Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems Second Quarter 2024 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. As a reminder, this conference is being recorded. I would now like to hand over the call to David Ravia, Elbit Systems Investor Relations Director. David, please go ahead.

Thank you, Operator. Good day, everyone. And welcome to our second quarter 2024 earnings call. On the call with me today are Butzi Machlis, our President and CEO; and Kobi Kagan, our CFO. Before we begin, I would like to point out that the Safe Harbor statement and 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 and certain supplemental non-GAAP information. We believe that this non-GAAP information provides additional details to help understand the performance of our business. You can find all the detailed GAAP financial data, as well as the non-GAAP information and their reconciliation in today’s press release. Kobi will begin by providing a discussion of the financial results, followed by Butzi, who will talk about some of the significant events during the quarter and beyond. We will then turn the call over to a Q&A session. With that, I would like now to turn the call over to Kobi. Kobi, please.

Thank you, David. Hello, everyone, and thank you for joining us today. The second quarter of 2024 yielded positive results driven by a 12% year-over-year increase in revenues, additional growth of our backlog that now exceeds $21 billion, and improved profitability. I will now highlight and discuss key figures and trends in our financial results. Second quarter revenues reached $1,626 million, compared to $1,454 million in the second quarter of 2023. This reflects 12% growth and is the second quarter in a row in which we have experienced low double-digit revenue growth. In the second quarter of 2024, Europe contributed 29% of revenues, North America 23% of revenues, Asia-Pacific 15% of revenues, and Israel contributed 27% of revenues. It should be noted that our diverse geographic revenue distribution is a very important factor for the long-term sustainability of our business. Israeli revenues grew from $245 million in the second quarter of 2023 to $444 million in the second quarter of 2024. This growth reflects the increased demand for rapid solutions following the breakout of the Swords of Iron War. In addition, we see growth in North America revenues due to the increasing demand for Maritime and Warfighter systems. The non-GAAP gross margin in the second quarter was 24.4%, compared to 26.1% in the second quarter of 2023. GAAP gross margin in the second quarter was 24% of revenues, compared to 25.6% in the second quarter of 2023. The second quarter non-GAAP operating income was $130.5 million or 8% of revenues, compared with $116.5 million or 7.9% of revenues in the second quarter of last year. GAAP operating income for the second quarter was $116.5 million or 7.2% of revenues, compared to $101.6 million or 7% of revenues in the second quarter of 2023. This growth in operating income and expansion in operating margin are the result of increased operating expenses efficiency. The operating expense breakdown in the second quarter was as follows. Net R&D expenses were $116.8 million or 7.2% of revenues, compared to $93.4 million or 6.4% of revenues in the second quarter of 2023. This increase was due to additional R&D efforts in our Land segment and continuous investment in High Power Laser solutions. Marketing and selling expenses were $87.7 million or 5.4% of revenues versus $101.7 million or 7% in the second quarter of 2023. G&A expenses were $68.7 million or 4.2% of revenues, compared to $75.4 million or 5.2% of revenues in the second quarter of 2023. Financial expenses were $29.1 million in the second quarter of 2024, compared to $32.1 million in the second quarter of 2023. The financial expense amounts reflect the enduring capital monetary policy implemented by Central Banks in the markets in which Elbit operates including the Bank of Israel and the United States Federal Reserve in response to rising inflation by retaining interest rates at high levels. Additionally, a rapidly growing backlog due to the Swords of Iron War required higher levels of working capital and capital expenditures. We recorded a tax expense of $11.3 million in the second quarter of 2024, compared to $9.2 million in the second quarter of 2023. The effective tax rate in the second quarter of 2024 was 13.2%, compared to 13.6% in the second quarter of 2023. Our non-GAAP diluted EPS was $2.08 for the second quarter of 2024, compared to $1.65 in the second quarter of 2023. GAAP diluted EPS was $1.76 for the second quarter of 2024, compared to $1.40 in the second quarter of 2023. We can see a 26% increase in both non-GAAP and GAAP diluted EPS in the second quarter of 2024 compared to the second quarter of 2023. We remain focused on profitability with the aim of achieving additional growth in the next quarter of 2024. I will now review the second quarter of 2024 year-over-year performance of our business segments. Note that our segmental disclosure is provided on a GAAP basis. Aerospace revenues were almost similar year-over-year with a small 1% decrease. C4I and Cyber revenues increased by 11% year-over-year, mainly due to radio system sales. ISTAR and EW revenues increased by 9% year-over-year, mainly due to electronic warfare and electro-optic system sales in Israel and Asia-Pacific. Land revenues increased by 37% year-over-year, mainly due to an increase in munition sales in Israel. Elbit Systems of America revenues increased by 11% year-over-year. Our order backlog as of June 30, 2024, reached $21.1 billion, $5 billion higher than our backlog at the end of the second quarter of 2023. Approximately $2.5 billion of this increase came from Israel. In the second quarter of 2024, the company recorded new orders of $2.4 billion, of which $1.1 billion came from the Israeli market. Approximately 69% of the current backlog is attributable to orders from outside of Israel. Approximately 43% of the current backlog is scheduled to be performed during 2024 and 2025, while the rest is scheduled to be performed during 2026 and after, which demonstrates the potential growth of the company. Operating cash flow for the six months ending 30th of June, 2024, was $26 million inflow, compared to $210.7 million outflow for the same period last year. We continue to increase inventories to support the increase in backlog. The Board of Directors has declared a dividend of $0.50 per share. I will now turn the call over to Mr. Machlis, Elbit CEO. Butzi, please go first.

Thank you, Kobi. I would like to start by expressing our sincere gratitude to all Elbit employees worldwide for their unwavering dedication and commitment to our customers in Israel and abroad. Our workforce deserves special recognition for their extraordinary efforts over the past several months in meeting the urgent needs of the Israeli Ministry of Defense during the recent conflict and supporting our international customers. I, along with the entire company, wish for the immediate return of all hostages held captive in Gaza. They are in our hearts and minds, and we are waiting for their return home. In line with the previous quarter, we are pleased to report continued growth in our order backlog, which has now exceeded US$21 billion. Revenue increased by approximately 12%, and profitability improved. Two key factors have been instrumental to our success: Elbit Systems’ extensive geographical footprint across Europe, North America, Asia, and Israel, and our portfolio of advanced technological solutions that have proven effective in the context of rising global defense budgets. Elbit Systems remains committed to expanding its global presence while fulfilling our customer commitments. Our company continues to implement its transformation plan, aiming to meet our internal target of US$7 billion in revenues, which I believe will be achieved ahead of schedule along with our internal target of around 10% operating margin. Despite the significant increase in revenues from the Israeli market, the majority of our revenues are generated outside of Israel, and our primary focus remains the international market. While supply chain challenges still exist, our diversified supplier base has mitigated their impact. International revenues accounted for 73% of total revenue in the second quarter. We were pleased to announce several recent international contract awards that enhance our global presence. Last week, for example, we announced a $270 million contract to supply rocket artillery to an international customer over a four-year period. On April 25, 2024, Elbit America celebrated the delivery of the 3,000 F-35 Helmet Mounted Display System from the company’s site in Merrimack, New Hampshire. The F-35 Generation III Helmet Mounted Display System is an advanced helmet-mounted display system. In addition, we secured an initial $37 million contract in May 2024 to supply the Iron Fist Active Protection System to General Dynamics Ordnance and Tactical Systems for upgrading the U.S. Army Bradley Vehicle. This 24-month contract offers significant growth potential. Furthermore, we recently announced a $130 million contract with BAE Systems Hägglunds for Iron Fist Active Protection System integration into the CV90 Infantry Fighting Vehicle as part of a project for European countries marking another strategic partnership. The Iron Fist System provides 360-degree protection against a wide range of anti-armor threats, including rocket-propelled grenades and kinetic energy tank rounds in both open terrain and urban environments. This advanced technology is the result of substantial R&D investments. The system’s growing demand underscores Elbit’s leadership position and the market’s appetite for innovative solutions. Through the recent conflict, we significantly increased production to meet the IDF’s urgent needs while maintaining deliveries to international customers. Our focus is on expanding production capacity to drive revenue growth beyond the increase in fuel costs. A prime example of our capacity expansion is a recent award of a $300 million contract with the Israeli Ministry of Defense for ammunition supply. This 10-year contract will see the construction of a new manufacturing facility scheduled for completion within two years. Combining the new plant facility and the Ramat Beka facility, which is scheduled for completion by the end of this year, our production capabilities will be enhanced and support increased demand for both the Israeli Ministry of Defense and international markets. In support of the surge in demand, we are also adding shifts and recruiting hundreds of new employees. On July 29th, Elbit Systems was awarded a contract worth approximately $190 million from the Israeli Ministry of Defense for the supply of Iron Sting Guided Mortar Munition. This two-year contract, which has international potential, will see the delivery of precision-guided mortar ammunition launched from a 120-millimeter mortar designed to accurately target and destroy objectives utilizing both GPS and laser-guided technology. In July 2024, we participated in the Farnborough Airshow in the UK, which was very successful. During the show, we demonstrated a wide range of solutions to our international customers and met with many strategic business partners. And with that, I will be happy to take your questions. Operator?

Thank you. The first question is from Pete Skibitski of Alembic Global. Please go ahead.

Yes. Hello. Good afternoon. Nice quarter.

Thank you, Pete.

First of all, the growth in backlog has been very impressive, showing an increase of about 40% since the end of 2022, which is incredible. I would like to gain a better understanding of the gross margin dynamics. We've seen a shift in your geographic revenue mix towards Israel over the last three to four quarters, which appears to have led to some gross margin compression. I'm curious about how we should consider the margin dynamics moving forward, especially since you reiterated the 10% operating margin target for 2026. I'm wondering how you plan to achieve that target in light of the gross margin compression.

Thank you, Pete. It’s Kobi. Actually, we see a $5 billion increase in backlog just over the last year. So that is an incredible increase in our backlog, and of course, with this increase, we also watch the backlog for stability, and we watch it very carefully. So, as you mentioned, we see a lower gross profit level but you see a higher operating profit level. With the sales in Israel, we see much lower M&A expenses and the total result, the operating profit level is at the same level of company profitability. So we don’t see any issue and we actually, now, we believe that we are in a very good position to achieve the 10% operating profit non-GAAP in 2026. As well, you can see a different OP profitability between the segments and also GP profitability between the segments. We disclosed in the last annual report the segment profitability, where you see the OP profitability, which is quite different between the segments, and you see a decline in the profitability in the U.S., which we see now this year, yielding a much favorable outcome in the U.S., which supports our prediction of continual OP profitability expansion. So the management is closely monitoring this issue of profitability, and we are certain that even though the mixed risks were less favorable in GP terms, we can see the continuous growth in meeting the 10% target that is our internal target.

Okay. That’s very helpful. Yeah. And I didn’t know, it looks like SG&A altogether for this quarter was less than 10% for the first time in quite a while. And so that’s a trend that we should expect will continue so that you can get to your operating profit target, it sounds like.

Thank you. You notice the increased operating expense efficiency that we see are very strong in this quarter. A very strong operational efficiency...

Okay. Okay.

...which compensated even more than compensated for the decline in the GP profitability.

Okay. That makes sense. Just last one for me, I noticed cash flow did improve this quarter, and really for the first half of 2024, it’s much better versus the first half of 2023. Do you think now, do you expect you can be free cash flow positive for 2024 in light of the pretty good start to the year?

So we are very positive on this. I cannot give you a certain answer as of the profitability which we can monitor much closer. It, of course, depends on the continuous payments from the Ministry of Defense in Israel, which paid accurately during the second quarter. So we had a very positive factor of payment from the Ministry of Defense in Israel. We cannot guarantee that it’s going to continue to the rest of the year, and there are many other different variables and moving parts, especially the fact that we need to be ready with inventories to support the growth of the company and expected growth, and again, some issues with our supply chain that are still pushing us for additional inventories that we need to keep. So that is, of course, stressing the cash, but to give you a bottom line, we should expect a positive free cash flow for the year 2024.

Hi, Pete. It’s good to hear from you. We are working very hard on the cash flow.

Hi.

We understand the importance of cash flow, specifically considering the current interest rate, and that’s an area of focus for the entire company.

Okay. That’s great. Very helpful, guys. Thank you.

Thank you, Pete. Looking forward to seeing you.

The next question is from Greg Konrad of Jefferies. Please go ahead.

Good afternoon. Great quarter.

Thank you, Greg.

Thank you, Greg.

Maybe just sticking to margins for a minute, I mean, you called out the higher R&D in the quarter and the 10% margin target. Any thoughts around how mix evolves over the next couple of years given some of the development work you talked about and what that means for maybe production mix over the next couple of years to kind of get to that 10% target?

So thank you, Greg, for the question. We can see a shift in the company in terms of moving from a project company to more leaning towards a product company. So the ratio between projects and products is different now with an increased level of products. Products involve, for instance, the sonar buoys for our maritime business or the night vision products we have in the U.S., or the ammunition that we’re supplying here from Israel. The fact that we see more product mix and a higher product mix ratio than we have in the past is very supportive in terms of our profitability. The certainty in products is much higher than the uncertainty in projects. We are still a project company, but the fact that the ratio of products is increasing supports our profitability target.

And then maybe just transitioning to Land. I mean, obviously, growth was very impressive in the quarter and has been very impressive in the past couple of quarters. I mean, how do you think about the runway there? Are there any near-term capacity constraints just given you called out some of the elements of CapEx and any way to think about the impact of the capacity coming online relative to the overall land business?

So, as you mentioned, the Land segment was very strong this quarter. We saw 37% growth from the same quarter in 2023, and with that, of course, we need additional investments, additional CapEx investment. We are going to inaugurate the new facility in the south of Israel, Ramat Beka, by the end of this year, which will actually give us additional capacity, increasing dramatically. Our capacity increasing efficiency as well with many technologies, robots, car bots, and additional production streams, which are more modern than our old facilities here in the central part of Israel. So that is going to give us a lot of capacity mostly for the Land business, but not just for Land. We have investments that we are making here in Israel and around the world. For instance, we inaugurated a new facility for UAVs here in Israel. We are growing our capacity in our factories in the U.S. For instance, our Charleston facility in the U.S. was inaugurated last year and it’s a very big investment. We also have new facilities in Germany and the U.K. So we keep investing, and tightening this whole area is more than a $150 million investment that we concluded with the new ERP system that was actually implemented in more than 90% of the company. Without this ERP system and without this investment, we couldn’t support this double-digit growth that we see now in the company.

And then just last one for me and maybe this is somewhat tied to the last question. You mentioned Charleston, but the Americas really seem to turn in the quarter. It had been somewhat weaker the past couple with a nice uptick in Q2. What’s driving the U.S. facing business just given it kind of moved more in line with what we’re seeing out of peers domestically? Any particular drivers of that normalization to call out?

Hi. Good afternoon. It’s Butzi. We see a different picture, actually. We see a growth of 10% in the U.S. market. The last quarter, our revenues in the U.S. were approximately $370 million in comparison to the previous quarter last year, which was about $337 million. So it’s a 10% growth in the U.S. market, and we have very strong positions in the U.S. market in several domains. We continue to win business, and we are confident that our position in the U.S. will continue to grow.

Thank you. I’ll leave it at that.

Thank you.

The next question is from Omri Efroni of Oppenheimer. Please go ahead.

Hi guys and congrats on the great quarter. Can you hear me?

Yeah.

Great. I was wondering, I have a few questions. My first one is about loitering munitions. I was wondering if Elbit is thinking about entering the loitering munitions segment in a much more aggressive way. We see a lot of demand like companies from AeroVironment with their switchblades 300 and 600. I was wondering if Elbit, with all its experience in this segment, has any plans in that area?

Hi, Omri. Yes. Of course, we believe that loitering munitions is an important market for us. We have very strong positions already in this market. We are one of the first companies to introduce a loitering munitions solution to the market and we have many customers who are acquiring the SkyStriker system, which is a family of loitering munitions solutions, and these systems are already operational with several customers. But you are fully right. We are planning to continue to invest in this domain. There are many additional opportunities in this domain. One of them is manned-unmanned teaming, combining several UAVs with one operator supporting AI in the way fighting procedures. That’s a segment that we continue to invest in. We are planning to expand the family even more based on the current positions we have in the international market, and we believe that it’s a good opportunity for us.

Okay. Great.

I also just want to mention that we are fully vertical here. We do everything from the UAVs, building the platform itself, all the communications, all the electro-optics, all the warheads, everything, the price control, everything, the command and control, everything is done internally in the company. So we are fully controlling our destiny. We are fully controlling the cost. It’s all in our hands.

So do you think that...

Actually, it’s an expansion of other solutions we are providing for these customers.

So do you think the time to market is going to be quicker if you want to go to loitering munition in the next two to three quarters? Is it possible to have new, maybe much more capacity and maybe new products in the following two to three quarters?

Yes. I just want to mention that we have delivered already thousands of first SkyStriker systems to many customers. We have several production lines for this, and we are ready to support any demand that will come from the market.

Got it. Thank you. And maybe more questions from me. Can you give some color about the UAV integration center or factory, how it’s called in Hebrew? And I don’t know if in the boundaries that you can speak of, how much capacity is going to come from there or maybe how much more efficient it’s going to be compared to the integration center you have right now.

We see a growing demand for our UAV solution and the beauty here is not just the UAV itself. It’s the entire system. So we provide a variety of payloads which include EO payloads, EW payloads, unique other payloads like sky-high and many more. We also provide the network, the command and control; everything, once again, is coming from us. We are fully vertical here. And we see the importance of UAVs here in the current conflict we have in Israel, and we see a growing demand for the family of UAVs that we are providing abroad as well. We introduced a new member to the family, the Hermes 650, which was introduced just recently to the market. And because of the growing demand we see and many orders we got, there is a need for a much more modern facility, and we are consolidating several facilities into one, again with a lot of automation and robots, which the new facility, which is actually operational already, will be able to deliver many more solutions to the growing demand we see in the market.

Maybe one more question for me, the last one. I was wondering if a hurricane situation in the Red Sea has any material effect on the company? Do you think, if so, if you have some problems with the situation, how Elbit is going to mitigate it? Thanks.

As I mentioned in my preview, we see some supply chain issues. However, they are not significant, and we find several ways to overcome them.

Okay. Got it. Thank you and congrats on the quarter again.

Thank you.

Thanks, Omri.

There are no further questions at this time. Before I ask Mr. Machlis to provide his closing statement, I would like to remind participants that a replay of this call will be available two hours after the conference ends. In the U.S., please call 1-888-782-4291. In Israel, please call 03-925-5900. And internationally, please call 9723-9255-900. A replay of this call will also be available on the company’s website, www.elbitsystems.com. Mr. Machlis, would you like to make your concluding statement?

Thank you. I would like to thank all our employees for their 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 in our company. Have a good day and good-bye.

Thank you. This concludes the Elbit Systems Ltd. second quarter 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.