fits the current strategy of the company.
So can you shed a bit more light in both directions or we have to wait?
I have nothing special to report right now, but I can tell you that we are working both directions constantly.
Okay, so it sounds interesting and thank you for taking so many questions. I think maybe somebody wants to follow me. Thank you, Ella.
If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by while we poll for more questions. There are no further questions at this time.
In Israel, please call 03925-5900 and internationally, please call 972-3925-5900. A replay of this call will also be available on the company's website, www.elbitsystems.com. Mr. Machlis, would you like to make a concluding statement? Thank you. I would like to thank all our employees for their continued hard work and contribution to Elbit System's success. To everyone on the call, thank you for joining us today and for your continued support and interest in our company.
call 03-925-5900 and internationally please call 9723-925-5900. A replay of this call will also be available on the company's website www.elbitsystems.com. Mr. Machlis, would you like to make a concluding statement? Thank you, I would like to thank all our employees for their continued hard work and contributions to Elbit System's success. So 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 first quarter 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.