Q2 2023 Elbit Systems Ltd Earnings Call
Speaker 1: we close the business as part of our strategy to optimize our business portfolio.
Speaker 1: David Fetterman was appointed Chair of the Board of Trustees.
Speaker 1: of LBS Systems Board of Directors replacing Michael Mickey-Federman, who remains on the board as a director.
Speaker 1: Miki was appointed as a chair of the board in July 2000 following the merger between ELOP and Elbit Systems.
Speaker 1: In 2000, Elbit Systems reported annual revenues of $591 million and a backlog of $1.4 billion. In 2022, Elbit reported annual revenues of $5.5 billion, a 900% increase and a backlog of $50.1 billion.
Speaker 1: that increased to $6.1 billion at the end of the second quarter. Revenues and other backlog was during Miki's tenure as chair of the
Speaker 1: Outstripped global defence budget roles and Elbit Systems has become one of the leading defence companies in the world. 23. Elbit Systems will rank...
Speaker 1: 21st in defence news, top 100 global defence companies.
Speaker 1: On behalf of Elbit's employees, I would like to thank Miki for his leadership and I would like to wish David Fedderman's success in his role as chair of the board of directors.
Speaker 1: And with that, I will be happy to take your questions.
Speaker 2: 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.
Speaker 2: If you are using a speaker equipment, kindly lift the handset before pressing the numbers.
Speaker 2: Your questions will be pulled in the order they are received. Please stand by while we poll for your questions.
Speaker 3: Thank.
Speaker 2: The first question.
Speaker 2: Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems second quarter 2023 results conference call. All participants are present in listen only mode. Following management's formal presentation, instructions will be given for the questions and answer session. As a reminder, this conference is being recorded.
Speaker 4: This is from Sheila from Jeffries. Please go ahead. Good morning, guys, and thank you. Good quarter. I just wanted to ask a few questions if that's okay. You talked about it in the prepared remarks a little bit, but obviously Europe was really strong in the quarter and Israel and North America weaker.
Speaker 4: How should we think about the cadence of growth across geographies from here and any color on the regional mix in the backlog?
Speaker 1: Hello, Sheila. We see a big potential ahead of us. The funnel of opportunities we deal with is quite big.
Speaker 1: We see many opportunities in all domains. We expect to see growth in Europe and Asia Pacific.
Speaker 1: as well as in the US.
Speaker 1: Here in Israel we are waiting for a five-year planning of the Israeli MOD, which should take place around the end of this year. After it will take place, I believe that we'll be able to get more orders from the MOD. Latin America is shrinking and I don't expect big orders from this region.
Speaker 1: in the near future. This is it more or less. After Abraham Accord, I would like to say that there are more opportunities for us in the Middle East. We have a subsidiary in the UAE and
Speaker 1: We believe that there is quite a big potential for us in this market as well.
Speaker 1: Our diverse presence is a...
Speaker 1: is stabilizing factors for future growth and I believe that's a strategy.
Speaker 1: strategy of Elbit which includes two main pillars. One is a very wide portfolio and the other one is being a global company with many subsidies all around the globe is proving itself and I expect to see additional growth in revenues as well as in replacing this very specific and very different world that we are in.
Speaker 4: Great. And I might ask one or two more if that's okay. When we think about the European market, obviously it's been really good. Again, is there a different strategy there? You mentioned, you know, how broad your coverage is in your prepared remarks in Europe , like how you sell in Europe versus...
Speaker 5: include a contribution from a Sotoskilo.
Speaker 5: Second quarter revenues increased by 12% to $1,454,000,000 compared to $1,303,000,000 in the second quarter of 2022, with growth across all business segments.
Speaker 4: how you saw in North America and Asia.
Speaker 4: so in North America and Asia.
Speaker 1: We continue to enhance our local presence in Europe . We have many subsidiaries. We have subsidiaries in the UK. We just inaugurated a month ago another facility for orbit in the UK.
Speaker 5: C4I and cyber revenues increased by 1% year over year. I-STAR and EW revenues increased by 21% mainly due to European electronic warfare sales. Land revenues increased by 3% mainly due to armored vehicle upgrades and ammunition sales. LB systems of America revenues increased by 7% in the second quarter due to growth in night vision sales.
Speaker 1: We are enhancing our position also in Germany. We inaugurated another facility in Germany in Ulm. We have subsidiaries in Sweden. We have subsidiaries in Belgium. We have subsidiaries in Switzerland. We have subsidiaries in Austria as well as in Romania. We are enhancing our position also in Romania.
Speaker 1: working hard with our customers to improve our local position in the continent. With regards to the US, we have a lot of challenges with regards to the US.
Speaker 1: As you know, we acquired two companies in the US recently. We acquired Spartan and we acquired Night Vision. And we are very happy with these acquisitions. Actually we see a lot of interest for our portfolio in the US market and we expect additional growth for us in the US market.
Speaker 4: Great. And then one more, if I don't mind, on the free cash flow, you know, continued usage. How much of that 300 million or so of usage in the first half will reverse in the second? And how much is tied to Israel specifically on the working capital?
Speaker 5: Asia-Pacific revenues declined mainly due to lower precision guided munition sales. The non-GAAP gross margin for the second quarter was 26.1% compared to the second quarter of 2022 at 26.5%. GAAP gross margin in the second quarter was 25.6% of revenues compared to 26.1% in the second quarter of 2022. Second quarter non-GAAP operating income was $112 million or 7.7% of revenues compared to the second quarter of 2022.
Speaker 5: compared with $103 million or 7.9% of revenues last year. The sequential improvement in non-GAAP operating profitability is an encouraging indication of the tangible benefits of the Operational Transformation Plan.
Speaker 5: Gap operating income for the second quarter was $102 million, or 7% of revenues, versus $115 million, or 8.8% of revenues, in the second quarter of 2022.
Speaker 5: The operating expenses breakdown in the second border was as follows. Net R&D expenses were 6.4% of revenues versus 7.4% in 2022. Marketing and selling expenses were 7% of revenues versus 6.4% last year. The positive inflection in global defence budget growth has created multiple opportunities and the increase in marketing and sales spend will help to realise the potential these create.
Speaker 5: J&A expenses were 5.2% of revenues compared to 5.6% last year. Social expenses were $32 million in the second quarter compared to $9 million in 2022.
Speaker 5: Financial expenses in the second quarter were higher as a result of the significant increase in interest rates and higher debt.
Speaker 5: Operating cash flow in the second quarter was a $138 million outflow compared to a $169 million outflow in the same quarter last year.
Speaker 5: Operating cash flows in the first half of 2023 reflect an increase in inventories to support revenue growth and delays of payments from the Israeli Ministry of Defense.
Speaker 5: There is a risk to receiving these outstanding payments and we continue to work with our customers to expedite these payments. Our operational improvement plans should also support our efforts to improve cash generation in the medium term. We recorded the tax expense of $9 million in the second quarter compared to $13 million in 2022. The effective tax rate in the second quarter was 13.6%, a similar level to the tax rate in 2022.
Speaker 5: Our unknown gap diluted DPS was $1.57 in the second quarter compared with $1.73 in 2022. Gap diluted DPS was $1.40 for the second quarter compared with $1.82 in 2022.
Speaker 5: Our backlog of orders as of June 30, 2023, was $16.1 billion.
Speaker 5: a $2 billion higher than the backlog at the end of the second quarter of 2022.
Speaker 1: I will now turn the call over to Mr. Matlis, LBCO. Butsi, please go ahead. Thank you, Kobe. The second quarter results demonstrate the successful implementation of LBC system long-term strategy. Revenue growth accelerated in the quarter as we started to benefit from increased capacity, the easing of supply chain bottlenecks, and continued demand for portfolio of solutions from customers around the world. The operational improvement plan that we discussed with you in the past is starting to deliver tangible results with sequential increase in operating profitability.
Speaker 1: The national expenses in the first half reflect the increase in interest rate and higher debt due to delayed payment from customers. In recent years, we have leveraged a strong balance sheet to overcome the challenges presented by COVID-19 and supply chain disruption to sustain deliveries to our customers.
Speaker 1: The increased interest rate environment has raised our cost of financing.
Speaker 1: As part of our operational improvement plan, we are working to improve care generation and reduce financial leverage.
Speaker 1: This should contribute to the
Speaker 1: I would like to review how the financial results in the second quarter reflect the successful implementation of the Elbit system's long-term strategy. The growth in European revenue in recent quarters is a direct result of our multiyear investment in building a multi-domestic footprint across Europe . Elbit systems identify the long-term potential across the European market as part of our strategic planning. Even European governments had significantly reduced the scale of their military forces following the end of the Cold War. This also resulted in reduced economic growth in the second quarter.
Speaker 1: procurement for the domestic defence industrial base and the investment in defence related to research and development. At Elbit Systems we identified the opportunity this provided to supply our advanced solutions to customers across Europe by building domestic subsidiaries with engineering, manufacturing and support capabilities.
Speaker 1: transferring or cutting edge IP and solutions and adapting them to the requirements of the different European customers.
Speaker 1: The Russian invasion of Ukraine was a wake-up call for many European countries that have substantially decided to ramp up their defense spending, capitalizing their military forces and the domestic industrial base. Following years of investment in our multidomestic presence across Europe and portfolio of leading and relevant solutions, LB Systems has started to benefit from the growth in European defense spending.
Speaker 1: as demonstrated by the growth in recent quarters as well as the orders we announced for World People X UAV from Romania and Airborne EW System from Germany in recent months.
Speaker 1: In 2017, we acquired IMI from the Israeli government and integrated it into our land segment. IMI has two major product areas, active protection systems for armed vehicles and a broad portfolio of munitions.New ts
Speaker 1: strategic rationale for the condition or the potential
Speaker 5: delays will cross the year-end. So we expect that on the second half the Ministry of Defence will pay all the outstanding receivables that we are currently missing in our cash flow position.
Speaker 5: will cross the year end. So we expect that on the second half, the Ministry of Defense will pay all the outstanding receivables that we are currently missing in our cash flow position. Great, thank you.
Speaker 6: Thanks, Sheila. The next question is from Pete Skibisky of Alembic Global. Please go ahead. Hello, good afternoon, everyone. Hey, Pete. But see, I did wanna follow up on Sheila's question with regard to Europe , because the revenue there has been incredible, right? Up 40% last year and roughly 60% here through the first half. So very impressive. And just from the perspective of playing the role of a devil's advocate, as they say, how much concern do you have about the willingness of European governments to continue to fund defense budget increases? Just in light of, you know, I think there's some inflationary pressures there. There's, I think, some macroeconomic concerns there. Do you think the governments will follow through with budget increases in the next few years, you know, in the current kind of macroeconomic backdrop they find themselves in? From what I understand, thank you, Pete. From what I understand, there is, all European countries understand right now they need to spend 2% of GDP for defense. Not only then, some countries are really investing more than that.
Speaker 1: This is not for the short term, it's for the long term. Many countries also understand, as I described earlier, that they need to build local capabilities and they want to reduce their dependency on external sources. This is exactly the LBT strategy. So I do not see a decline in defense spending in the near term or even in the medium term in Europe . It is reasonable to add to this that inventories, there are actually huge demand to increase inventories for munitions as well as for additional stuff and additional products in Europe . Actually many countries are left without critical mass of ammunition, of tanks, of artillery pieces, of UAVs, of communication equipment. So it will take years to fill all the storage again with the required quantities. So I don't see a shift or a change in the demand in the market. I also want to add that the backlog we have in Europe as well as in other places is not just for the coming quarters. It's a long term backlog and I'm sure it will yield additional revenues.
Speaker 6: We see a growing demand for guided munitions, for UAVs, for EW systems, for command and control and communication solutions, for anti-dwelling solutions all over the continent as a result of the conflict with Ukraine and I don't expect it to change in the near future. Okay, that's very helpful. I appreciate all the color on that. Let me ask one about Israel now and not to go down a political path from thousands of miles away here, but can you briefly give us a sense of, let's call it the recent social unrest that we've heard about? Do you expect that to have any impact upon the MOD's budget processes or contracting activities? No, without entering into politics, as you said, I don't expect Israel, there is a budget in the country and as a result of that, there is a process which is taking place right now in Israel to build a five-year plan for the IDF. This plan should be concluded around the end of this year and then we expect to get orders. I don't see any changes to that. Okay, I appreciate it. Last one from me. You know, so earlier this year we sort of stopped talking about phantom stock options expense because the shares had retreated a bit, but of course now the shares are up about 25% here today. Do we have to start thinking again about stock option expense as a headwind to margin at some point? Could you give us some color there?