Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems Second Quarter 2021 Results Conference Call. All 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.elbitsystems.com. I would now like to hand over the call to Rami Meyerson, Elbit Systems' Investor Relations. Rami, please go ahead.
Thank you, Michal. Good day, everyone, and welcome to our Q2 2021 earnings call. On On the call with me today are Butti Mokolov, 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 refer to the content of this conference call. As we do every quarter, we will provide you with both our regular GAAP financial data as well as certain 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. Jesse will begin by providing a discussion of the financial results, With that, I would like now to turn the call over to Joplin.
Joplin, please? Thank you, Rami. Hello, everyone, And thank you for joining us today. The results of our Q2 reflect sustained demand for Elbit Systems' solutions and services from our customers around the world as reflected in the growth in revenues and the backlog and an encouraging operational improvement. 2nd quarter results include the results of Spartan and Ocar acquired in the beginning of April.
At the beginning of July, we completed public tenders for 3 series of nodes, raising approximately $600,000,000 S and P Global Ratings Malot, an Israeli rating agency, assigned its Israeli AA rating with Stable outlook to the notes, which are traded on the Tel Aviv Stock Exchange. The significant participation by investors 2nd quarter revenues were $1,302,000,000 increased 21% year over year. A major part of the growth was organic in addition to the contribution from Spartan. In terms of annual revenue breakdown across our ASOC operation, Airborne Systems accounted for 40% of total quarterly revenues An increase year over year mainly due to the airborne precision guided munitions sales. Land Systems accounted for 22% of total revenues, a similar level of revenues to the Q2 of 2020.
C4ISR at 26 percent of revenues increased year over year, primarily due to the acquisition of Spartan. Electro optics accounted for 8% of total revenue and declined year over year, mainly due to the phasing of Elbit Light vision recent programs in the U. S. I would like to note that significant volumes of electro optic equipment are included on solutions that We report as part of our airborne land and C4I 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 Q2, North America was the largest, Contributing 34 percent 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 sales. Asia Pacific revenues increased mainly due to the sales of precision guided initiatives. The non GAAP gross margin for the 2nd quarter was 26 Gross margin in Q2 of 2021 was 26% of revenues, in line with the Q2 of 2020. The sequential improvement in gross margin compared to the Q1 of 2021 is encouraging and Initial benefits of cost control measures we adopted to help mitigate the financial impact of the stronger Shekel and the COVID-nineteen that we discussed with you previously.
The 2nd quarter non GAAP Operating income was $114,900,000 or 8.8 percent of revenues compared $92,700,000 or 8.6 percent of revenues last year. GAAP operating income for 2nd quarter was $117,000,000 similar to the Q2 last year. GAAP operating income in the quarter included the profit Marketing and selling expenses were 5.8% of revenue versus 6.2% last year. G and A expenses were 5.1 percent of revenues compared with 4.8% last year due to the acquisition related Financial expenses were $7,100,000 in the 2nd quarter compared with $16,500,000 in 2020. The lower level of financial expenses was mainly a result of gains from changes in fair value of financial assets and liabilities.
We recorded a tax expense of $20,100,000 in the 2nd quarter compared with 23,600,000 In 2020, the effective tax rate in the 2nd quarter was 18.5% compared with 20.8% in 2020. Our non GAAP diluted earnings per share was 2 point Compared with $1.56 in last year. The GAAP diluted EPS was $2.30 compared with $2.02 last year. Our backlog orders as of June 30, 2021 was approximately $13,600,000,000 at 2,800,000,000 Higher than the backlog at the end of June 2020 and $1,800,000,000 higher than that at the end of March 2021. Approximately 51% of the current backlog is scheduled to be performed during 2021 2022 And the rest is scheduled for 2023 and beyond.
This ratio is lower than at the Q2 of last Following a number of multiyear contracts awarded recently. The order backlog is equivalent Operating activities for the Q2 was $170,000,000 inflow compared with $179,000,000 inflow in the same quarter last year. The net proceeds from the recent bond offering will be included in our 3rd quarter results. Following a review of Capital structure and cash requirements, the Board of Directors declared a dividend of $0.46 per share for the Q2 of 2021. I will now turn over the call to Mr.
Machlis. Please proceed.
Thank you, Yossi. I would like to begin by thanking the investors that participated in the tender for Elbit Systems' note in July for the strong growth Confidence in the company's training. The record $13,600,000,000 backlog at The end of the Q2 included the 1,650,000,000 20 year contract from the Hellenic Ministry of National Defense Elbit Systems has developed a broad portfolio of market leading training and simulation solutions for militaries around the world that are Spending the simulator and training capabilities. These solutions provide a more realistic training That better prepares the soldiers for a wide range of scenarios at a lower cost. Firefighting's Squadron in Greece.
Elbit Systems operates the Israeli Firefighting Squadron on behalf of the Israeli from the squadron as well as an airport transport aircraft to Greece to assist the effort of the Greek firefighters who are battling Wildfires across the country. The delegation includes Elbit Systems' employees that will provide I am proud that Elbit Systems is taking part in this critical mission as part of our commitment To protecting the environment in Israel and the overall growth engine. At the Investor Day in April, we highlighted 3 medium term growth engines, network precision munition, maritime systems and high powered lasers. I am pleased with the progress that these growth engines demonstrated during the Q2. Was one of the revenue growth drivers in the quarter as Yofi mentioned.
The recent conflict In the south of Israel highlighted the growing spread profit and missiles represent a civilian population and military installations around the world, Increasing the urgency to develop more efficient and cost effective solutions. In June, Elbit Systems, together with the Israeli MOD and Israeli Air Force, successfully carried out a series of tests of interception to shoot down drones with an airborne high powered laser installed on a light aircraft. 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 Spartan in the U. S. And received an $80,000,000 contract in June to supply AI Power XR electro optical system For maritime office of an Asia Pacific Congress.
Elbit Systems' Spectra XL is a multi We expect our long range electro optical systems that provide naval air and land quarters with high star capabilities In both day and night and under low visibility conditions, Vectoral utilized artificial intelligence to continuously Can for Target expect operational insight and reduce human error. In June, our U. K. Subsidiary, Elbit Systems UK, We filled a $60,000,000 contract to supply Exact Night Vision Global to U. K.
Armed Water. Systems from the Exact family have accumulated significant operational experience and have been selected by a number of net In June, our U. S. Subsidiary, Elbit Systems of America, was awarded 2 orders This is Philip, U. S.
Army Piloting Nitrogen Systems. In June, Elbit Systems' German subsidiary, Elbit Systems Joytrend was awarded a $20,000,000 contract to supply e links for certified multichannel radio to the Swedish arm We'll supply additional ELink's radio for vehicles as part of the Sweden tactical radio after October. Our Ealing's radio have been selected by several enforces across Europe, including Switzerland, Spain In summary, our broad based backlog continues to provide us with good visibility and we continue to
Kindly lift the handset before Our systems,
you mentioned the strength in Precision Munitions. I mean, how lumpy is that? Or does this business reset at kind of this higher level when we just think about it going forward?
Well, the basics of these product lines, Several of those are coming from the acquired subsidiary IMI that we did in 20 'eighteen. Now there is a big variety of products that are in that category. That means airborne launch precision guided munitions. When we bought IMI, we had about 20% or less of international business At IMI, which include a very low level of revenues from this kind of product lines. With our Geographic spread of our marketing and contacts with the various customers, we were able To promote significantly the interest of customers in this kind of precision guided munition.
And we do see A significant growth over the years for this kind of family of products. We 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 of launching capabilities on one an improvement of Precision guidance on the other side. By the way, the acquisition that we did, A smaller acquisition that we did this quarter, a company by name of Brocade, we bought them from BAE. 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 of continuous growth in this area.
That's helpful. And I mean, you brought up IMI, which I think you've done a good job kind of improving the margins. I mean, margins stood up Out in the quarter, good sequential progression and some of the highest over the past several years. I mean, how much does mix play into that or have You've been able to drive productivity where we 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 5 years. We are somewhere in the middle of performing and achieving the goals of this plan. We had another 2 years I think we are ahead of what we initially planned. We are improving at a nice rate the margins. And it looks like that there is still room for improvement for the following 2 to 3 years.
A major milestone that we will be achieving towards the end of 'twenty three, beginning of 'twenty four is the movement of The manufacturingproduction facilities to the southern part of Israel into a new modern production facility And through that also lowering the cost of labor and that will give another boost for improvement of Profitability of production of these products.
And then just last one for me. I mean, strong free cash Slow 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 During the Q2, they did pay some of their Billings, however, these are fluctuating a little bit. There may be some fluctuations in the next quarter. We are very optimistic that everything will be settled by year end because the delays were caused By the approval of the overall budget for Israel, including the budget for Ministry of Defense. This will be solved Somewhere in November. And therefore, everything it looks like every outstanding billings will be paid
The next question is from Dina Korshunov of Leader. Please go ahead.
Hi, guys. How are you? Congratulations with your great results. I have a couple of questions. I think the First one and the most interesting is, what are the main segments that contributed to the Big increase in the revenue this quarter.
Can you tell us? Do you think it's sustainable for some kind of amount or it's something?
Growth in revenues is not related just for 1 line of business. We see it all over the portfolio. And I think that the strategy is that we have chosen It's starting to bring results. The strategy is a wide portfolio, very advanced Wide portfolio on one hand and being global as much as we can with local facilities around the globe. And we see a growing demand on one hand for this portfolio because of tensions around the globe and To support the local economies and to create more growth and the fact that we have so many subsidiaries all around the world is certainly helping us To get to that conference.
So the answer is we see a growing demand For the whole portfolio all around the globe and you see in the backlog This backlog should be converted into revenues and profit in the near future as you saw In these results, and I believe that this trend of growth in revenue and In profitability, we'll continue. Talking about profitability, we invest a lot of our platforms in order to increase Effectiveness, efficiency and to create synergies between the different activities we have in the company. That's why we are successful to gain more profit and I believe that this trend will continue.
I understand. Great. And does the high revenue volume contributed to the increase in the profitability in the quarter or just
No, no. It's too different. The high working revenue is related to backlog, which is transformed into revenue. The reason for the growth in profit is big efforts and a very hit We have implemented quite a long time ago and starting to bring results to increase Effectiveness and efficiency in the company.
Understand right. And last question, do you expect Some kind of decline in the results of next quarter if there will be acceleration in COVID-nineteen restriction in the world? I
think that we have proved that we know how to operate and how to be success We're also under restriction because of COVID-nineteen. And we understand that The pandemic will not disappear in the near future. We are ready to continue to operate In the future, also under new restrictions and the fact again that we have coming up to the world around the globe is certainly helping us. And it seems that we are ready to work under new
The next question is from Pete Skibitski of Alembic Global. Please go ahead.
Yes. Good afternoon, Vazee and Yossi and Rami. Very nice quarter all around, guys.
Thank you.
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 contract is definitely a significant contributor to that.
Okay. Okay. And Yossi, I think you guys have been alluding to the implementation The new implementation of your ERP system, is that complete at this point? Is that an ongoing process? And Has that been pretty important to the margin strength?
It's an ongoing effort. The plan And the implementation started about 3 years ago. It was a very detailed plan and we are on plan, Give or take some changes. Right now, by the end of this year, we will probably be completed around 70% of the implementation and by the end of 2022, we expect to be close to 90 So as I said, our Financial report statements include all the capital investments that we did in that ERP system, they include all the expenses related with the implementation. But unfortunately, so far, we did not see yet The benefit is coming through because not the whole organization is on the same system.
We start right now to See, some of that very small amount of savings, but I think it looks like that somewhere in 20 '23, we will be we will face some more material improvement in cost In reduction of inventory because of coronaity of items in shorter turnaround times and other benefits That will improve the operational performance of the company, hopefully including the cash flow.
That's great. A couple more from me. I want to ask about a program, the F-thirty five, Because I know you guys have a good amount of content on the F-thirty five. And the reason I ask is because we've heard from other suppliers that There have been some revenue headwinds over the last couple of quarters, maybe 2 or 3 quarters call on the F-thirty 5 because Lucky kind of slowed things down a little bit and 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-thirty five for maybe the last couple of quarters, but maybe that should start to grow again maybe later this year into 2022?
I don't know if you could provide any color on that.
On the F-thirty five, you are right that we have significant The helmet system is one of them. The full display In the cockpit, it's another one and some other parts as well. So far, we're working with Lockheed Martin Hand by hand and our production plans are very closely related with their requirements. They give us some forecasts. And according to that, we work and of According to the purchase orders that we get from them.
So far, I wouldn't say that we have experienced 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. 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 and A going forward, how active you are? 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 and A is part of our strategy. It was and it has been, it will continue to be. And the rationale behind that is to expand our portfolio on one hand and also to get additional global position in the lower markets. And we continue to look for opportunities. We are monitoring the market.
We see some opportunities which are relevant to us. And based on And as you said, we have the right capital. We have the capital right now to continue doing it. I think that we also go to the market We know how to make acquisitions and how to merge the activities and how to get Synergies, home positions and it will continue to be part of our future strategy as well.
Ladies and gentlemen, there is a temporary technical issue in the Q and A polling process. It has been fixed and is now working properly. There is a follow-up from Pete Skibitski of Alembic Global. Please go ahead.
Yes, thanks. But see, there was some press out there, some articles out there in the quarter about your ground your mobile artillery 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 can give us a sense of what kind of domestic and international opportunities are out there for that system because I think it's Maybe the most modern mobile system that's out there right now since it's finishing up development.
So
Thank you. It's in the middle of development. We have a big contract here in Israel for this Sigma-one hundred and fifty five Turco breakdown. It's a very sophisticated It's a piece of equipment, it's a bit robot actually and which can reach ranges For more than 40 kilometers, there's a limited amount of crew members, and it can fire guided ammunition as well, We are in the middle of the development. We are progressing well with our local customer in Israel.
And we will start performing live shooting next year. And the first Should be completed around the end of next year. We I agree with you that one of the most advanced solutions, which is in the market right now, We see growing demand for that in several countries. And we are promoting it already in several countries. And I just want to add that This quarter, we acquired the ROCAL from BAE here in Israel in Jerusalem.
And One of the technologies and one of the assets they have is a guided fuel, which can be added to a regular fuel injector To make it guided, which will actually enable us to provide a Complete solution for our customer, which includes the Hobbit Cell itself with all the automation embedded in it, the fire control Some reconnaissance capabilities collected, which can create target To the Hobbit, all type of ammunition, which can be fired, including That is the mission as well. So we can provide a full solution for our customer. And we and there is a growing demand for that. It was also published recently that the previous version of the gun was presented in the U. S.
For some requirements, which are available in the U. S. Market as well, and this 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.
Could you just maybe give us an update in terms of Has the government made all of its appointments to the Israeli MOD? Is the budget Outlook fairly stable at this point, just things like that that maybe people like me internationally don't have as much visibility into?
Of course, there is an understanding here in Israel in the government about the size of the defense budget for the coming year. Actually, the agreement which has been made between the Ministry of Finance and the Ministry of Defense is This budget, the entire the national budget It's under an improvement process in the country, and it should be concluded By the beginning of November, and then it should be implemented. This is after more than 2 years more than 2 years results, the national budget here. And when this budget will be implemented, there are many additional opportunities for us, which I expect to happen. So that's the status of the budget.
The budget is bigger and there are several opportunities for a bit embedded And this budget will enable the Israeli IMOD and To implement the plan, it's a 5 year plan To acquire new type of technologies to support Israeli forces. What's also important to mention is the budget will be for 2 years to cover 20212022.
Okay. So much more visibility at this point it seems like than you've had in a while. So that's great. Thanks so much for the color guys. Have a great day.
The next question is from Elad Krause of Excellency. Please go ahead.
Hi, Bhutto, Rami. I have a couple of questions. First of all, regarding the new businesses, do you see any change in the margins that you're selling Regarding compared to the past, is it higher, lower, more of the same?
I just want to clarify a little bit of how we work so that you all understand. First of all, of The prices are set by the market. And that is where we compete On one hand, there might be some movements because of changes in economies in the various parts of the world and So on, but the prices are set by market competition. The cost element is set, of course, by our of cost of the various programs and on a multiyear basis and we definitely take into The difference is the budget. So this is the process we are going through.
If we look What we are getting at the new businesses that we acquire, then definitely, we Can see that there are some movements, but not major movements in the prices that we are getting on one hand. On the other hand, there is movement in the cost structure of our company, which on a multiyear basis, we Have a significant effort to reduce overheads, to increase yields of production, to centralize Production and acquisition operations. And that As we mentioned earlier, the ERP system that we are implementing, all of that should lead to effectively Lower 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 defining the prices in the competition stage.
I also want to add to that, that we have much more to offer to the market than we had few years Because of the acquisitions we made and because of the synergies between all different parts of the portfolio, we have much more solutions to provide. And the fact that we control most of the technology in house creates a big creates opportunities for For cost reduction as well. Perfect.
Another thing, do you see any major changes In the CapEx of the company, due to the fact that you're moving out from Central Asia and within a new place for AIN?
Well, The CapEx, I would split that into 2 parts. The part, which is I would 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 are, I would say, one of a kind. One of it is the investment in the 1 ERP system, Which is a significant investment over the years, which does affect our CapEx to the tune of, I would say, $10,000,000 to $20,000,000 maybe some more 1,000,000 of dollars per year.
The other element, Which is extraordinary is the movement of the production facilities of IMI to the southern part of the country, Which is also one of a kind. It does affect and it will affect also 2022 2023, I don't see a significant step up in that part for the following 2 years, but it's a one of a kind. So if you look at what's happening in the CapEx in the last 5 years, let's say, the last 3 years that we went through In the next 2 years of coming, they do support the CapEx number does support these 2 major efforts, which are not recurring The recurring CapEx essentially is rather stable, maybe with some Minor increases in some advanced technologies that require specific engineering
There are no further questions at this time. Before I ask Mr. Majlis to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available 2 hours after the conference end. In the U. S, please call 1-eight eighty eight 7,824,291.
In Israel, please call 039255900. And internationally, Please call 972-three 925-five thousand nine hundred. A replay of the call will also be available at the company's website, www at elbitsystems.com. Mr. Machlis, would you like to make your concluding statement?
I would like to thank all our employees again For the continued hard work, particularly in this challenging time. To everyone on the call, thank you for joining us today
This concludes the Elbit Systems Limited 2nd quarter 2021 results conference call. Thank you for your participation. You may go ahead and disconnect.