Elbit Systems Ltd Q1 FY2025 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' First Quarter 2025 Results Conference Call. As a reminder, this conference is being recorded. I would now like to hand the call over to Ms. Daniella Finn, Elbit Systems' Vice President, Investor Relations. Daniella, please go ahead.

Thank you, Nathan. Good day, everyone, and welcome to our First Quarter 2025 Earnings Call. On the call with me today are Butzi Machlis, President and CEO of Elbit Systems, and Kobi Kagan, CFO. Before we begin, I would like to point out that the safe harbor statement in the company's press release issued earlier today also refers to the content of this conference call. As usual, we will provide you with both 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 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 Butzi, who will talk about some of the significant developments during the quarter and beyond. We will then turn the call over to a question-and-answer session. With that, I would like to now turn the call over to Kobi. Kobi, please go ahead.

Thank you, Daniella. Hello, everyone, and thank you for joining us today. The strong set of results published earlier today continues the trend we've seen over the past few quarters of strong revenue growth and margin expansion. This quarter is the fourth consecutive quarter in which we published double-digit growth for revenues, backlog, operating income, net income, and EPS. We are very pleased with these results, and in this quarter, we presented strong free cash flow totaling $161 million. I will now highlight and discuss some of the key figures and trends in our financial results. First-quarter revenues were $1.896 billion compared to $1.554 billion in the first quarter of 2024. In the first quarter of 2025, Europe contributed 24%; North America, 21%; Asia Pacific, 18%; and Israel contributed 32% of revenues. Demand continues to be robust in all key geographies. GAAP gross margin in the first quarter was 24% of revenues compared to 24.1% in the first quarter of 2024. The non-GAAP gross margin for the first quarter was 24.3% compared to 24.7% in the first quarter of 2024. The first-quarter GAAP operating income for the first quarter was $149.7 million or 7.9% of revenues versus $105.4 million or 6.8% of revenues in the first quarter of 2024. Non-GAAP operating income was $165.1 million or 8.7% of revenues compared with $121.6 million or 7.8% of revenues in the first quarter of last year. The operating expense breakdown in the first quarter was as follows: Net R&D expenses were $114.3 million or 6.1% of revenues compared to $98.5 million or 6.3% of revenues in the first quarter of 2024. Marketing and selling expenses were $100.9 million or 5.3% of revenues versus $89.1 million or 5.7% in the first quarter of 2024. G&A expenses were $89.4 million or 4.7% of revenues compared to $81.2 million or 5.2% of revenues in the first quarter of 2024. Financial expenses were $39 million in the first quarter compared to $31.2 million in the first quarter of 2024. The increase in financial expenses in the first quarter of 2025 was mainly due to the hedging transaction and the net effect of changes in the exchange rates of different currencies in which the company operates. We recorded a tax expense of $16.1 million in the first quarter compared to $11.6 million in the first quarter of 2024. The effective tax rate in the first quarter of 2025 was 13.9% compared to 14.6% in the first quarter of 2024. GAAP diluted EPS was $2.35 for the first quarter of 2025 compared to $1.65 in the first quarter of 2024. Our non-GAAP diluted EPS was $2.57 for the first quarter of 2025 compared to $1.81 in the first quarter of 2024. Quarterly segment revenue for the first quarter of 2025 indicates that Aerospace revenue increased by 20% year-over-year, mainly due to an increase in precision-guided munition sales in Israel and Asia Pacific. C4I and Cyber revenues increased by 12% year-over-year, mainly due to an increase in radio systems and command and control system sales in Israel and Europe. ISTAR and EW revenue increased by 4% in the first quarter of 2025, mainly due to electro-optic system sales. Land revenue increased by 48% in the first quarter of 2025, mainly due to increased ammunition and munition sales in Israel and Europe. Elbit Systems of America revenues increased by 18% due to the increase in more fighter systems and medical instrumentation sales. Our order backlog as of March 31, 2025, was $23.1 billion, $2.7 billion higher than the backlog at the end of the first quarter of 2024. Approximately 66% of the current backlog is attributable to orders from outside of Israel. Approximately 51% of the current backlog is scheduled to be fulfilled during the remainder of 2025 and during 2026, and the rest is scheduled for 2027 and beyond. Net cash provided by operating activities at the end of the first quarter 2025 was $184 million as compared to $6 million cash used in the first quarter of 2024. Operating cash flow during the quarter was affected mainly by the increase in net income and an increase in contract liabilities, which were offset by the increase in inventories and trade receivables. During the first quarter of 2025, we also delivered $161 million of free cash flow. The Board of Directors has declared a dividend of $0.60 per share. I will now turn the call over to Mr. Machlis, our CEO. Butzi, please go ahead.

Thank you, Kobi. I would like to begin by thanking our Elbit employees around the world for their hard work and ongoing support and commitment to our customers. These results would not have been achieved without our ongoing commitment and dedication. During Q1 2025, we have seen a dynamic trend of strong growth continue as demand in the defense business remains high. This is the fourth quarter in a row in which we have delivered double-digit year-over-year growth in revenues, operating profit, net profit, and backlog. Our backlog has reached a record of $23.1 billion, up 40% from last year. For the period of the last four quarters, our GAAP EPS is almost 8%, and the non-GAAP EPS is at $9.50. The ongoing conflict in Ukraine and locally here in the Middle East continue to dominate the geographical agenda. These are evident in government decision-making around the world to increase the defense budget, coupled with ongoing rhetoric by President Trump for NATO allies to increase defense spending, which is propelling this super cycle we are seeing in defense spending. We continue to see strong demand for Elbit's products and advanced technological solutions, as evidenced in our growing backlog and sales. Last week, the NATO Secretary General presented a proposal for a plan to further increase defense spending in Europe to gradually reach 5% of GDP by 2032, which is expected to be presented at the next NATO Summit at the end of June. We believe our geographic exposure to Israel, the U.S., Europe, and Asia Pacific is unique. During the quarter and beyond, we continue to receive orders for our solutions in artillery, ammunition, electronic warfare, radio systems, and self-protection solutions, among others. For example, we won a contract totaling approximately $100 million to provide joint national digital file command centers for a European country, a contract totaling $80 million to supply the IMOD with advanced airborne self-protection suits for the F-16 fleet designed to further secure the safety of the F-16 aircraft, enabling it to operate safely in a hostile environment. Another self-protection solution was won for an American EW self-protection solution for frigate installation to a NATO European country. The Elbit DESEAVER MK-4 Countermeasure dispensing system is an advanced maritime electronic warfare solution designed to effectively counter complex missile attack scenarios. Additionally, we won a contract for our ReDrone Counter-UAS solution with another NATO European country. This multi-sensor and multi-mission system is part of Elbit's advanced EW, radar, and seeking portfolio, enabling rapid detection and location of multiple drones simultaneously. During the quarter, we continued winning contracts for our advanced rocket munition launcher, which is a precise and universal launch system. This time, together with KNDS, Germany selected our pull solution, which has now been chosen by multiple European countries, including Germany, the Netherlands, and Denmark, among others, as testimony to its effectiveness in enhancing defense capabilities in the modern battlefield. Additionally, we won a $130 million contract with another NATO European country during the quarter. The scalable pull system enables a variety of ranges to be used, starting from 35 kilometers up to 300 kilometers. The agile and scalable features of this advanced and versatile artillery rocket system, combined with the capability of launching 100 rocket types from a single platform, have been key wins for our customers versus our competitors. In February, we showcased our latest developments in air defense technology at the Aero India show. Elbit's innovative portfolio featured solutions, including unmanned aerial systems, directed infrared countermeasure technology, electronic warfare capabilities, precise guided munitions, and our helmet-mounted displays, among others. I am pleased to say that there was strong interest in our product display. We continue to see a growing amount of interest in the Iron Beam system, the high-power laser solution, which is expected to be operational by the end of 2025. The laser component of the Iron Beam solution developed by Elbit is intended to provide a robust defense against a variety of incoming threats. The $200 million contract announced back in October 2024 positioned Elbit as an Israeli laser center and a global leader in high-power laser technology, both for land and airborne solutions. We shall continue to update you on developments in this area. And with that, I will be happy to answer your questions.

Before that, I would like to hand the call back to Ms. Daniella Finn for a few questions that were pre-sent and pre-recorded. Daniella, please go ahead.

Thank you very much, Nathan, and a couple of questions from Chen Pierrek from Excellence. The first question is, is there an expectation of a slowdown in activity in Israel due to a possible decline in the intensity of the conflict in Gaza, or a ceasefire imposed by the U.S.? How is the company preparing for such a scenario?

Thank you. First, I would like to say that I am praying for the end of the current war we have in Israel and for the lift of hostages from Gaza. The investment in defense is, I believe, will continue in the near-term future. And the main reason for that is these investments are helping to create an advantage for Israel in our arena and to build more inventories and to treat the equipment which is coming back from the field. So, I really believe that this investment will continue. The same can be said for Europe. Countries are preparing themselves to invest more in defense and they're not very concerned about Russia, mainly in Northern Europe. So, I do not see any slowdown in defense spending in the coming years, neither in Israel nor in Europe.

Is an improvement in the gross profit rate expected in the coming year? Or will profitability targets be achieved by relying on operating leverage?

Thank you, Dan. With the high demand we are witnessing and the expedited growth of our backlog, we can be more selective in the bookings we take. Additionally, on top of that, we will see continuous operational OpEx leverage, as you mentioned.

And the next question from Chen is what is the expectation for CapEx for the rest of the year?

We see the same level of CapEx investment, with a small increase to around $250 million, as we recorded $215 million in 2024.

I'd like to add more context to the first question regarding investment here in Israel and Europe. The main reason for investment is not just to support the current conflict, but to create deterrence against our enemies here in our region and also in Europe. Because of that, I truly believe that this is the main reason for the investment, not the current conflicts happening right now, either here or in Europe, but to create deterrence, which can avoid war in the future.

Thank you for that. The final question is about the status of Iron Beam. Will it be operational by the end of the year? We touched on that briefly, but please elaborate a bit more if you can.

Yes. The Iron Beam solution should be operational by the end of this year. We are working hard to make it happen, and there is a lot of progress there. In parallel, we continue to invest in the airborne solution. We believe that bringing the airborne solution to the arena will create a huge change in the way countries are fighting. Mainly, hundreds of engineers and technicians are working to develop the system, and there is a lot of progress in that area as well.

The next question is from Omri Efroni of Oppenheimer.

Congrats on the great quarter. I have three questions. I hope you don't mind. The first is about the land division. The operating margin was pretty high; it's at 9%. I know that most of the equipment is going into Israel. I was wondering if you have any more upside when Israeli stockpiles are full, and if Elbit will be able to sell to other countries? That's the first question. The second question is about the Iron Beam. I was wondering if you have any internal sales targets for the system? If so, will it be sold only to Israel, or can you sell it in the United States? The third question is about the pictures you put on Slide 7. I see here the Soldier Lethality Program, aka the IVAS in the United States. I was wondering if you have any targets or any more information you can provide for the IVAS and Soldier Enhancement, and maybe some insights on maritime sensing and future products that might emerge next year?

Let's address your questions one by one. The first question was about the land revenues, correct?

Yes.

First, I would like to state that the land division is not selling just ammunition; they are providing full turnkey solutions, which includes artillery systems, provinces, motors, command and control systems, fire control systems, electro-optics, and of course munitions and guided munitions, all combined. After the acquisition of IMI, we merged all related elements into one division, selling comprehensive solutions to our customers. Regarding the demand in Israel, we are witnessing significant opportunities for increased profits, and we see a lot of growth in demand, particularly in Europe, not just in Israel. So, I truly believe there's potential for more revenues and profits in this domain.

You also asked about demand outside of Israel.

Yes, I believe it continues to remain strong. My main question is when will you start selling outside of Israel, particularly to Europe, and at what volumes are operating margins going to enhance?

We continue to improve our numbers in the land division, and we see a significant change there. Currently, they are contributing substantially to our profit, and the quantities are going up. We anticipate more opportunities to increase the bottom line, particularly with a lot of growing demand in Europe, not just in Israel. So, I am optimistic about seeing more revenues and profits in this area.

The second question was around Iron Beam, correct? You asked about sales targets for the system?

Yes, the revenue targets for Israel and the United States.

Usually, we don't disclose this information publicly. However, I can tell you that there is immense interest surrounding the laser solution and other types of energy weapons. We are exploring several types of energy weapons in both Israel and abroad. Concerning specific numbers, we generally do not share that data publicly.

Okay. Regarding the third question about soldier lethality and maritime sensing?

Yes, we are very pleased with the acquisition of Night Vision, which took place a few years ago. This company is growing and improving. They provide night vision equipment for the Army and Marines, as well as international customers. Based on Elbit's portfolio, we are able to offer complete turnkey solutions for infantry soldiers. This is also a lesson learned from the current conflict we are experiencing in our region. We are tailoring unique solutions for future infantry soldiers, and we are presenting these to our various customers in the U.S. and abroad. I'm also happy to announce a $112 million contract with the U.S. Marine Corps, and we've seen considerable potential in this specific domain; it's a growing segment of our portfolio.

The next question is from Conor Walters of Jefferies. Please go ahead.

Congrats on such an excellent quarter. To stick with the top line, Q1 was off to a strong start with 22% growth, well on track for the double-digit target for the year. I'm curious what played out better than expected for the quarter and how we should look at the drivers for the remainder of the year, particularly regarding the momentum in land and aerospace?

Thank you for the question. We had a very solid start for 2025, as you mentioned. It was right on plan; this was not something we did not foresee. We see significant growth in the land backlog, evidenced by a 48% increase in revenues year-over-year for the land division. Other segments also demonstrated growth, most of them in double digits this quarter. So, it was as planned and aligned with the company's growth targets.

That's very helpful. Maybe one more for you, Kobi; free cash flow generation in the quarter was very strong again, continuing the momentum we saw from Q4 of last year, with nearly 140% conversion on your adjusted net income. I'm curious how we should view the opportunity for the full year and what's driven the step change in your cash conversion over the last few quarters?

Thank you, Conor, for pointing that out. We had three major components in the free cash flow generation this quarter. First, increased net income—that is straightforward, which directly translates to better cash conversion. Secondly, we had very strong contract liabilities and down payments in this quarter, resulting in an additional $170 million of contract liabilities. Lastly, there was a one-time payment of $57 million we received from the Israeli Land Authority, which was part of the contract for the evacuation of the facility in Ramat HaSharon, scheduled for relocation to Ramat Beka by the end of 2026. Those are the three main factors behind our free cash flow performance in the first quarter.

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 in two hours after the conference ends. In the U.S., please call 1-888-782-4291. In Israel, please call 03-925-5900. Internationally, please call 9723-925-5900. The replay of the call will also be available on the company's website at www.elbitsystems. Mr. Machlis, would you like to make your concluding statement?

I would like to thank 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 goodbye.

Thank you. This concludes the Elbit Systems' First Quarter 2025 Results Conference Call. Thank you for your participation. You may now go ahead and disconnect.