Earnings Call Transcript - ESLT Q2 2025

Operator, Operator

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

Daniella L. Finn, VP, Investor Relations

Thank you, Ila. Good day, everyone, and welcome to our second quarter 2025 earnings call. On the call with me today are Butzi Machlis, President and CEO; 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 contents 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 all the detailed GAAP financial data as well as the non-GAAP information and the reconciliation in today's press release. As usual, 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 the question-and-answer session. With that, I would like to now turn the call over to Kobi. Kobi, please go ahead.

Kobi Kagan, CFO

Thank you, Daniella. Hello, everyone, and thank you for joining us today. We are very pleased to announce another set of quarterly results with strong double-digit year-over-year growth across all parameters. We recorded growth across all business segments and geographies, especially in Europe, as well as margin expansion. Backlog increased 12% from the corresponding quarter in 2024, and free cash flow generated this quarter totaled $71 million. I will now highlight and discuss some of the key figures and trends in our financial results this quarter. Second quarter 2025 revenues were $1.973 billion compared to $1.626 billion in the second quarter of 2024. In the second quarter of 2025, Europe contributed 29%; North America, 21%; Asia Pacific, 13%, and Israel was 34% of revenues. Demand continued to be robust in all three geographies as evident in the higher sales in all geographies this quarter. GAAP gross margin in the second quarter was 24% of revenues compared to 24% in the second quarter of 2024. The non-GAAP margin for the second quarter was 24.4% of revenues compared to 24.4% in the second quarter of 2024. GAAP operating income for the second quarter was $157.8 million or 8% of revenues versus $116.5 million or 7.2% of revenues in the second quarter of 2024. Non-GAAP operating income was $175.1 million or 8.9% of revenues compared with $130.5 million or 8% of revenues in the second quarter of last year. We are very pleased with this margin expansion, which is a result of the company's joint effort to improve profitability. The operating expense breakdown in the second quarter was as follows: Net R&D expenses were $129.7 million or 6.6% of revenues compared to $116.8 million or 7.2% of revenues in the second quarter of 2024. Elbit continues to invest in R&D to develop cutting-edge technological products and solutions, which will maintain Elbit's position as a market leader. Marketing and selling expenses were $91.5 million or 4.6% of revenues versus $87.7 million or 5.4% in the second quarter of 2024. G&A expenses were $93.9 million or 4.8% of revenues compared to $68.7 million or 4.2% of revenues in the second quarter of 2024. The increase in G&A expenses for the second quarter of 2025 was mainly due to one-time expenses incurred during the current quarter. G&A expenses during the second quarter of 2024 were lower than average. Financial expenses were $31.2 million in the second quarter compared to $29.1 million in the second quarter of 2024. Financial expenses during the quarter were impacted by the relatively sharp fluctuations of the exchange rate, the strong free cash flow from the beginning of the year, and from the offering proceeds that in the short term decreased the company's loan portfolio. We recorded a tax expense of $7.1 million in the second quarter compared to $11.3 million in the second quarter of 2024. The effective tax rate in the second quarter of 2025 was 5.6% compared to 13.2% in the second quarter of 2024. The decrease in effective tax rate for the second quarter of 2025 was mainly due to the increase in deferred tax assets and the settlement of tax assessments. GAAP diluted EPS was $2.69 for the second quarter of 2025 compared to $1.76 in the second quarter of 2024. Our non-GAAP diluted EPS was $3.23 for the second quarter of 2025 compared to $2.08 in the second quarter of 2024. Quarterly segment revenue for the second quarter of 2025. Aerospace revenue increased by 12% year-over-year, mainly due to an increase in Precision Guided Munition sales in Israel and Asia Pacific and UAS sales in Europe. C4I and Cyber revenues increased by 21% year-over-year, mainly due to radio systems and command and control system sales in Israel and in Europe. ISTAR and EW revenues increased by 15% in the second quarter of 2025, mainly due to electro-optical system sales in Israel and electronic warfare system sales in Europe. Land revenues increased by 45% in the second quarter of 2025 due to ammunition and munition sales in Israel and in Europe. Elbit Systems of America revenues increased by 4% due to the increase in maritime and warfighter systems sales. Our order backlog as of June 30, 2025, was $23.8 billion, $2.6 billion higher than the backlog at the end of the second quarter of 2024 and $626 million higher than the backlog in the first quarter of 2025. The increase in backlog during the quarter came mainly from new international orders. Approximately 68% of current backlog is derived from orders outside of Israel. Approximately 46% of the current backlog is scheduled to be performed during the remainder of 2025 and during 2026, and the rest is scheduled for 2027 and beyond. Cash flow provided by operating activities in the six months ended June 30, 2025, was $304 million as compared to $26 million in the six months ended June 30, 2024. The cash flow in the six months ended June 30, 2025, was affected mainly by the strong increase in net income. On the back of the continued strong financial performance of the company, the Board of Directors has decided to increase the dividend and declare a dividend of $0.75 per share, 50% higher than the dividend distributed last year and the second dividend raised this year. I will now turn the call over to Mr. Machlis, Elbit's CEO. Butzi, please go ahead.

Bezhalel Machlis, President and CEO

Thank you, Kobi. Hello, everyone, and thank you again for joining us today. As Kobi just described, there are indeed exceptional results with double-digit growth in all parameters of revenue and profitability growth across all our segments and geographies. I'm very pleased with these results. During the quarter, we carried out a successful share offering, raising $573 million net with demand for the shares offered reaching three times the initial amount. These proceeds will help support and grow Elbit's future businesses, enabling us to increase our production capacity and deliver on the growing demand for our products. Additionally, these proceeds will potentially enable us to further expand via M&A activity, acquiring either new technologies or expanding our global reach. During the quarter, the conflict between Israel and Iran has escalated and resulted in a 12-day campaign against Iran. Since the October 7 war, the Middle East has gone through significant changes in many aspects, thanks to the technological superiority of the IDF. Elbit played a key role in supplying the IDF with our advanced technologies and solutions. These included the Hermes 900 drones armed with various payloads flying over Tehran as shown on social media. ISR systems provided crucial and continuous information, which were a key factor in defending our positions. EW self-protection tools played a vital role in protecting the IDF aircraft. Our trainers ensured that pilots and other personnel were professionally trained for one of the most complicated missions ever carried out. I am extremely proud of all Elbit employees who took part in this important mission and of all who contributed to the development of solutions that supported the IDF during the conflict and since October 7. For all of this, I am truly grateful. During the quarter and up until the announcement today, Elbit won additional significant new contracts. This morning, we announced we were awarded a contract worth $1.625 billion to deliver a range of defense solutions to a European country over the next five years. Under the contract, Elbit will deliver a variety of its products and solutions, including a comprehensive military digitization and network combat solution, as well as Torch-X C4ISR suite of command-and-control applications, advanced working capabilities, and a range of unmanned aerial systems such as the Hermes 900, Skylark 3, loitering munitions, and the luminous soldier level tactical drones, among others. The contract also included a range of ISTAR capabilities, including electronic warfare and SIGINT systems. This contract, among others in Europe, marks another important milestone in Elbit's expanding footprint in Europe and its growing operations across the continent. A couple of weeks ago, Elbit was awarded a contract worth approximately $260 million by Airbus to supply its J-MUSIC Directed Infrared Countermeasures self-protection system for installation on the German A400 transport aircraft. We continue to gain traction with the PULS rocket launcher in Europe, winning yet another contract to a European country for $130 million. In May, we received a delivery order valued at $110 million for SBNVG from the Marine Corps as part of the multiyear ID/IQ contract previously secured. These systems will support U.S. Marine Corps missions in operation with low light and no light conditions worldwide. Elbit was also awarded a contract worth approximately $100 million to supply the advanced UT30 unmanned turret system to General Dynamics European Land Systems. The systems will be installed on the ASCOD armored fighting vehicles and supplied to a NATO European country. These systems will enhance the firepower and survivability of the ASCOD vehicles. During the quarter, we were awarded several contracts valued at approximately $330 million by international customers, including NATO member countries, to supply a broad range of advanced naval technologies and solutions, including electronic warfare and anti-submarine warfare systems, modernization and upgrade programs, combat management systems, and more. And last but not least, two days ago, we announced two contract wins for about $250 million for the supply of airborne munitions to the Israeli Ministry of Defense. Despite some delays due to the ongoing conflict in our region, we are progressing well with the Ramat Beka site. Construction is continuing, and initial production is expected towards the end of this year. This production site will be state-of-the-art and will include automated AI and robotic solutions and platforms to enable utmost facility efficiencies. I'm truly inspired by our employees' dedication and commitment to the company, and I would like to personally thank each and every one of our employees for contributing immensely to the success of the company. It wouldn't be possible without you. And with that, we will be happy to answer your questions. Operator?

Operator, Operator

The first question is from Jordan Lyonnais of Bank of America.

Jordan J Lyonnais, Analyst

Going into the back half of the year, how should we think about the margin expansion and what's going to drive it?

Kobi Kagan, CFO

Thank you, Jordan, for the question. We are paying a lot of attention and putting a lot of effort into expanding our margins, as demonstrated in the last three years, where we enjoyed around 3% margin expansion. As we demonstrated in the past, we are committed to continue improving the margin through our new ERP system, for instance, through operational leverage which is playing an important role in margin expansion, and by other means.

Jordan J Lyonnais, Analyst

Got it. And if I could, could you give any updates on R&D or what you're seeing in the supply chain, specifically for SRM?

Bezhalel Machlis, President and CEO

On IRON BEAM – yes, we are developing and delivering the high-power laser source for the IRON BEAM solution. The IRON BEAM solution is led by Rafael, who is the main integrator of the system. However, the laser part is coming from us. We are starting to deliver the first unit to Rafael for integration quite soon, and we expect to deploy the system by the end of this year. In parallel, we are developing the prime and airborne high-power solution for the Israeli Air Force and there is a lot of interest for this solution from international customers globally as well.

Operator, Operator

The next question is from Sheila Kahyaoglu of Jefferies.

Sheila Karin Kahyaoglu, Analyst

Maybe just if we could start on the top line. Year-to-date growth of 22% is pretty phenomenal, derisks even the mid-teens growth guidance for the year. How do we think about the deceleration in the second half and the outlook for '26 as you consider capacity utilization and all these new orders coming in?

Kobi Kagan, CFO

Sheila, Kobi. As you know, we mentioned that we are looking at 2025 at mid-teens growth. This is our internal target. Looking forward, of course, to 2026, again, our internal targets are double-digit growth also for next year. I believe that the announcement this morning will support the backlog required to facilitate double-digit growth. So beyond that, as you know, our policy is not to give guidance. These are our internal targets and what we can provide.

Sheila Karin Kahyaoglu, Analyst

Maybe any detail you could give on the segments. Obviously, land 45% growth in Q2 is pretty spectacular, tracking ahead of your soft commentary on the $2.25 billion for the year. How long is that sustainable and aerospace is also doing quite well?

Kobi Kagan, CFO

As you mentioned, Sheila, all segments actually did very well. We had growth across all segments. Land has especially become the biggest segment now in Elbit, with a 45% increase year-over-year and over $550 million. That will drive additional growth in this segment, which enjoys very high demand for all the leading products. And as we mentioned, it's not just ammunition, but also Iron Fist. We have the SIGMA, which is the new Howitzer, which we're starting to supply now to the IDF, and also the Rampage missile, which was heavily used during the Iran conflict, and that enjoys both domestic and international demand. We believe that this segment is going to continue to grow in revenue and also expand margins further.

Sheila Karin Kahyaoglu, Analyst

Great. And one last one, if I may. Great job on turning around ESA. How could we think about what's left to do there, whether it's restructuring or legacy dilutive contracts?

Kobi Kagan, CFO

As we mentioned, we have turned around ESA. ESA was recording a loss in 2023. We see expansion in the margins, as you mentioned, flushing out losing contracts. This next quarter, Q3, will be the last quarter of Sparton, the maritime company with the last quarter of losing contracts. That will allow us to further expand the margins in Elbit Systems America this year, and will help secure continued margin expansion next year.

Operator, Operator

We have turned around ESA, which was recording a loss in 2023. We see improvements in margins as we eliminate unprofitable contracts. The upcoming third quarter will be the final quarter for Sparton, the maritime company, which has been dealing with losing contracts. This change will enable us to further increase margins in Elbit Systems America this year and support continued margin growth next year.

Daniella L. Finn, VP, Investor Relations

Ila, it's Daniella and I have a couple of questions from an investor who sent them to me over email. The first question is, given the strong demand for UAS counter-drone measures, what are the company's plans for future development? Could you also address the issue of potential exports of these solutions to Europe and to the U.S.?

Bezhalel Machlis, President and CEO

We have a system called ReDrone, which is actually a combination of several technologies from the company, including some technologies for detection and several technologies for effectors. Regarding detection, there are radar technologies, electro-optical technologies, SIGINT technologies, among others, and regarding effectors, there are soft-kill technologies like jamming, energy weapon solutions, and hard-kill solutions as well. All of these are integrated into a coherent solution. The name of this system is ReDrone. This system was delivered and heavily used successfully by the IDF in Israel, and I'm happy to say that it has also been exported to other countries. One of them is the Dutch Army, who has chosen this system. There are additional NATO countries which have acquired this system from us, along with other global customers. This system is one of the most advanced solutions available in the market right now.

Daniella L. Finn, VP, Investor Relations

Thank you for your questions today. I'm addressing CapEx investments. During the quarter, we reported a total of $72 million, which is lower than the amount from the same quarter last year. What can we anticipate regarding the pace of capital investments for the year? Additionally, what is the expected total expenditure for 2025?

Kobi Kagan, CFO

Thank you, Daniella. As mentioned in the first quarter, we benefited from governmental evacuation funds from the Israeli Land Authority, which drove down Q1 CapEx investments. The running rate of the CapEx investment is around $250 million, and we are currently looking at expanding the investment based on the follow-on offering that was received during May.

Daniella L. Finn, VP, Investor Relations

Thank you, Kobi. The final question is about Israel's geopolitical positioning. We are seeing significant demand for defense security applications, but Israel is facing a challenging geopolitical situation. How is the company navigating these difficulties, aside from the major announcement we saw this morning?

Bezhalel Machlis, President and CEO

Yes. What I would like to say is that, Daniella, as you mentioned, there is a growing demand for defense solutions worldwide. Elbit is in a unique position to offer a very advanced portfolio. As you saw this morning in our announcement, we have the ability to provide integrated solutions for our customers. We are capable of working with the customer to help shape transformation for their forces based on our operational experience and the very wide portfolio we have, connecting all the dots together into one coherent advanced solution which enables countries to leapfrog their operational capabilities. Such partnerships that Elbit is able to offer are quite unique, and we are very well positioned here. I can tell you that there is a lot of interest from many customers worldwide to understand the breadth of our portfolio and our operational experience. We have numerous discussions daily with many customers in Europe as well as other locations to try to grasp how we executed in Iran, for example, and to understand what is exportable and how we can assist these countries in acquiring such capabilities. Furthermore, I would like to note that we are operating abroad mainly through our subsidiaries. We have about 40 subsidiaries worldwide, concentrated in Europe as well as throughout the continent. Essentially, what we offer our customers is not just purchasing directly from Elbit Israel; we facilitate collaborations through our subsidiaries, allowing them to speak their own language and to pursue development locally, fostering jobs and boosting their economies. This is also a significant advantage for us. We are also collaborating with many partners abroad. Just to provide an example, in Germany, as mentioned, we are partnering with Airbus to promote our DIRCM system for the A400. We are working with KNDS to promote the PULS and rocket solutions, not just for Germany, but for Europe as a whole. In summary, we are positioned uniquely to provide advanced solutions based on our extensive portfolio, operational experience, and local job creation to better support local economies. I believe it’s true that in certain cases, like in France, which has not historically been a customer of Elbit, there is some resistance to purchasing from Israeli companies. However, overall, I can confidently state that the opportunities we face today are unprecedented. We have never encountered such a vast array of prospects, and I believe we are well-positioned to continue the company's growth in the near future.

Operator, Operator

There are no further questions at this time. Before I ask Mr. Machlis to go ahead with 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 (972) 3925-5900. A replay of the call will also be available at the company's website. Mr. Machlis, would you like to make a concluding statement?

Bezhalel Machlis, President and CEO

Thank you. I'd like to thank everyone on the call for joining us today and for your continued trust and support of Elbit. Have a good day, and goodbye.

Operator, Operator

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